The Basics: California State Tax

Like many other states, the Sunshine state has income tax, sales tax, property taxes, and estate taxes. Our tax system is set up to be much like the federal income tax system, but our rates are often significantly lower for high income earners. These differences mean that you need to make adjustments to your federal return to pay for California State income tax. The tax professionals at Kaufman Advisors can help you make these adjustments while still taking advantage of any benefits that may be available to you within the California income tax system.

Differences Between Federal and California State Taxes

Although federal income taxes and California income taxes are very similar, there are some important differences as well. Below are some of the highlights.

• There are special rules in California that only apply to active duty military pay and income from services performed by certain military spouses.
• Sick pay received under either the Federal Insurance Contributions Act or the Railroad Retirement Act are not included as income under California law.
• California law also allows for an exclusion from income for California Qualified Stock Options. There are certain restrictions on this exclusion that your tax preparer can help you work through.
• Nonresidents of California can exclude income from compensation for the performance of certain merchant seaman, rail carriers, motor carriers, or air carriers. Keep in mind, this only applies to nonresidents of California who may have earned income in California.
• California does tax the interest from non-California state and local bonds, but California bonds are treated differently. Interest on federal bonds is not taxed either.
• In some cases, California will not tax dividends that have been paid by a fund that is related to a municipal obligation. This restriction is somewhat complicated, so be sure to talk to an experienced tax preparer to take full advantage of this potential benefit.
• For non-cash farmer’ cooperative or mutual association dividends, the federal government taxes the dividend in the year of the receipt. California allows you to either include the dividend in gross income when it is received or wait until it is redeemed. Once the election is made, you cannot switch back to the other method unless the Franchise Tax Board approves the change.
• California does not tax your prior year state income tax refund, but federal law will.
• Income from a business, trade, or profession that is at least partially conducted in California is subject to California tax. Determining how much tax may be can be a challenge, but if you find a tax preparer that specializes in small business taxes, then he or she can help you determine how much tax you should actually be paying (and not a penny more!).
• California sometimes use special deprecation methods for some types of properties that are not available on your federal return, including on some residential rental property. Talk to a tax professional for more information.
• California has a 20-year recovery program for fruit-bearing grape vines in California after 1992. Federal law allows 10 years, but because of the prevalence of grape vines in California, the tax laws in California are slightly different.
• California allows for certain clean fuel and electric vehicles deprecation. Essentially, the tax law treats the vehicle as a luxury vehicle if it qualifies and was placed into service after 1997.
• California does not allow a deduction for business expenses if it is for a club that discriminates.
• Federal law allows a credit for small employers that provide their employees with health insurance up to a portion of the expenses. In California, the entire amount of the payment of insurance is allowed as a credit.
• Tax basis of assets could be different under California law when compared to federal law.

There are a huge number of additional differences as well. The important thing to note here is that just because it is allowed under federal law, does not mean that California also allows it, and vice versa. California is very liberal in some areas of these tax provisions, but very strict or stringent in other areas. It is also important to note that each state’s tax laws are different—just because you have done taxes in one state does not mean that you should be doing taxes in another state.

Calling in the Professionals

The tax preparers at Kaufmann Advisors can help you put together both federal and state tax returns that are not only valid, but they take advantage of all of the tax benefits and credits that you are entitled to under either law.