CALIFORNIA PERSONAL INCOME TAX A REVIEW FOR TAX PREPARERS

Transcription

1 CALIFORNIA PERSONAL INCOME TAX A REVIEW FOR TAX PREPARERS COPYRIGHT CALIFORNIA TAX INSTITUTE (Our 30 th Year) YORBA LINDA, CA REVISION JULY 2015 Continuing Education: 5 CE Hours California Tax Law CTEC# 1022-CE-0013 Parts of this publication were provided from information furnished by the Franchise Tax Board. This publication is provided with the understanding that the publisher is not engaged in rendering accounting or legal service.

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3 INTRODUCTION CALIFORNIA TAX INSTITUTE #1022 has been approved by the California Tax Education Council (CTEC) to offer CONTINUING EDUCATION that meets the annual requirement Imposed by the State of California. A listing of additional requirements to renew tax preparer registration may be obtained by contacting CTEC at PO Box 2890, Sacramento, CA , by phone at , or on the Internet at COURSE SCHEDULE CALIFORNIA INCOME TAX #1022-CE Hours Continuing Education Credit (5 hours California Tax Law) This course is based on California Tax Law and reviews California tax law changes. The cost for this program is only $50.00 including shipping unless purchased as a bundle. A. CORRESPONDENCE SCHOOL OPERATING DAYS AND HOURS Office Hours are 9:00 am to 5:30 pm - Monday through Friday (holidays excluded). Our help line is available most evenings until 5:30 pm at to answer questions regarding this course. B. EFFECTIVE DATE OF CATALOG January 1, 2015 to December 31, 2015 C. COURSE INFORMATION The CALIFORNIA INCOME TAX correspondence course (#1022-CE-0013) is designed to help you maintain and/or improve your professional and proficiency skills required in the preparation of Federal and California income tax. The correspondence course is comprised of three sections: California Income Tax Examination Student Evaluation The CALIFORNIA INCOME TAX course is recommended to provide five hours California state continuing education. The program has been prepared in accordance with the standards set forth in Circular 230 section CE credits have been granted based on a 50-minute hour. The course is self-taught by the student. Advance preparation is not required. The program level is basic California state taxation. Competency of each student is determined by written examination that covers all sections of the course. The CTEC registered tax preparer should read CALIFORNIA INCOME TAX and then answer the review questions related to that section. The answers to the review questions are given with explanation. Complete the final examination at the end of the text. The answer sheet is at the back of this text. Complete the Evaluation form following the answer sheet. D. REFUND POLICY Any student that is not satisfied with this course can receive a complete refund of tuition by returning all course materials in satisfactory condition within 30 days of receipt. E. ENROLLMENT REQUIREMENTS Students may enroll any school day as instruction is offered in continuous modules allowing student entry at any time. To be admitted, a student must be CTEC registered California tax preparer or IRS Registered Tax Return Preparer.

4 F. GRANTING OF CREDIT FOR PREVIOUS EDUCATION This course is an all-inclusive course comprised of California income tax instruction. G. ATTENDANCE POLICY The course is self-taught by the student. Competency of each student is determined by written examination that covers all sections of the course. The course shall be completed within 365 days from placing your order. H. GRADING SYSTEM The student should review text materials prior to taking the open book test. There are a total of 50 review questions with a review of the correct answers and a final examination of 25 open book Multiple Choice questions. Each question has only one answer. After completing the test, please send the completed answer sheet to our attention. The CALIFORNIA TAX INSTITUTE requires a passing score of 70%. The answer sheet also has a comment section for the student to evaluate this correspondence course. This section is required by the California Tax Education Council and the Internal Revenue Service and will help us to continue to improve this correspondence course. Upon receiving a passing score of 70%, you will receive your certificate of completion. An additional test will be available to any registrant that does not receive a passing score.

5 TABLE OF CONTENTS California Exemption Credits 1 Registered Domestic Partners (RDP) Standard Deduction Children With Investment Income Itemized Deduction California Does Not Tax Renter s Credit Mental Health Services Tax 2 Contributions Child and Dependent Care Expenses 3 California Senate Bill Mandatory Electronic Payments 5 Net Operating Loss Estimated Tax Payments 2015 Head of Household Forms To Use Form 540 2EZ Form Form 540NR Use Tax Table Requirements For Filing 8 Residency Social Security and Individual Taxpayer Identification Number Employment Contract Determining Residency Deceased Taxpayer 9 Military Personnel Certain Children With Investment Income 10 Marital Status, Dependents, and Income Other Filing Requirements 11 Determining Filing Status Single Married/RDP Filing Jointly Married/RDP Filing Separate Return Head of Household 12 Costs Included In Keeping Up A Home 13 Costs Not Included In Keeping Up A Home Qualifying Widow(er) With Dependent Child Exemption Credit 14 Personal Exemption Blind (Additional Exemptions) Senior 65 or Over (Additional Exemption) Personal Exemption Credit Dependent Credit (Not Including Taxpayer or Spouse) Total Exemption Credit 15 Exemption Credit for Married/RDP Filing Separately Returns 16 Income Taxable by California Income Not Taxable by California 19 Interest 20 Dividends 21 Business Income (or Loss) Pensions and Keoghs (HR 10)

6 Individual retirement Account (IRA) Installment Sales 22 Like-Kind Exchange Lump-Sum Distributions Sale of Real Estate Partnership, S Corporation, and Trust Income (Loss) Sale of Stocks and Bonds 23 Division of Income Itemized Deductions Vehicle License Fee for Federal Schedule A 25 Standard Deduction Part-Year Non-Residents First Review Questions 26 First Review Answers 27 Schedule CA 28 Difference Between Federal and California Law Depreciation 33 Form FTB 3885A Depreciation and Amortization Adjustment Depreciation of assets Acquired Prior to 01/01/1987 California Schedule D Capital Assets 34 Short-term Gains and Losses Long-term Gains and Losses Limit on Capital Losses Child and Dependent Care 36 Employee Business Expense 36 Summary of Special Credits Other Taxes and Settlement Programs 40 Alternative Minimum Tax Tax on Early Use of IRA and Keogh Plans 41 Mental Health Service Tax Settlement Programs Use Tax Adoption Credit 43 Renter s Credit Excess California Disability Insurance (SDI) Overpayment 44 Penalties and Interest Late Filing of Return Demand/Failure to Furnish Penalty Late Payment of Tax Interest Other Penalties 45 Installment Payments Collections Fees Paid Tax Preparer s Information Requirements Power of Attorney Filing Date Mailing the Income Tax Return 46 Amended Returns Federal Income Tax Return Changes Estimated Tax Payments Installment Payments 47 Farmers and Fishermen

7 Failure to Make Estimated Tax Payments Common Law Employees Statutory Employees 48 Statutory Non-Employees Independent Contractors Other Nonresident Issues Net Operating Losses Passive Activities Code of Conduct and Responsibilities 49 Community Property 50 Commingled Property Community Income Beginning and End of Community Property 50 Separate Property Pre-nuptial Agreement Tax Treatment of Community Property for RDP 51 Statute of Limitations Second Review Questions 52 Second Review Answers 53 Final Examination 54

8 Summary of the 2014 California Tax Law change is as follows: California Exemption Credits California exemption credits have been increased to $108 for filers and $333 for their dependents. Additional exemptions are allowed for the elderly that are 65 years of age or older. A person that turns 65 on January 1, 2015 is considered to have turned 65 on December 31, 2014 for tax purposes. Exemptions have also been increased for the blind. In 2014, all exemption credits will be limited based upon your client s federal adjusted gross income. If your client s adjusted gross income (AGI), exceeds $176,413 (Single or Married/RDP filing a separate Return), $264,623 (Head of Household), and $352,830 (Married/RDP joint return or qualifying widow(er). Registered Domestic Partners (RDP) Registered Domestic Partners (RDP), under California law, must file their income tax returns using either the Married/RDP filing jointly or Married/RDP filing separately filing status. RDPs will have the same legal benefits, protections, and responsibilities as married couples unless otherwise specified. For purposes of California income tax, references to a spouse, a husband, or a wife also refer to a California Registered Domestic Partner (RDP) unless otherwise specified. Standard Deduction Amount Single or Married/RDP filing separately $3,992 Married/RDP filing jointly, Qualifying Widow(er) $7,984 or Head of Household Children with Investment Income Children with investment income under 19 or students under 24 who received more than $2,000 investment income during the tax year and had at least one living parent must file Form 540 and FTB 3800, or include the child s interest and/or dividend income. Form FTB 3803, Parent's Election to Report Child's Interest and Dividends is to be completed. The maximum amount the taxpayer can report on Form 3803 is $10,000 and may not be less than $1,000. Itemized Deductions Itemized deductions may be reduced if your client s federal adjusted gross income (AGI), exceeds $176,413 (Single or Married/RDP filing a separate return), $264,623 (Head of Household), and $352,830 (Married/RDP joint return or Qualifying Widow(er). A California taxpayer may itemize deductions for California taxes even if the individual did not itemize on their federal Schedule A. California does not tax unemployment compensation, Social Security, California lottery winnings, paid family leave benefits, and state income tax refund. The Renter's Credit Renter s credit is available for California residents that paid rent for at least six months in California adjusted gross income must be $37,768 or less if filing Single or Married/RDP filing separately; or $75,536 or less if Married/RDP filing jointly, Head of Household, or Qualifying Widow(er). The Renter s credit for qualified single or married/rdp filing separately is $60. The Renter s credit for qualified married/rdp filing jointly, head of household, or qualifying widow(er) is $120. Form 540 California taxpayers are required to file Form 540 if they have a tax liability from any of the following items: - Alternative Minimum Tax - Tax on a qualified retirement plan including a Traditional Individual Retirement Plan (IRA) or an Archer Savings Plan (MSA). - Recapture Taxes - Tax on an accumulation distribution from a trust - Deferred tax on certain installment obligations 1

9 - Tax on a lump-sum distribution - Tax for children under 19 or students under 24 who received more than $2,000 investment income from interest and/or dividends during the tax year and had at least one living parent. Mental Health Services Tax Mental Health Service Tax is an additional tax of 1% and is imposed on taxable incomes over $1,000,000 for tax year The Affordable Care Act (ACT) Employers are required under the Affordable Care Act to report the cost of health coverage on their employees W-2 in Box 12 using Code DD. Currently employer provided health care benefit is not taxable and allows the employee to see their employer s cost for their health care benefit. Financial assistance will be available through the Health Insurance Premium Tax Credit. The Health Insurance Premium Tax Credit is a refundable credit for 2014 to help individuals and families that meet the standards to afford health insurance coverage purchased through an Affordable Insurance Exchange (Marketplace). Legal residents of California will be able to purchase health insurance through Covered California. The health insurance coverage purchased through Covered California began in January MINIMAL ESSENTIAL HEALTH CARE COVERAGE The following are examples of minimal essential health care coverage: - Employer-sponsored health care coverage, including self insurance plans, and retiree coverage - COBRA coverage - Health Care coverage purchased in the individual market - Medicare Part A coverage - Medicaid coverage - Children s Health Insurance Program - Certain types of Veterans health coverage administered by the Veterans Administration - TRICARE coverage - Coverage provided to Peace Corp volunteers - Coverage under the Non-appropriated Fund Health Benefit Program - Refugee Medical Assistance - State high-risk plans - Self-funded health coverage offered to students by universities on or before December 31, Other coverage recognized by the Secretary of HHS as minimum essential coverage - Health insurance through Covered California STATUTORY EXEMPTIONS FROM OBTAINING MINIMAL ESSENTIAL HEALTH CARE COVERAGE The following is exempted: - Religious Conscience recognized by the Social Security Administration as consciously opposed to accepting any health insurance - Health Care Sharing Ministry recognized as a member of a health sharing ministry - Indian Tribes recognized as a member of a federally recognized Indian tribe - Income below the income tax return filing requirements income is below the minimum requirement to file Short Coverage Gap individual went for three months without insurance - Hardship individual has suffered a hardship and is unable to obtain coverage - Affordability individual cannot afford coverage because the cost would exceed 8% of household income - Incarceration individual is in jail, prison, or similar penal institution - Not lawfully present individual is illegally in the United States Contributions A taxpayer can make voluntary contributions to several funds of $1 or more in whole dollar amounts. 2

10 The amount contributed either reduces the taxpayer s refund or increases the tax amount owed. A taxpayer may only contribute to the funds listed and cannot change the amount contributed after the return is filed. The funds are as follows: - California Seniors Special Fund Contributions to this fund will be distributed to the Area Agency on Aging Councils and excess contributions will be distributed to senior citizens organizations throughout California. - Alzheimer s Disease/Related Disorders Contributions will be used to provide grants to scientists to study Alzheimer s disease and related disorders. - California Senior Legislature Fund Volunteers develop statewide senior legislative proposals to be presented to the State Legislature. - Rare and Endangered Species Preservation Contributions are for the protection of California s endangered species. - State Children s Trust Fund for the Prevention of Child Abuse Contributions are used for the prevention of child abuse and neglect. - California Breast Cancer Research Fund Contributions are used to fund research to prevent and cure breast cancer. The funding also keeps doctors informed on the latest medical discoveries. - California Firefighters Memorial Fund Contributions are used to maintain the Firefighter s Memorial in Sacramento and assist survivors of fallen firefighters. - Emergency Food For Families Fund Contributions are for local food banks to purchase food for delivery. The State Department of Social Services monitors the food distribution. - California Peace Officer Memorial Foundation Contributions maintain the Peace Officer s Memorial in Sacramento and helps the families of fallen peace officers. - California Sea Otter Fund Contributions to this fund are equally divided between the California Department of Fish and Game and the California Coastal Conservatory. The funds are for the preservation of sea otters and improve the nearshore ocean ecosystem. - California Cancer Research Fund Contributions are for research for the causes, detection, and prevention of cancer. - Child Victims of Human Trafficking Fund Contributions are for eligible community-based organizations to provide services to minors that have been victims of human trafficking. - School Supplies for Homeless Children Fund Contributions are for school supplies for homeless children. - State Parks Protection Fund/Parks Pass Purchase Contributions are used for preservation and protection of California state parks and for the cost of a Vehicle Day Use Annual Pass that is valid at most California state parks. - Protect Our Coast and Oceans Fund Contributions are used to protect our coast and ocean for educational activities at underserved communities. - Keep Arts in School Fund Contributions are used by the Arts Council for grants to individuals or organizations administering art programs for children in preschool through 12 th grade. - American Red Cross, California Chapters Fund Contributions will be used by California chapters of the American Red Cross for planning and implementing programs for disaster relief in California. - Habitat for Humanity Fund - California Sexual Violence Victim Service Fund Child and Dependent Care Expenses will be reported on Form FTB 3506, Child and 3

11 Dependent Care Expenses. Dependent care must be provided in California and earned income must have a source in California. The Child and Dependent Care Expense Credit is nonrefundable. In general, for taxable years beginning on or after January 1, 2010, California tax law conforms to the Internal Revenue Code as of January 1, Mello-Roos cannot be deducted as a property tax itemized deduction if they are assessed to fund local benefits and improvements that tend to increase the value of the taxpayer s property. California does not conform to federal tax law for: - Exempt interest from federal bonds and non-california state bonds or non-california municipal bonds, - Section 179. Federal law Section 179 is $500,000 for 2014 and California s maximum expense deduction is $25,000 - First Year Special Depreciation - Educator Expense or the Tuition and Fees Deduction - Health Savings Account - Domestic Production Activities - Discharged Mortgage Debt - Earnings of American Indians on Reservations - Clergy Housing Exclusion - Employee Income Exclusions for Ridesharing Fringe Benefits - State Income Tax Refund - Alimony Received by a Nonresident Alien - MACRS Recovery Period for Nonresidential Real Property - Depreciation of assets acquired prior to January 1, Amortization of Pollution Control Facilities - Clean Fuel Vehicle First Year Deduction - IRA Basis Adjustment - Railroad Retirement Benefits - Social Security Benefits - Paid Family Leave - Unemployment Compensation - California Lottery Winnings - California Lottery Losses - Federal NOL - Reward from a Crime Hotline - Foreign-earned Income and Housing Exclusion - Income Received from a Recycling Center for Empty Beverage Containers - Payments for Wrongful Incarceration - Mortgage Forgiveness Debt Relief - Survivor Benefits Received for a Public Safety Officer Killed in the Line of Duty - Alimony Paid by a Nonresident Alien - Self-employed Health Insurance Deduction - Annual Tax Paid by a Limited Partnership - State, Local, and Foreign Income Taxes Paid This listing is not all inclusive. California Senate Bill 797 California Senate Bill 797 clarifies the definition of who is and who is not exempt from CTEC registration. CPAs, Enrolled Agents, and attorneys are exempt from CTEC registration. Under certain circumstances, the law also allows employees working under a CPA, Enrolled Agent, and attorney exemption status. All CPAs, Enrolled 4

12 Agents, and attorneys must sign the returns prepared by their exempt employees so that they are held accountable for the employees work. Tax preparation includes data entry. Individuals who input tax-related data into a computer must register as a CRTP (California Registered Tax Preparer). Mandatory Electronic Payments Taxpayers are required to remit their payments electronically if they make an estimated payment or an extension payment exceeding $20,000 for taxable year 2014 or the total tax liability shown on their original 2013 tax return exceeds $80,000. Once the taxpayer meets this threshold, all subsequent payments regardless of amount, tax type, or taxable year must be remitted electronically. Individuals that do not send the payment electronically will be subject to a one percent noncompliance penalty. The taxpayer can request a waiver from mandatory e-pay if one or more of the following is true: - The taxpayer has not made an estimated tax or extension payment in excess of $20,000 during the current or previous tax year. - The taxpayer s total tax liability reported for the previous taxable year did not exceed $80,000 - The amount paid by the taxpayer is not representative of his/her total tax liability. Net Operating Loss Occurred after January 1, 2014 NOLs shall be carried back to each of the preceding two years based upon when the NOL was incurred as follows: - January 1, 2013 through December 31, The carryback amount shall not exceed 50% of the NOL. - January 1, 2014 through January 1, The carryback amount shall not exceed 75% of the NOL. - January 1, The carryback amount shall not exceed 100% of the NOL. Individuals, Estates, and Trusts must compute the NOL carryback on Part IV of Form 3805V, Net Operating Loss (NOL) Computation and Disaster Loss Limitations Individuals, Estates, and Trusts. Estimated Tax Payments 2015 Installments due for taxable year 2015 are required to be 30% of the required estimate tax liability for the 1 st and 4 th required installments, 40% for the 2 nd required installment, and 0% for the 3 rd required installment. Period Payment Due Date January 1 through March 31, 2015 April 15, 2015 April 1 through May 31, 2015 June 15, 2015 June 1 through August 31, 2015 September 15, 2015 September 1 through December 31, 2015 January 15, 2016 Head of Household If the taxpayer is unmarried, his/her unmarried child no longer qualifies the taxpayer for Head of Household filing status if the child is 19 years of age or older, is not a student under age 24, and has gross income equal to or greater than the federal exemption amount ($3,950 in 2014). If the taxpayer is unmarried and his/her unmarried child is under 19 or a student under 24 and pays more than one-half of his/her own support, the child no longer qualifies the taxpayer as Head of Household. Forms To Use The Federal Form 1040, 1040A, or 1040EZ, must be completed before Form 540 or Form 540 2EZ. Form 540A has been eliminated. Form 540 2EZ may be used by taxpayers that are: Single, Married/RDP filing jointly, Head of Household, Qualifying Widow(er), and 0-3 dependents are allowed. 5

13 Total income is $100,000 or less (Single or Head of Household) or $200,000 or less (Married/RDP filing jointly or Qualifying Widow(er)). Income must be from wages, salaries, tips, taxable interest, dividends, and pensions, taxable scholarship or fellowship grant (only if reported on Form(s) W-2, unemployment compensation reported on Form 1099-G, paid family leave, Social Security, tier 1 and tier 2 railroad retirement payments, and capital gains distributions from mutual funds. Only tax credits allowed are for personal exemptions, senior exemption, up to three dependent exemptions, and nonrefundable renter s credit. Income may only be from wages, salaries, tips, taxable interest, dividends, and pensions, taxable scholarships and fellowship grants (only if reported on Form W-2), capital gains, unemployment compensation reported on Form 1099-G, paid family leave insurance, Social Security benefits; tier 1 and tier 2 railroad retirement payments. Adjustments to income are not allowed. Form 540 will be used by all California residents that do not file Form 540 2EZ. Filers of Form 540 will use Schedule CA to make Federal adjustments to gross income and itemized deductions. Adjustments for the treatment of Capital Gains and Losses will be reported on California Schedule D and transferred to Schedule CA. Depreciation and Amortization will be reported on FTB 3885 and then transferred to Schedule CA. Filers of Form 540 are required to attach a copy of their completed Federal Form 1040 if their Form 1040 contains schedules other than Schedules A or B. Form 540NR, California Nonresident or Part-Year Resident Income Tax Return, is used to report California sourced income. California Adjustments from Schedule CA (540NR) is used to make income adjustments to determine the taxpayer s adjusted gross income. USE TAX TABLE The Use Tax applies to purchases from out-of-state sellers and is similar to the sales tax paid on purchases within California. Failure to timely report and pay the use tax due may result in the assessment of penalties. The tax preparer may be able to use the Estimated Use Tax Table to estimate and report the use tax due on individual non-business items your client purchased for less than $1,000 each. Estimated Use Tax Table California AGI Range Use Tax Liability Less Than $10,000 $2 Less than $19,999 $5 $20,000 to $29,999 $9 30,000 to $39,999 $12 $40,000 to $49,999 $16 $50,000 to $59,999 $19 $60,000 to $69,999 $23 $70,000 to $79,999 $26 $80,000 to $89,999 $30 $90,000 to $99,999 $33 $100,000 to $124,999 $39 $125,000 to $149,999 $48 $150,000 to $174,999 $57 $175,000 to $199,999 $63 More than $199,999 Multiply AGI by 0.035% ( EXAMPLE Larry and Beth House file married filing jointly. During 2014, they made non-business purchases for less than $1,000 each outside of California. Their 2014 AGI is $145,788 and their use tax liability from the Use Tax Table is $48. 6

14 EXAMPLE Kevin and Sharon Holt file married filing jointly. During 2014, they made non-business purchases for less than $1,000 each outside of California. Their 2014 AGI is $249,445 and their use tax liability from the Use Tax Table is calculated as follows: $249,445 x (0.035%) = $87. USE TAX WORKSHEET The Use Tax Worksheet must be used to calculate your client s use tax liability if: - Your client owes use tax on purchases of individual items with a purchase price of $1,000 or more. - Your client owes use tax on any item purchased for use in a trade or business not registered with the State Board of Equalization. - Your client prefers to calculate the amount of use tax based upon actual purchases subject to use tax. EXAMPLE Your client purchased out of state items used in his business. His total cost was $23,300 and his California sales/use tax rate is 8%. Use Tax Worksheet 1. Enter purchases from out of state sellers made without payment $23,300 of California sales/use tax. Enter purchases of items with a purchase price of $1,000 or more plus items purchased for use in a trade or business not registered with the State Board of Equalization. 2. Enter the applicable sales and use tax rate. 8% 3. Multiply line 1 by the tax rate on line 2. $1, If your client chooses to estimate the use tax due on individual non-business purchased for less than $1,000 each, enter the total on this line. $-0-5. Add lines 3 and 4. This is your client s total use tax. $1, Enter any sales or use tax your client paid to another state for purchases included in line 1. $-0-7. Subtract line 6 from line 5. This is the total sales/use tax due. $1,864 Enter $-0- if the amount is less than $-0-. EXAMPLE Your client purchased out of state items used in his business. His total cost was $68,904 and his California sales/use tax rate is 8%. Use Tax Worksheet 1. Enter purchases from out of state sellers made without payment $68,904 of California sales/use tax. Enter purchases of items with a purchase price of $1,000 or more plus items purchased for use in a trade or business not registered with the State Board of Equalization. 2. Enter the applicable sales and use tax rate. 8% 3. Multiply line 1 by the tax rate on line 2. $5, If your client chooses to estimate the use tax due on individual non-business purchased for less than $1,000 each, enter the total on this line. $-0-5. Add lines 3 and 4. This is your client s total use tax. $5, Enter any sales or use tax your client paid to another state for purchases included in line 1. $-0-7. Subtract line 6 from line 5. This is the total sales/use tax due. $5,512 Enter $-0- if the amount is less than $-0-. 7

15 If your client purchased any of the following items from out of state, s/he should pay the sales/use tax directly to the State Board of Equalization and not on his income tax return. - Cigarettes and tobacco products when the purchaser is registered with the State Board of Equalization as a cigarette and/or tobacco products consumer. - Leases of machinery, equipment, vehicles, and other tangible property. - Aircraft - Vessels documented with the U.S. Coast Guard. - Mobile homes or commercial coaches that must be registered annually as required by the Health and Safety Code. - Vehicles, vessels, and trailers that must be registered with the Department of Motor Vehicles. REQUIREMENTS FOR FILING 1. RESIDENCY A resident is any individual who is: - In California for other than a temporary or transitory purpose; or - Domiciled in California, but outside California for a temporary or transitory purpose. A taxpayer will be presumed to be a California resident for any tax year in which he/she spends more than nine months in this state. A taxpayer may only have one principal residence. The residence where the taxpayer spends more than six months is considered to be the taxpayer s main residence. -A nonresident is any individual who is not a resident. -A part-year resident is any individual who is a California resident for part of the year and a nonresident for part of the year. 2. SOCIAL SECURITY NUMBER (SSN) OR INDIVIDUAL TAXPAYER IDENTIFICATION NUMBER (ITIN) The Individual Taxpayer Identification Number is issued by the Internal Revenue Service to foreign nationals and others who have a federal tax filing requirement and do not qualify for a social security number. The ITIN is a nine digit number that always starts with the number 9. The ITIN is for tax processing purposes only and can be obtained by filing Form W-7 with the IRS. The ITIN is not available for U.S. citizens. NON RESIDENT ALIEN SPOUSE If the taxpayer s spouse is a non resident alien, s/he must have either an SSN or an ITIN if: - Taxpayer files a joint return - Taxpayer files a separate return and claims an exemption for his/her spouse, or - Taxpayer s spouse is filing a separate return 3. EMPLOYMENT CONTRACT An individual domiciled in California who is outside California under an employmentrelated contract for at least 546 consecutive days will be considered a nonresident unless: - The individual has intangible income exceeding $200,000 in any taxable year during which the employment-related contract is in effect; or - The principal purpose of the absence from California is to avoid personal income tax. 4. DETERMINING RESIDENCY The following list shows some of the factors to use to determine residency: - Amount of time spent in California versus amount of time spent outside of California; - Location of taxpayer s spouse and children; - Location of taxpayer s principal residence; - Where taxpayer s driver s license was issued; - Where taxpayer s vehicles are registered; - Where taxpayer maintains his/her professional licenses; 8

16 - Where taxpayer is registered to vote; - Location of banks where taxpayer maintains accounts; - Location of taxpayer s doctors, dentists, accountants, and attorneys; - Location of taxpayer s church, temple, or mosque, professional associations, or social and country clubs of which he/she is a member; - Location of taxpayer s real property and investments; - Location of taxpayer s social ties; - Permanence of taxpayer s work assignment in California. 5. DECEASED TAXPAYER The decedent's income includible on the final return is generally determined in the same way as if the person was still alive except that the taxable period is usually shorter because it ends on the date of death. The method of accounting by the decedent determines the income includible on the final return. Under the cash method the decedent only accounted for money as it was actually or constructively received. Under the accrual method the decedent only accounted for money when it was earned and expense was incurred. The death of a taxpayer that was a partner in a partnership does not close the partnership's tax year before it normally ends. The tax year continues for the remaining partners and the deceased partner. Income earned up to the date of death of the partner is income in respect of the decedent. Income earned after the partner's date of death is income to the estate or successor in interest. The rules for exemptions and deductions for individuals also apply to the decedent's final return. The executor/administrator can claim the personal exemption in full on the final income tax return. If the decedent was another person's dependent, the executor/administrator cannot claim the personal exemption on the decedent's income tax return. Medical expenses paid before death by the decedent are deductible on the final income tax return if deductions are itemized. Medical expenses that are not deducted on the final income tax return are liabilities of the estate and are shown on the federal estate tax return. If the decedent's estate pays the decedent's medical bills within one year of the decedent's death, the executor/administrator can claim the medical deductions on the decedent's final income tax return. Tax return must be filed by appointed executor or administrator of the deceased taxpayer's estate. Deceased and the date of death should be entered next to the deceased taxpayer's name at the top of the tax return. A surviving spouse that did not remarry during his/her tax year may file a joint return by indicating next to the signature that he/she is the surviving spouse. 6. MILITARY PERSONNEL Military pay is not taxable for non resident military personnel serving in California unless: - California becomes the permanent residence of the military person, or income, other than military pay, is earned by military personnel or spouse in California Military pay is not taxable for resident military personnel stationed outside California on permanent orders unless: - Spouse remains a California resident - Military person or spouse has income derived from California sources California allows an exemption from taxes to any California taxpayer who dies on active duty with any branch of the armed forces of the United States. 9

17 7. CERTAIN CHILDREN WITH INVESTMENT INCOME Any child who is under age 19 or a student under age 24 at the end of 2014, and has investment income over $2,000 is taxed at the parent s rate if the parent s rate is higher than the child s rate. If the child s investment income is more than $2,000; use Form FTB 3800, Tax Computation for Children Under 19 with Investment Income, to figure the child s tax. Also include investment income that was not taxed on the child s federal tax return but is taxable under California law. If the child uses Form FTB 3800, he/she must file Form 540, California Resident Income Tax Return or Form 540NR, California Nonresident or Part-Year Resident Income Tax Return. 8. MARITAL STATUS, DEPENDENTS, AND INCOME determine if filing a California income tax return is required for FILING STATUS AGE CALIFORNIA GROSS INCOME DEPENDENTS or more Single or Under 65 $16,047 $27,147 $35,472 Head of Household 65 or older* 21,447 29,772 36,432 Married/RDP filing joint Under 65 (both) 32,097 43,197 51,522 or Married/RDP filing 65 or older (one) 37,497 45,822 52,482 Separate** 65 or older (both) 42,897 51,222 57,882 Qualifying Widow(er) Under 65 27,147 35, or older 29,772 36,432 Dependent of another Under 65 More than the standard person - any filing 65 or older deduction status FILING STATUS AGE CALIFORNIA ADJUSTED GROSS INCOME DEPENDENTS or more Single or Under 65 $12,858 $23,938 $32,263 Head of Household 65 or older 18,238 26,563 33,223 Married/RDP filing joint Under 65 (both) 25,678 36,778 45,103 or Married/RDP filing 65 or older (one) 31,078 39,403 46,063 Separate* 65 or older (both) 36,478 44,803 51,463 Qualifying Widow(er) Under 65 23,938 32, or older 26,563 33,223 Dependent of another Under 65 More than the standard person - any filing 65 or older deduction status * A person born on January 1, 1950 is considered to be 65 in ** The income of both spouses/rdps must be combined; both spouses/rdps may be required to file a return even if only one spouse/rdp had income over the amounts listed. RDPs are registered with the California Secretary of State as Registered Domestic Partner and are required to file using the Married/RDP filing jointly or Married/RDP filing separately filing status.

18 9. OTHER FILING REQUIREMENTS Your client must file a return if any one of the following applied for 2014: Your client owes special taxes that include: - Recapture taxes - Tax on an accumulation distribution from a trust - Tax on a lump-sum distribution - Tax for children under age 19 or student under age 24 who has investment income greater than $2,000 - Tax on qualified retirement plan including an IRA or an Archer Medical Savings Account (MSA) - Alternative Minimum tax - Deferred tax on certain installment obligations DETERMINING FILING STATUS A taxpayer s filing status for California must be the same as the filing status used on the taxpayer s federal income tax return (except RDP). If an individual did not file a federal return because he/she did not have a federal filing requirement, he/she should use the filing status he/she would have used had the individual been required to file. An individual may file either a joint return or separate return if either spouse was: - An active member of the United States Armed Forces during 2014; or - A nonresident for the entire year and had no income from California sources during SINGLE A taxpayer may file Single if he/she was not married or an RDP on the last day of the tax year or has obtained a Final Decree of Divorce or Separate Maintenance and does not qualify to use another status. The taxpayer could also file Single if all the following apply: - S/he was married but lived apart from his/her spouse for the entire year, and - S/he provided more than half the cost of maintaining his/her home during the tax year, and - His/her home was the principal home of his/her child or stepchild for more than 6 months of the tax year, and - The child was his/her dependent. 2. MARRIED/RDP FILING JOINTLY RETURN A couple may file a joint return if: They were married or an RDP on the last day of the tax year, both agree to file a joint return, and they were residents of California for the entire tax year (does not apply to military personnel on active duty). Federal filing status for RDP will be Single. California does not recognize common law marriages. - Taxpayer s spouse/rdp died in 2014 and the taxpayer did not remarry or enter into another registered domestic partnership in Taxpayer s spouse/rdp died in 2015 before the 2014 tax return was filed. If your client filed jointly for federal taxes, you may file them separately for California if either spouse was: - A nonresident for the entire year and had no income from California sources during An active member of the United States armed forces or any auxiliary military branch during MARRIED/RDP FILING SEPARATE RETURN A couple meeting Married/RDP filing jointly return requirements may file Married/RDP filing separate return if they choose. RDP will file Single for federal taxes. A separate return must be filed if either spouse/rdp was not a California resident for the entire tax year. A Married/RDP couple filing separately must: - Include half of all community income on each return - Include all separate income on their respective return - Both must itemize or not itemize 11

19 - Both must enter other spouse's name and social security number in spaces provided on Form HEAD OF HOUSEHOLD If a taxpayer filed federal Form 1040NR or Form 1040NR-EZ, the taxpayer does not qualify to use the Head of Household or Married Filing Jointly filing status. Instead, the individual must use Single, Married Filing Separately, or Qualifying Widow(er). RDP can file Head of Household if s/he meets Head of Household filing requirements. The general rules to qualify for California Head of Household filing status are: - Taxpayer was unmarried or considered unmarried as of the last day of the year, and - Taxpayer paid more than half the costs of keeping up his or her home for the year, and - Taxpayer s home was the main home for the taxpayer and another person who lived with The taxpayer f or more than half the year, and - The other person was taxpayer s qualifying relative or foster child, and - The taxpayer was not a nonresident alien at any time during the year. To be unmarried or considered unmarried the taxpayer must meet the following requirements: UNMARRIED For Head of Household purposes unmarried means one of the following: Never married. Divorced under a final court decree. Legally separated under a final court decree. Marriage annulled under a final court decree. Widowed (spouse died in a previous tax year). Taxpayer paid more than half the cost of keeping up his or her home as the main home for one of the qualifying persons listed below: Taxpayer s birth child, stepchild, grandchild, adopted child, brother, sister, half-brother, half-sister, stepparent, grandparent, stepbrother, stepsister, son-in-law, daughter-in-law, father-in-law, mother-in-law, brotherin-law, or sister-in-law, who lived with taxpayer for more than half of 2014 and for whom taxpayer was entitled to claim dependent exemption credit; or taxpayer s blood-related uncle, aunt, nephew, or niece who lived with taxpayer for more than half of 2014 and for whom taxpayer was entitled to claim a dependent exemption credit. Taxpayer s unmarried child no longer qualifies taxpayer for head of household status if he/she is 19 years of age or older, is not a student, and has gross income equal to or more than $3,950. Taxpayer s foster child who lived with taxpayer during all of the tax year and for whom taxpayer is entitled to claim a dependent exemption credit. A foster child is one who is in the care of someone (other than the child s parent) who cares for the child as his or her own child. The foster relationship must have begun while the child was a minor. In 2014, for a child to qualify as taxpayer s foster child, the child must either be placed with taxpayer by an authorized placement agency or by order of a court. The child of a person taxpayer lived with is not taxpayer s foster child, even if the child lived with taxpayer all year, because the child was in care of his/her parent. Taxpayer s parent for whom taxpayer provided more than half the cost of keeping up a home for all of the tax year and for whom taxpayer is entitled a dependent exemption credit. Taxpayer s parent need not live with taxpayer. 12

20 OR CONSIDERED UNMARRIED For Head of Household purposes considered unmarried means: Taxpayer was legally married on the last day of the year, but lived apart from spouse at all times during the last six months of the tax year. Taxpayer paid more than half the cost of keeping up his or her home as the main home for one of the qualifying persons listed below: Taxpayer s birth child, stepchild, or adopted child who lived with taxpayer for more than half of the year and for whom taxpayer is entitled to claim a dependent exemption credit. Taxpayer s foster child who lived with taxpayer during all of the tax year and for whom taxpayer is entitled to claim a dependent exemption credit. A foster child is one who is in the care of someone (other than the child s parents) who care for the child as his or her own child. The foster relationship must have begun while the child was a minor. The child of a person taxpayer lived with is not taxpayer s foster child, even if the child lived with taxpayer all year, because the child was in the care of his or her parent. Two or more people sharing the same household may not claim the Head of Household filing status. Taxpayer is keeping up a home only if taxpayer pays more than half of the costs of keeping up the home. If two or more families occupy the same dwelling, but maintain separate finances, and each family does not contribute to the support of the other family, each family may be treated as keeping up a separate home. Costs Included In Keeping Up A Home - Rent - Mortgage interest - Property taxes - Home insurance - Repairs - Utilities - Food eaten in the home Costs Not Included In Keeping Up A Home - Clothing - Education - Medical treatment - Vacations - Life insurance - Transportation - Rental value of a home your client owns - State Aid to Families with Dependent Children monies received do not count as amounts your client paid. 5. QUALIFYING WIDOW(ER) WITH DEPENDENT CHILD - The taxpayer's spouse must have died during either of 2 tax years prior to the current tax year, and - The taxpayer did not remarry prior to the end of the current tax year, and 13

21 - The taxpayer has a dependent child, stepchild, foster child, or adopted child that lived with the taxpayer for the entire year, and - The taxpayer paid more than half the cost of keeping up his/her home for the child - Client could have filed a joint return with his/her spouse for the year his/her spouse died - Client's dependent child, stepchild, adopted child or foster child lived with him/her (except for temporary absences) - Client paid over one-half the cost of keeping up the home for this child for the whole year. - Do not claim an exemption for client's spouse. EXEMPTION CREDITS 1. PERSONAL 2014 NUMBER OF EXEMPTIONS (1) Single 1 (2) Married/RDP Filing Jointly 2 (3) Married/RDP Filing Separate Return 1 (4) Head of Household 1 (5) Qualifying Widow(er) 2 2. BLIND (ADDITIONAL EXEMPTIONS) - Single 1 - Husband/RDP 1 - Spouse/RDP 1 - Both Husband and Spouse/RDPs 2 A married/rdp couple filing jointly and both are blind can claim 4 exemptions. The first year that your client claims the blind exemption credit, s/he must include a doctor's statement to Form 540 or Form 540 2EZ indicating that s/he is visually impaired. Your client is visually impaired if s/he cannot see better than 20/200 while wearing glasses or contact lenses, or if your client s field of vision is not more than 20 degrees. An individual who is someone else's dependent may not claim this credit. 3. SENIOR 65 OR OVER (ADDITIONAL EXEMPTIONS) - Husband/RDP 1 - Spouse/RDPs 1 - Both Husband and Spouse/RDPs 2 - A married/rdp couple filing jointly and the husband/rdp is 65 and the spouse/rdp is less than 65 can claim 3 exemptions PERSONAL EXEMPTION CREDIT Each personal, blind, and senior exemption is worth $ DEPENDENT CREDIT (NOT INCLUDING TAXPAYER OR SPOUSE) Credit is allowed for each listed dependent To claim an exemption for each of your client's dependents, write each dependent's name, Social Security number or Individual Tax Identification Number and relationship on Form 540 or Form 540 2EZ in the space provided. The persons listed as dependents on Form 540 or Form 540 2EZ must be the same persons that were listed on the federal income tax return. Each exemption is worth $333 for 2014 for dependents other than taxpayer and spouse. 14

22 TOTAL EXEMPTION CREDITS If your Federal adjusted gross income is more than the following amounts, your client s total exemption credit will be limited: 2014 Single or Married/RDP Filing Separately $176,413 Head of Household $264,623 Married Filing Jointly/RDP or Qualifying Widow(er) $352,830 EXAMPLE Single taxpayer under 65 with Federal AGI $193,963. a. Enter Federal AGI $193,963 b. Enter filing status amount $176,413 Single or married/rdp filing separately $176,413 Head of Household $264,623 Married/RDP filing jointly or Qualifying widow(er) $352,830 c. Subtract line b from line a $17,550 d. Divide line c by $2,500 ($1,250 if 8 married filing separately). If the result is not a whole number, round it to the next higher whole number (7.02 rounds to 8) e. Multiply line d by $6 $48 f. Enter the number of personal, blind, and 1 senior exemptions Form 540/540A g. Multiply line e by line f $48 h. Enter the exemption credit dollar $108 amount claimed on Form 540/540A i. Subtract line g from line h. If less than $60 zero enter $-0- j. Enter the number of dependents claimed on -0- line 10, Form 540/540A k. Multiply line e by line j -0- l. Enter the dollar amount from line 10, -0- Form 540/540A m. Subtract line k from line l. If zero or less -0- enter -0- n. Add line i and m. Enter the result. $60 Line n is your client s exemption credit that is reported on line 32, Form 540 or Form 540 2EZ. In this example, the exemption credit was limited to $60 instead of $108 due to the taxpayer s federal AGI exceeding $176,

23 EXAMPLE Married/RDP taxpayers, both under 65, filing jointly with two dependent children. Their Federal AGI is $405,573. a. Enter Federal AGI $405,573 b. Enter filing status amount $352,830 Single or married/rdp filing separately $176,413 Head of Household $64,623 Married/RDP filing jointly or Qualifying widow(er) $352,830 c. Subtract line b from line a $52,743 d. Divide line c by $2,500 ($1,250 if 22 married/rdp filing separately). If the result is not a whole number, round it to the next higher whole number (21.1 rounds to 22). e. Multiply line d by $6 $132 f. Enter the number of personal, blind, and 2 senior exemptions Form 540 g. Multiply line e by line f $264 h. Enter the personal exemption credit $216 dollars claimed on Form 540/540A (2 x $108 = $216) i. Subtract line g from line h. If zero or $-0- less than zero enter $-0- j. Enter the number of dependents claimed on 2 line 10, Form 540 k. Multiply line e by line j $264 l. Enter the dollar amount from line10, $666 Form 540 (2 dependents x $333 = $666) m. Subtract line k from line l. If zero or $402 less than zero, enter $-0-. n. Add lines i and line m. $402 Line n is your client s exemption credit that is reported on Line 32, Form 540. In this example, the exemption credit was limited to $402 instead of $882 due to their Federal AGI exceeding $352,830. EXEMPTION CREDITS FOR MARRIED/RDP FILING SEPARATELY RETURN When taxpayers file separate returns, the taxpayer and his/her spouse/rdp must each claim their own personal exemption credit. When a taxpayer has more than one dependent supported by community funds, the taxpayer and his/her spouse/rdp may divide the number of dependents between them in any manner they choose. Taxpayers/RDPs may not split the exemption credit for any one dependent. INCOME TAXABLE BY CALIFORNIA 1. WAGES, SALARIES, AND OTHER EARNINGS Taxpayer must include everything he/she receives in payment for personal services in his/her gross income. EXAMPLES OF INCOME TAXPAYERS MUST REPORT (NOT ALL INCLUSIVE) - wages, including salaries, fringe benefits, bonuses - commissions, fees, and tips 16

24 - dividends Dividends are distributions of money, stock, or other property that corporations pay to stockholders. They also include dividends your client receives from a partnership, an S corporation, or an estate or trust. If total dividends exceed $1,500, Schedule B must be completed. Dividends include: - ordinary dividends - these are paid out of earnings and profits and are ordinary income - nontaxable distributions -these distributions are nontaxable until your client gets back all of his/her cost Do not report as dividends the following: - mutual insurance company dividends that reduced the premiums your client paid - amounts paid on deposits or accounts from which your client could withdraw money (reported as interest on line 8a Form 1040) - interest Examples of interest you must report: -accounts with banks, credit unions, and savings and loan associations -building and loan accounts -notes, loans, and mortgages -tax refund interest -bonds and debentures - bond deposits, bonus, notes mortgages on which your client receives payments certain arbitrage bonds accounts with savings and loans association, mutual savings bond, credit unions, in certain instances part of federal Social Security benefits and tier 1 railroad retirement benefits may be taxable - partnership income and S corporation income reported on Schedule K-1 - tier 2 and supplemental annuities under the railroad retirement act - original issue discount - distributions from an Individual Retirement Arrangement (IRA), including SEPs - amounts received in place of wages from accident and health plans (including sick pay and disability pensions) if your client's employer paid for the policy - bartering income your client received - business expense reimbursements your client received that are more than s/he spent for these expenses - alimony, separate maintenance, or support payments received - the value of free tours received from a travel agency for organizing a group of tourists - benefits received under a credit card disability or unemployment insurance plan that exceed the amount of premiums paid during the tax year - Pulitzer, Nobel, and other prizes in recognition of past accomplishments (in religious, charitable, scientific, artistic, educational, literary, or civic fields) are claimed as income unless your client meets all of the following requirements: your client was selected without any action on his/her part to enter the contest or proceeding your client is not required to perform substantial future services as a condition to receive the prize or award, and the prize or award is transferred directly to a governmental unit or tax exempt charitable organization as designated by your client - life insurance proceeds that are more than the premiums paid - profits from businesses and professions 17

25 - your client's share of profits from partnerships and S corporations - profits from farming - pensions, annuities, and endowments - lump-sum distributions - gains from the sale or exchange of: real estate securities coins gold silver gems other property - gains from the sale of your client's personal residence that are greater than the excludable amount - rents and royalties - your client's share of estate or trust income, including accumulation distributions from trusts - prizes and awards - contests - raffles - lottery (except California lottery) - gambling winnings - earned income from sources outside the United States (foreign government, an international organization, a foreign embassy, or any foreign employer) - director's fees - fees received as an executor or administrator of an estate - stock options if you receive a nonstatutory option to buy or sell stock or other property for your services, you usually will have income when you receive the option, when you exercise the option, or when you sell or otherwise depose of the option. - if you receive property for your services, you must include its fair market value in your income - severance pay (pay received by employees who lose their job) - employer-provided vehicles personal use of the car is usually a taxable noncash fringe benefit - stock appreciation rights granted by your employer when exercised - bribes received - campaign contributions diverted to a candidate for his/her personal use - employment agency fees that you pay and later your employer reimburses you, the amount is included in your income - kickbacks - if you steal property, you must report its fair market value in your income in the year you steal it unless in the same year, you return it to its rightful owner - embezzled or other illegal income - strike and lockout benefits including both cash and the fair market value of other property - if you find and keep property that does not belong to you that has been lost or abandoned, it is taxable to you at its fair market value in the first year it is your undisputed possession - if a debt is cancelled or forgiven, other than as a gift or bequest, a taxpayer generally must include the cancelled amount in his/her gross income for tax purposes - a recovery of an amount previously deducted on a taxpayer s return (bad debt) - hobby income (expenses cannot exceed hobby income reported) - back pay awards received in a settlement or judgment for back pay. Included are payments received for damages, unpaid health insurance premiums, and unpaid life insurance premiums - military retirement pay received based on age or length of service 18

26 EXAMPLES OF INCOME CALIFORNIA TAXPAYERS DO NOT REPORT (NOT ALL INCLUSIVE) - welfare benefits - workers' compensation benefits, insurance damages, etc, for injury or sickness - child support payments - unemployment benefits - Social Security - gifts, money, or other property you inherited or that was willed to you - Black Lung benefits - meals and lodging provided by employer - mileage allowance - scholarship and fellowship grants - cash rebates - Veteran s benefits paid under any law, regulation, or administrative practice managed by the Department of Veterans Affairs (VA). The following amounts received by the veteran or their families are not taxable: - grants for homes designed for wheelchair living - interest on insurance dividends left on deposit with the VA - bonus paid by a political subdivision or state because of service in a combat zone - payments received under the compensated work therapy program - death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, grants for motor vehicles for veterans that lost their sight or the use of their limbs - benefits under a dependent-care assistance program - education, training, and subsistence allowances - disability compensation and pension payments for disabilities paid to either veterans or their families - dividends on Veterans' life insurance - life insurance proceeds received because of a person's death - interest on certain California state and municipal bonds - amounts your client received from insurance because s/he lost the use of his/her home due to fire or other casualty to the extent the amounts were more than the cost of his/her normal expense while living in his/her home - cancellation of certain student loans - value of accident or health plan coverage provided by employer - contributions by taxpayer s employer to provide long-term care services (unless through a flexible spending or similar arrangement) - contributions by taxpayer s employer to provide Health Flexible Spending Arrangement (health FSA) that qualifies as an accident health plan are not taxable to the employee. Reimbursements of medical expenses from the FSA are usually not taxable to the employee. FSAs are subject to a $2,500 salary reduction limit on contributions. - reimbursements received for reimbursements of medical care expenses from the taxpayer s employer provided Health Reimbursement Arrangement (HRA) that qualifies as an accident or health plan are not taxable to the employee. - contributions by your employer to the taxpayer s Archer MSA. This amount is generally not included in the taxpayer s income but is reported in box 12 of your client s W-2 and coded R. - contributions by taxpayer s employer for disability premiums - dependent child care assistance from employer for nursery or baby-sitting - employee purchase discounts - qualified adoption expenses paid by your employer in connection with the taxpayer s adoption of an eligible child. - the value of a turkey, ham, or other item of nominal value given to taxpayer at Christmas or other holidays 19

27 - your client can exclude up to $5,250 of qualified educational assistance provided by his/her employer. For additional information see IRS Publication 970, Tax Benefits For Education. - the cost of up to $50,000 of group-term life insurance coverage provided by your client s employer (or former employer). Taxpayer must claim as income the cost of insurance their employer paid for group term life insurance exceeding $50,000. The taxpayer may reduce this amount by any amount they paid toward the purchase of the insurance. Group-term life insurance is also known as term life insurance. The insurance normally provides a death benefit to employees, does not discriminate, and is provided by the employer to a group of employees. - qualified retirement planning services provided to taxpayer (and taxpayer s spouse). - qualified transportation fringe benefit can be excluded up to certain limits. Exclusion for commuter highway vehicle transportation and transit pass. - qualified parking fringe benefit exclusion. - reimbursed employee business expenses - qualified bicycle commuting fringe benefit exclusion cannot exceed $20 a month. - taxpayer s employer s contribution to a qualified retirement plan - income received from activities related to Indian fishing rights if the taxpayer is a member of a qualified Indian tribe that secured the rights by treaty, executive order, or an Act of Congress as of March 17, interest on frozen deposits - interest on qualified savings bonds taxpayer redeems if the taxpayer paid qualified educational expenses in the same year - if debt is cancelled under a bankruptcy proceeding under title 11 of the U.S. Code, the amount cancelled is not income - qualified moving expenses paid by taxpayer s employer - income from a covenant not to compete in California, if severable from the sale of other intangibles, is income from sources within California - alimony received by a non-resident - Railroad Retirement tiers I and II - U.S. Government securities - CA Municipal bonds - Pension received by a non-resident - California Lottery winnings - Paid family leave benefits - Rewards from a crime hotline - Income received from a recycling center for empty beverage containers - Payments made for wrongful incarceration - California state income tax refund Residents of California are taxed on all income including income from sources outside of California. Nonresidents and part-year residents of California are taxed only on income from California sources. Nonresidents of California are not taxed on pensions received from California in INTEREST Interest that a taxpayer receives or that is credited to tax-payer's account is taxable. EXAMPLES INCLUDE - Cooperative banks - Credit unions - Mutual savings banks - Federal savings and loan associations - Domestic savings and loan associations - Domestic building and loan associations - Tax refund interest 20

28 - All Savers Certificate EXCLUDE THE FOLLOWING INTEREST EXAMPLES: - IRA, until withdrawn - Interest received on obligations of the United States government or its possessions - Interest received on bonds of the District of Columbia - Interest received on bonds of the State of California and its political subdivisions - United States savings bonds - United States Treasury bills and notes - United States Government Securities 3. DIVIDENDS Dividends are distributions of money, stock, or other property paid to a taxpayer by a corporation. Taxpayers may also receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Examples include: Dividends include: - ordinary dividends - these are paid out of earnings and profits and are ordinary income - nontaxable distributions -these distributions are nontaxable until your client gets back all of his/her cost Do not report as dividends the following: - mutual insurance company dividends that reduced the premiums your client paid - amounts paid on deposits or accounts from which your client could withdraw money (report as interest on line 8a Form 1040) 4. BUSINESS INCOME (OR LOSS) A resident s income from California sources includes income from a business, trade, or profession carried on in California. Self-employed taxpayers need a business license. Net earnings from self-employment generally is the income from your client's business or profession. Your client is self-employed if s/he conducts a trade or business as a sole proprietor, an independent contractor, or is otherwise in business for himself/herself. Self-employment includes full-time business activities and part-time work that your client performs at home or in addition to his/her regular job. 5. PENSIONS AND KEOGHS (HR 10) Distributions from employer-sponsored and self-employment (Keogh) pension, profit sharing, stock bonus plans, or other deferred compensation arrangements are taxable to California residents regardless of where the services were performed. Distributions from employer-sponsored and self-employment (Keogh) pension, profit sharing, stock bonus plans, or other deferred compensation arrangements are not taxable by California to nonresidents regardless of where the services were performed. 6. INDIVIDUAL RETIREMENT ACCOUNT (IRA), ROTH IRA, SIMPLE IRA, SIMPLIFIED EMPLOYEE PENSION (SEP), AND KEOGH DISTRIBUTIONS IRA, Roth IRA, SIMPLE IRA, SEP, and Keogh distributions received after becoming a nonresident are not taxable by California. 21

29 7. INSTALLMENT SALES Installment payments received by a nonresident on the sale of California property are taxable by California. The interest earned by a nonresident on the installment note is not taxable by California. Installment payments received by a nonresident on the sale of out-of-state property are no longer taxable by California even if the out-of-state sale was made while the taxpayer was a California resident. Installment sale payments received by a California resident on the sale of out-of-state property are now taxed by California even if the out-of-state sale was made before the taxpayer became a California resident. The interest earned on the installment note while the taxpayer is a California resident is taxable by California. 8. LIKE-KIND EXCHANGE If you are a nonresident and exchange real or tangible property located within California for real or tangible property located outside California, the realized gain or loss is recognized. This requires the taxpayer to keep track of their deferred California sourced gains and losses to report them to California in the year the taxpayer sells or disposes of the property received in the exchange. If a taxpayer exchanges real or tangible property located outside California for real or tangible property located within California, the gain recognized when the taxpayer sells or disposes of the California property in a non-deferred transaction has a California source and is taxable by California. 1. The property must be business or investment property. Neither property may be property used for personal purposes. 2. The property you trade and the property you receive must not be property you sell to customers. 3. The property must not be stocks, bonds, notes, certificates of trust or beneficial interest, or other securities. 4. There must be a trade of like property. 5. The property to be received must be identified in writing within 45 days after the date taxpayer transfers the property given up in the trade. 6. The property to be received must be received by the earlier of: a. The 180 th day after the date on which you transfer the property given up in the trade, or b. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs. 9. LUMP-SUM DISTRIBUTIONS Lump-sum distributions received by California residents are taxable regardless of source. Lump-sum distributions from a qualified plan or annuity received by a nonresident are not taxable by California. Lump-sum distributions, derived from a California source, received from most nonqualified plans are taxable for nonresidents by California. 10. SALE OF REAL ESTATE The gain or loss from the sale of real estate has a source where the property is located. If a taxpayer sells California real estate and moves out of state, the gain is taxable by California. The gain is taxable even if the real estate is sold when the taxpayer is a nonresident. Withholding Services and Compliance Section Withholding may be required on sales of California real estate, income allocations or distributions from partnerships, and other payments of California source income paid to nonresidents. Form 593 is used to withhold 3 1/3% called Total Price Method. 11. PARTNERSHIP, S CORPORATION, AND TRUST INCOME (LOSS) When a partner is a part-year resident during any part of its own or the partnership s taxable year, the part-year resident must divide his/her taxable year into two distinct periods. For the period during which the part-year resident was a resident of California, all items of income and deductions are to be included in the partner s California taxable income. For the period during which the part-year resident was a 22

30 nonresident of California, only gross income and deductions realized from sources within California are included in the partner s California taxable income. All California-sourced items of income and loss realized by the partnership during the partnership s taxable year when the partner was a nonresident of California are included in California taxable income. This also applies to shareholders of an S corporation and beneficiaries of a trust. 12. SALE OF STOCKS AND BONDS The gain or loss from the sale of stocks and bonds has a source where the taxpayer is a resident at the time of sale. California will not tax the gain on the sale of stock of a California corporation by a nonresident of California. California will tax the gain on the sale of stocks by a resident of any stocks. 13. DIVISION OF INCOME The residence of the spouse earning the income determines the division of income between spouses when separate returns are filed. Each spouse must follow the law in his/her own state of residence to determine whether income is separate or community. When separate returns are filed, the taxpayer and spouse must each report half of the community income plus all of their separate income on their return. California is a community property state. Community property is all of the property that is not separate property acquired by a husband or wife or both while domiciled in a community property state. Income generated from community property is community income. Community income also includes compensation for services if the spouse earning the compensation is domiciled in a community property state. Community property states (and U.S. territory) are: - Arizona - New Mexico - California - Puerto Rico - Idaho - Texas - Louisiana - Washington - Nevada - Wisconsin Separate property is: - Property owned separately by the husband or wife before marriage; - Property received separately as gifts, bequest, or inheritances; - Property purchased with separate property funds; - Money earned while domiciled in a separate property state; and - All property declared separate in a valid agreement (pre-nuptial, post-nuptial - Income from separate property is income of the spouse who owns the property. When separate returns are filed, each taxpayer must report their separate income on their separate return. ITEMIZED DEDUCTIONS 1. ITEMIZED DEDUCTIONS In tax year 2014, itemized deductions will be reduced by the lesser of an amount equal to 6% of AGI which exceeds $176,413 (Single or Married/RDP filing separate return), $264,623 (Head of Household), and $352,830 (joint return/rdp or Qualifying Widow(er)); or 80% of the deductions otherwise allowed. A California taxpayer may itemize deductions for California taxes even if the individual did not itemize on their federal Schedule A. EXAMPLE Mario and Ramona Palacios file Married/RDP filing jointly. Their Federal AGI is $385,818 which was entered on line 13 of California Form 540 and they itemized deductions of Federal Schedule A. They will be required to complete Itemized Deduction Worksheet. 1. Amount from Schedule CA, line 42. $26,542 23

31 2. Using California amounts, add the amounts on federal Schedule A $3,863 (Form 1040), line 4 (medical deduction), line 14 (investment interest), and line 20 (casualty and theft loss), plus any gambling losses included on line Subtract line 2 from line 1. $22, Multiply line 3 by 80% $18, Amount from Form 540, line 13. $385, Enter the amount shown for your filing status. $352, Subtract line 6 from line 5. $32,988 If zero or less, enter the amount from line 1 on Schedule CA, line 43, and do not continue this form. 8. Multiply line 6 by 6% (.06). $20, Compare line 4 and line 6 and enter the smaller. $18, Total itemized deductions. Subtract line 9 from Line 1. Enter here and on Schedule CA (Form 540), line 43. $8,399 The itemized deduction for Mario and Ramona will be reduced from $26,542 to $8,399 or to the standard deduction if it is greater. EXAMPLE Frank Ford filing status is single. His 2014 Federal AGI is $247,476 which was entered on line 13 of California Form 540 and they itemized deductions of Federal Schedule A. Frank will be required to complete Itemized Deduction Worksheet. 1. Amount from Schedule CA, line 42. $22, Using California amounts, add the amounts on federal Schedule A $2,863 (Form 1040), line 4 (medical deduction), line 14 (investment interest), and line 20 (casualty and theft loss), plus any gambling losses included on line Subtract line 2 from line 1. $19, Multiply line 3 by 80% $15, Amount from Form 540, line 13. $247, Enter the amount shown for your filing status. $176, Subtract line 6 from line 5. $71,063 If zero or less, enter the amount from line 1 on Schedule CA, line 43, and do not continue this form. 8. Multiply line 6 by 6% (.06). $10, Compare line 4 and line 6 and enter the smaller. $15, Total itemized deductions. Subtract line 9 from Line 1. Enter here and on Schedule CA (Form 540), line 43. $ 6,735 The itemized deduction for Frank Ford will be reduced from $22,222 to $6,735 or to the standard deduction if it is greater. Federal medical exclusion percentage was changed in On the Federal Schedule A, you may deduct for your client, if either the taxpayer or spouse is age 65 or over, only that part of his/her medical and dental expenses that are more than 7.5% of his/her adjusted gross income on Form The exclusion amount is 10% for those taxpayers under 65. California did not conform to the federal change and the medical exclusion remains 7.5%. An adjustment will be required on California Form CA for those taxpayers that have medical expenses and are under 65 years of age. 24

32 No reduction is applicable to medical expenses, casualty and theft losses, investment expenses, or gambling losses. An itemized deduction for cosmetic surgery will be disallowed unless it is necessary to improve a deformity arising from a congenital abnormality, a personal injury resulting from accident or trauma, or a disfiguring disease. Political contributions are not deductible. Adjustments to Federal itemized deductions are computed on Schedule CA for taxpayers completing Form 540. California itemized deductions are determined by subtracting state, local, foreign income taxes, general sales and use tax, prior year state taxes paid in 2014, SDI (State Disability Insurance) and Voluntary Disability Insurance (VPDI) claimed on Federal Schedule A from the total Federal Itemized deductions claimed on Schedule A. If a taxpayer had gambling winnings from a California lottery and claimed gambling losses from California lotteries, the gambling losses claimed on Federal Schedule A cannot be deducted for California. 2. VEHICLE LICENSE FEE FOR FEDERAL SCHEDULE A Your client may deduct the California motor vehicle license fee listed on his/her Vehicle Registration Billing Notice from the Department of Motor Vehicles. The following fees listed on the billing notice are not deductible: - registration fee - weight fee - air quality fee 3. STANDARD DEDUCTION California taxpayers that do not itemize deductions may take the standard deduction. If a taxpayer is married/rdp and files a separate return, the taxpayer and spouse/rdp must either both itemize their deductions or both take the standard deduction Single $3,992 Married/RDP Filing Joint Return $7,984 Married/RDP Filing Separate Return $3,992 Head of Household $7,984 Qualifying Widow(er) $7, PART-YEAR AND NONRESIDENTS Itemized deductions are claimed as a resident and they are adjusted based on the ratio of out of state income to California sourced income. 25

33 FIRST INTERACTIVE REVIEW QUESTIONS 26

34 FIRST INTEACTIVE REVIEW ANSWERS 27

35 CALIFORNIA ADJUSTMENTS - RESIDENTS SCHEDULE CA (540) Schedule CA is used to make adjustments to a taxpayer s adjusted gross income and to the taxpayer s federal itemized deductions using California tax law. DIFFERENCES BETWEEN FEDERAL AND CALIFORNIA LAW Wages, Salaries, Tips Military pay Sick pay received under the Federal Insurance Contributions Act and Railroad Retirement Act Employee income exclusion for ridesharing programs Income exempted by U.S. Treaties California Qualified Stock Options (CQSOs) Earning of American Indians Employer-provided meals Difference Active duty military pay is not included as part of California source income unless the military member is domiciled and stationed in California and the pay is earned in California. Active duty military members and their spouses who file joint Federal return may file separate returns for California. When separate returns are filed, the domicile of the spouse earning the income determines the division of the income between the spouses. California excludes from income. Under federal law and the provisions administered by the Employment Development Department, qualified transportation benefits are excluded from gross income. Under the California Revenue and Taxation Code, there are no monthly limits for the exclusion of these benefits. California law provides an income exclusion for compensation or the fair market value of other benefits received for participation in a California ridesharing arrangement, commuting in a third-party vanpool, a private commuter bus, a subscription taxi pool, and monthly transit passes provided for employees and their dependents. Income exempted by treaty under federal law may be excluded for California only if the treaty specifically excludes the income for state purposes. California law provides an income exclusion for California qualified stock options. California does not tax income earned by tribal members who live in Indian country affiliated with their tribe and receive earnings from the same tribal source of which they are members. Federal law allows employees to exclude from fringe benefits the value of meals provided by their employer at the job site for the employer s convenience if the meals were provided to more than 50% of the employees. 28

36 California law has not conformed to this provision which allows the exclusion solely because the meals were provided to more than 50% of the employees. Clergy housing exclusion California does not limit the exclusion for the rental allowance to the fair rental value of the home. Taxable Interest Income Non-California bonds: United States Other states California does not tax the interest earned on federal bonds (U.S. obligations). California taxes the interest from non-california state and local bonds. Dividend Income Exempt interest dividends California taxes dividends received from mutual funds that are paid from interest received from obligations (bonds) issued by non-california states or municipalities in other states. California does not tax dividends paid by a fund attributable to interest received from U.S. obligations or California state or municipal obligations if at least 50% of the fund s assets would be exempt from California tax when held by an individual. Taxable Refunds, Credits, or Offsets of Local Income Taxes State income tax refund California excludes the state income tax refund from income. Alimony Paid Paid by nonresident alien Received by a nonresident alien Alimony expense paid that was not deducted on the federal return is a deduction on the California return. Alimony received which was not included on the federal return must be included on the California return. Business Income or Loss Asset expenses election (Section 179) Federal law allows an expense election up to $500,000 for California allows up to $25,000 expense election. Business expense entertainment and club dues California does not allow a deduction for business expenses at a club that discriminates based on age, sex, religion, or race. 29

37 Enterprise Zone, Local Agency Military Base Recovery Area (LAMBRA), business expense deduction (depreciation expense corporate taxpayer) Real Estate Professionals Material participation in a rental real estate activity Capital Gains and Losses Capital loss carrybacks Gain on sale or disposition of a qualified assisted housing development to low-income residents or to specified entities who maintain housing for low-income residents Gain on sale of personal residence IRA Distributions IRA basis adjustment Federal law has no comparable deduction. A California enterprise zone business and a California LAMBRA may elect to immediately expense up to $40,000 of the cost of qualified property. For California purposes, you may not take an IRC Section 179 deduction on any asset used to calculate the business expense deduction. California considers these activities as passive. California does not allow a carryback of certain capital losses. California law allows the deferral of gain if the proceeds are reinvested in residential real property (other than personal residence) within two years of the sale. California taxpayers who served in the Peace Corp may reduce the 2 year ownership and residency requirement by the number of months served in the Peace Corp during the 5 year period prior to the sale of the residence, but not to exceed 18 months. There may be differences in the taxable amount of the distribution depending on when the contributions were made if the taxpayer changed residency status after he/she first began making contributions to their IRA, or made different deductions for California because of differences between Federal and California self-employment income. The taxpayer will need to calculate their IRA basis as if he/she were a California resident for all prior years. Pensions and Annuities Railroad retirement benefits Canadian Registered Retirement Savings Plan (RRSP) California does not tax railroad retirement benefits. California residents must include their RRSP earnings in their taxable income in the year earned. Health Savings Accounts (HSA) Contributions California does not allow a deduction for contributions to HSA account by an employer for an employee. 30

38 Distributions Interest/Dividend Income Unemployment Compensation Unemployment compensation Paid Family Leave (PFL) The amount taxable under federal law, less interest and dividend income previously taxed by California, is taxable by California. All interest earned and dividends earned on HSAs are taxable by California in the year earned. California does not tax unemployment compensation. California does not tax Paid Family Leave. Social Security Benefits Social security benefits and equivalent tier 1 railroad California does not tax social security benefits and equivalent tier 1 railroad retirement benefits. Other Income/Adjustments To Income Disaster loss carryover Federal NOL Deduction The allowable disaster loss carryover under California law is different than the allowable carryover under federal law. The California carryover is different than the federal carryover. California Form FTB 3805V must be completed. California NOL deduction California requires the completion of Form 3805V. Educator expense Student loan interest Tuition and fees deduction Domestic production activities Grants paid to low-income individual to construct or retrofit buildings to be more energy efficient Other Adjustments Franchise tax or income taxes paid by an S corporation Adoption-related expenses California does not allow a deduction. California conforms to federal law except for a spouse of a non California domiciled military taxpayer residing in a community property state. California does not allow this deduction. California does not allow this deduction. Federal law does not allow an income exclusion. California disallows this deduction. This credit does not apply when a child is adopted from another country or another state, or who was not in the custody of a California public agency or a California political subdivision. 31

39 Mortgage interest credit Mortgage forgiveness debt Relief Investment interest expense Generation Skipping Transfer Federal Estate Tax Medical benefits paid on behalf of registered domestic partners Alternative Minimum Tax Substandard housing expenses State withholding taxes or Prior year state balance due If the taxpayer increased his/her federal mortgage interest deduction by the amount of their mortgage interest credit, the California taxpayer can decrease their itemized deduction by the same amount. Federal law allows an exclusion of income from cancellation or indebtedness from the disposition of your client s principal residence for taxable years California does not conform to federal law regarding cancellation of indebtedness from the disposition of your client s principal residence occurring after December 31, The discharge is taxable. The California and Federal amounts may be different. Use Form FTB 3526 to determine the California deduction. This tax is not deductible on the California return. Federal estate tax paid on income in respect of a decedent is not deductible. Taxpayer s medical and health insurance benefits are extended to include the registered domestic partner and their dependents. Federal law does not include this provision. In general, California conforms to the Internal Revenue Code (IRC) as of January For California, a qualified taxpayer must exclude income, positive and negative adjustments, and preference items attributable to any trade or business when figuring AMT. For taxable years prior to 01/01/2002, California did not conform to the federal treatment of contributions of appreciated property for AMT. All carryovers from these contributions are still treated as an AMT preference item and subject to the AGI percentage limitation. California AMT tax rates are less than the IRS tax rates. California disallows interest, depreciation, tax, and amortization deductions to a taxpayer deriving rental income from substandard rental property. This tax is not deductible on the California return. 32

40 DEPRECIATION AND AMORTIZATION ADJUSTMENTS FTB DEPRECIATION Depreciation is the annual deduction allowed to recover the cost or other basis of business or income producing property with a determinable useful life of more than one year. Land and goodwill are not depreciable. Depreciation starts when your client first uses the property in his/her business and ends when the property is taken out of service, completely depreciated, or is no longer used in the business. Amortization is an amount your client may deduct for certain capital expenses over a fixed period of time. 2. FORM FTB 3885A DEPRECIATION AND AMORTIZATION ADJUSTMENT Depreciation and Amortization adjustment Form FTB 3885 A is required to be completed only if there is a difference between the amounts of depreciation and amortization allowed as a deduction using California tax law and the amount allowed by federal tax law. The form is used for the following adjustments: Asset Expense Election Section 179 Federal law allows an expense election up to $500,000 in 2014 of the cost of certain business property in lieu of depreciation. California allows an expense election up to $25,000. The federal Section 179 phase-out starts at $2,000,000. The California phase-out starts at $200,000. Federal law allows a Section 179 expense election for off-the-shelf software; California does not conform. MACRS Recovery Period for Nonresidential Real Property For federal purposes, the recovery period for nonresidential real property is 39 years. California conformed to this provision on 01/01/1997. The California recovery period of 31.5 years should be used for property placed in service on or after 05/13/1993 and before 01/01/1997. Depreciation of Assets Acquired Prior to 01/01/1987 Federal law allowed the rapid write-off of tangible personal property and buildings under the Accelerated Cost Recovery System (ACRS). California law in general did not conform to federal law but did allow ACRS for residential rental property constructed in California on or after 07/01/1985 and before 01/01/1987. Amortization of Goodwill and Certain Other Intangibles Property classified as IRC (Internal Revenue Code) Section 197 property under federal law is also Section 197 property for California purposes. Section 197 property acquired before 01/01/1994, the California basis as of 01/01/1994, must be amortized over the remaining federal amortization period. Business Property Moves Into California Depreciation methods and useful lives of trade or business property must be acceptable to California. If an unacceptable method was used before the move into California, use the straight-line method to compute the basis in the property. Depreciation and amortization adjustments are completed on FTB 3885 A and then transferred to Schedule CA. CALIFORNIA SCHEDULE D Schedule D is used to reconcile between the amount reported on Federal Schedule D and California 33

41 Schedule D for the gain or loss arising from the sale or exchange of capital assets. CAPITAL ASSET A capital asset includes most property owned and used for personal purposes, pleasure or investment by your client. Examples of capital assets include the following: - Client's house - Client's furniture - Client's stocks and bonds Capital Assets do not include the following: - Stock in trade or other property included in inventory or held for sale to customers. - Accounts of notes receivable your client received for services in the ordinary course of his/her trade or business, or from the sale of any property included in inventory, or for services your client performed as an employee. - Depreciable property used in your client's trade or business even if it was fully depreciated. - Real property (real estate) used in your client's trade or business. - A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property that was created by your client's personal efforts or prepared or produced for your client. - U.S. Government publications that your client received from the government. CAPITAL GAINS HOLDING PERIOD SHORT TERM HOLDING PERIOD The holding period for short-term capital gains and losses is one year or less. Generally, a nonbusiness bad debt must be treated as a short-term capital loss. LONG TERM HOLDING PERIOD The holding period for long-term capital gains and losses is more than one year. To figure the holding period, begin counting on the day after the property was received and include the day when the property was disposed. Stock purchase on May 11, 2014 will not be treated as long term until May 12, If a taxpayer inherits property, s/he is considered to have held the property longer than one year, no matter how long s/he actually holds it. Schedule D will not be required if your client sold stocks and/or bonds which have cost as their basis. Schedule D is also used to reconcile between the amounts reported on Federal Form 4797 and the amount to be reported for California. Assets placed in service prior to January 1, 1987 may have a different basis due to depreciation treatment between Federal requirements and California requirements. Schedule D must be completed for the sale of any of these assets. In general, California tax law conforms to the Internal Revenue Code as of January 1, California does not conform to the federal reduced capital gains tax rates. California taxes capital gains at the same tax rate as other income and allows a carryover of losses for residents. If the taxpayer was a nonresident when capital losses occurred, the taxpayer must recalculate the loss carryover as though the individual was a resident of California for all prior years. LIMIT ON CAPITAL LOSS For 2014 Capital losses are deducted from capital gains. Up to $3,000 capital loss may be deducted from ordinary income ($1,500 if married filing a separate return). Additional loss may be 34

42 carried forward to future years. CHILD AND DEPENDENT CARE QUALIFYING PERSON A qualifying person is any one of the following persons: - Any person under age 13 whom your client can claim as a dependent. - Your client's disabled spouse who is mentally or physically unable to care for himself/herself. - Any disabled person who is mentally or physically unable to care for himself/herself and whom your client could claim as a dependent except that he or she had income of $3,950 or more in Your client must have shared the same home with any person s/he claims as a qualifying person. QUALIFIED EXPENSE Qualified expenses include the following: - Service of a cook, maid, and babysitter - Service of a housekeeper, governess, and cleaning person - Services for the qualifying person's well being - Dependent care center Qualified expenses do not include the following: - Food - Schooling for a child in the first grade or above - Overnight camp expense is not considered necessary for the taxpayer to work CHILDREN OF DIVORCED OR SEPARATED PARENTS If your client was divorced, legally separated, or lived apart from his/her spouse during the last 6 months of 2014, s/he may be able to claim the credit even if the child is not his/her dependent. Your client must meet each of the following requirements: - Your client had custody of the child for the longer period of the year. - The child received over half of his/her support from one or both of the parents. - The child was in the custody of one or both parents over half of the year. - The child was under age 13, or was physically or mentally unable to care for himself/herself. - The child is not your client's dependent because your client waived the right to claim the child's exemption for 2014, or - Your client's divorce decree states that the other parent can claim the child as an exemption. Tax year 2014, allows a nonrefundable credit equal to a percentage of the Federal Child and Dependent care credit. This credit is only available for care provided in California. The requirement to maintain a home in California has been eliminated. Earned military compensation for a military service member domiciled outside of California is not considered as sourced in California and should not be used in computing this credit. Parents who are not married are treated the same as divorced or separated parents. FTB Form 3506, Child and Dependent Care Expenses Credit must be completed. The form is similar to IRS Form The credit percentage varies as follows based on the taxpayer s California adjusted gross income: AGI Credit $40,000 or less 50% Over $40,000 but not over $70,000 43% Over $70,000 but not over $100,000 34% Over $100,000 0% 35

43 EXAMPLE Waitsell and Dorothy Lena file jointly and have two dependent children that received child care. Their federal credit for 2014 is $960 and their California AGI is $88,973. Their child care credit for California is calculated as follows: Federal child care credit is $960 Enter percentage based upon their AGI 34% Multiply Federal child care credit by 34% $960 x.34 (34%) = $326 $326 is their California Child Care Credit EXAMPLE Norman and Judy Truelsen file jointly and have two dependent children that received child care. Their federal credit for 2014 is $440 and their California AGI is $38,956. Their child care credit for California is calculated as follows: Federal child care credit is $440 Enter percentage based upon their AGI 50% Multiply Federal child care credit by 50% $440 x.50 (50%) = $220 $220 is their California Child Care Credit EXAMPLE Raymond and Bui Nguyen file jointly and have two dependent children that received child care. Their federal credit for 2014 is $960 and their California AGI is $112,693. Their child care credit for California is calculated as follows: Federal child care credit is $960 Enter percentage based upon their AGI 0% Multiply Federal child care credit by 0% $960 x.0 (0%) = $0 $0 is their California Child Care Credit EMPLOYEE BUSINESS EXPENSE Employee business expenses are only deductible by those taxpayers who complete FTB 3885 A. Your client may use this form only if all of the following apply: - He or she is an employee deducting expenses attributable to your job - He or she does not get reimbursed by his or her employer for any expense - If taxpayer is claiming vehicle expense - Taxpayer owns his or her vehicle, and - Taxpayer is using the standard mileage rate for 2014 and also used it for the year taxpayer first placed the vehicle in service. The main differences between California and Federal law regarding Employee Business Expense is the following: Depreciation of Assets Acquired Prior to 01/01/1987 Federal law allowed the rapid write-off of tangible personal property and buildings under the Accelerated Cost Recovery System (ACRS). California law in general did not conform to federal law but did allow ACRS for residential rental property constructed in California on or after 07/01/1985 and before 01/01/

44 SUMMARY OF SPECIAL CREDITS All adjustments to Employee Business Expense attributed to the depreciation method used are reconciled on FTB 3885 A and then transferred to Schedule CA. CODE CODE CODE CODE CODE CODE CODE CODE CODE CODE CODE LOS ANGELES REVITALIZATION ZONE HIRING AND SALES AND USE TAX CARRYOVER This credit may only be claimed if there is a carryover available from prior years. LOW-EMISSIONS VEHICLE CREDIT CARRYOVER This credit may only be claimed if there is a carryover available from prior years. PRISON INMATE LABOR CREDIT This credit is equal to 10% of wages paid to prison inmates employed under an approved joint ventures agreement. SENIOR HEAD OF HOUSEHOLD This credit is 2% of taxable income up to $1,300 for seniors who qualified for head of household and the qualifying individual died during 2012 or JOINT CUSTODY HEAD OF HOUSEHOLD CREDIT This credit may be claimed by Single or Married/RDF filing separately at the end of 2014 that also furnished more than half the household expenses for their home which was also the home of their child, step-child, or grandchild for at least 146 days but not more than 219 days. A married child must be your client's dependent. LOW INCOME HOUSING CREDIT This credit is available to persons who undertake the development of low income housing in California. Use Form FTB 3521, Low-Income Housing Credit. DEPENDENT PARENT CREDIT This credit is available to persons married/rdp at the end of the year, but whose spouse was not a member of the household during the last six months of the year. The taxpayer furnished over 50% of the household expenses for his/her mother's or father's home and the parent is also the taxpayer's dependent. RECYCLING EQUIPMENT CREDIT CARRYOVER This credit may only be claimed if there is a carryover available from prior years. AGRICULTURAL PRODUCTS CREDIT CARRYOVER This credit may only be claimed if there is a carryover available from prior years. Use Form FTB 3540, Credit Carryover Summary. ENTERPRISE ZONE HIRING AND SALES AND USE TAX CREDITS This credit allows employers to claim a credit equal to a percentage of wages paid to qualified individuals hired to work in an enterprise zone by using Form 3805 Z. WATER CONSERVATION CREDIT CARRYOVER This credit may be claimed for water conservation measures only if a carryover is 37

45 available. CODE CODE CODE CODE CODE CODE CODE CODE CODE CODE CODE CODE SOLAR PUMP CREDIT CARRYOVER - FARMERS ONLY This tax credit for the cost of installing a solar pump system used for irrigation on farm land located in California may be claimed only if a carryover remains available. SOLAR ENERGY CREDIT CARRYOVER This credit is only available if your client has a carryover from a prior year. COMMERCIAL SOLAR ENERGY CREDIT CARRYOVER This credit for the costs of installing commercial solar energy systems may be claimed only if a carryover is available from prior years. ENERGY CONSERVATION CREDIT CARRYOVER This tax credit may only be used for a carryover from prior years. Use Form FTB 3540 Credit Carryover summary. RESEARCH CREDIT This tax credit is limited to costs for increasing research activities in California. Form FTB 3523, Research Credit, must be completed. POLITICAL CONTRIBUTIONS CARRYOVER This credit may only be claimed if a carryover is available from prior years. ORPHAN DRUG RESEARCH CREDIT CARRYOVER This credit is equal to 15% of the cost of conducting orphan drug research in California, only if a carryover is available from prior years. RESIDENTIAL RENTAL AND FARM SALES CREDIT CARRYOVER This carryover credit is for those that sold residential rental or farm property for a gain in prior years. OTHER STATE NET INCOME TAX CREDIT This tax credit is for net income tax paid to another state or possession of the United States on income which is also taxed by California. No credit is allowed for income taxes paid to any city, the Federal government or a foreign country. CREDIT FOR PRIOR YEAR ALTERNATIVE MINIMUM TAX This credit is for those that paid alternative minimum tax in a prior year but have no alternative minimum tax liability for EMPLOYER CHILD CARE PROGRAM CREDIT This credit is claimed if a carryover is available from prior years by employers for establishing a child care program or constructing a child-care facility in California for use primarily by their employees. EMPLOYER CHILD CARE CONTRIBUTION CREDIT This credit allows employers to claim a credit for their contribution to a qualified care plan made on behalf of any dependent under the age of 15 of the employer's California employee if a carryover is available from prior years. 38

46 CODE CODE CODE EMPLOYEE RIDESHARING CREDIT CARRYOVER This credit allows employees in a nonemployer sponsored vanpool program to claim a credit. Use Form FTB 3540, Carryover Credit Summary if a credit carryover is available from prior years. COMMERCIAL SOLAR ELECTRIC SYSTEM CREDIT CARRYOVER This credit is 10% of the cost of a qualified solar electric system installed on commercial premises located in California that your client owns during the tax year. It is only available if there is a carryover from a previous year. CHILD ADOPTION COSTS This credit is 50% of the costs of adopting a child who is a citizen or legal resident of the United States and who was in the custody of a California public agency or a California political subdivision. CODES 171, 191, 192, AND EMPLOYER RIDESHARING CREDITS CARRYOVER Employers who sponsor a ridesharing incentive program or provide subsidized public transit passes to their employees may claim this credit. The credit may only be claimed if there is a credit carryover from prior years. CODE MANUFACTURER S INVESTMENT It is only available if there is a carryover from a previous year. CODE CODE CODE CODE CODE 207- SALMON & STEELHEAD TROUT HABITAT It is only available if there is a carryover from a previous year. DONATED AGRICULTURAL PRODUCTS TRANSPORTATION This credit is equal to 50% of the costs paid or incurred for the transportation of agricultural products donated to nonprofit charitable organizations. DISABLED ACCESS Limited to $125 based on 50% of qualified expenditures that do not exceed $250. Use Form FTB RICE STRAW It is only available if there is a carryover from a previous year. FARMWORKER HOUSING It is only available if there is a carryover from a previous year. CODE CODE CODE COMMUNITY DEVELOPMENT FINANCIAL INSTITUTION This credit is equal to 20% of each qualified deposit. TARGETED TAX AREA (TTA) This credit is a business incentitive for TTA businesses. MANUFACTURING ENHANCEMENT AREA This credit is for a percentage of qualified wages paid to qualified disadvantaged. 39

47 CODE CODE CODE CODE JOINT STRIKE FIGHTER WAGES The credit may only be claimed if there is a credit carryover from prior years. JOINT STRIKE FIGHTER PROPERTY COST These credits may only be claimed if there is a credit carryover from prior years. SOLAR ENERGY SYSTEM CREDIT The credit may only be claimed if there is a credit carryover from prior years. ENVIRONMENTAL TAX Five cents for each gallon of ultra low sulfur diesel fuel produced during the tax year by a small refinery at any facility located in California. CODE NEW JOBS PUB $3,000 allowed for a qualified employer for each increase in qualified full-time employees hired in the current taxable year. CODE CODE CODE CODE CALIFORNIA MOTION PICTURE AND TELEVISION PRODUCTION The credit is 20% of the expenditures attributed to a qualified motion picture and 25% of production expenditures attributable to an independent film or TV series. DONATED FRESH FRUITS OR VEGETABLES 10% of the donation s cost for fruits and vegetables donated to a California food bank. CHILD AND DEPENDENT CARE EXPENSE Similar to the federal credit except that the California credit is based on a specified percentage of the federal credit. CALIFORNIA COMPETES The credit is available for business that want to come to California or to stay and grow in California CODE NEW EMPLOYMENT FTB 3554 The credit is available for a taxpayer that hires a full-time employee and pays wages in a designated census tract or economic development area. The taxpayer must receive a tentative reservation for that full-time employee. CODE COLLEGE ACCESS The credit is available to taxpayers who contribute to the College Access Tax Credit Fund. OTHER TAXES AND SETTLEMENT PROGRAMS 1. ALTERNATIVE MINIMUM TAX Persons that are subject to Federal Alternative Minimum Tax will also be subject to California's Alternative Minimum Tax. An exemption based on your filing status is subtracted from the AMT taxable income as follows: Married/RDP filing jointly or Qualifying widow(er) $86,502 Single or Head of Household $64,878 Married/RDP filing separately $43,250 Alternative Minimum Tax income shall not include income, adjustments and items of tax preference related to any trade or business of a qualified taxpayer who has gross receipts, less returns and allowances, during the taxable year of less than $1,000,000 from all trades or businesses. 40

48 If your client s child is under age 19 or a student under age 24, s/he may owe Alternative Minimum Tax if the sum on line 19 (taxable income) and any preference items listed on FTB Schedule P and included on the return is more than the total of $7,250 and the child s earned income. 2. TAX ON EARLY USE OF IRA AND KEOGH PLANS If the taxpayer is under 59 1/2 and received an early distribution from an IRA or Keogh plan which he/she participated in, the taxpayer must pay a 2 ½% penalty tax on the amount received. 3. MENTAL HEALTH SERVICE TAX This tax is an additional tax of 1% on a taxpayer s taxable income that exceeds $1,000,000. EXAMPLE A. Taxable income from Form 540, line 19 $1,255,000 B. Less 1,000,000 C. Subtotal 255,000 D. Multiply by 1% (.01) 2,550 E. Mental Health Tax $2, SETTLEMENT PROGRAMS The Franchise Tax Board has settlement programs to assist taxpayers with undisputed tax liability matters. Offer In Compromise, similar to the program offered by IRS is available to California taxpayers. 5. USE TAX TABLE The Use Tax applies to purchases from out-of-state sellers and is similar to the sales tax paid on purchases within California. Failure to timely report and pay the use tax due may result in the assessment of penalties. You may be able to use the Estimated Use Tax Table to estimate and report the use tax due on individual non-business items your client purchased for less than $1,000 each. Estimated Use Tax Table California AGI Range Use Tax Liability Less Than $10,000 $2 $10,000 to $19,999 $5 $20,000 to $29,999 $9 $30,000 to $39,999 $12 $40,000 to $49,999 $16 $50,000 to $59,999 $19 $60,000 to $69,999 $23 $70,000 to $79,999 $26 $80,000 to $89,999 $30 $90,000 to $99,999 $33 $100,000 to $124,999 $39 $125,000 to $149,999 $48 $150,000 to $174,999 $54 $175,000 to $199,999 $61 More than $199,999 Multiply AGI by 0.035% ( EXAMPLE Luis and Dolores Green file married filing jointly. During 2014, they made non-business purchases for less than $1,000 each outside of California. Their 2014 AGI is $115,742 and their use tax liability from the Use Tax Table is $ USE TAX WORKSHEET The Use Tax Worksheet must be used to calculate your client s use tax liability if: 41

49 - Your client owes use tax on purchases of individual items with a purchase price of $1,000 or more. -Y our client owes use tax on any item purchased for use in a trade or business not registered with the State Board of Equalization. - Your client prefers to calculate the amount of use tax based upon actual purchases subject to use tax. EXAMPLE Your client purchased out of state items used in his business. His total cost was $23,300 and his California sales/use tax rate is 8%. Use Tax Worksheet 1. Enter purchases from out of state sellers made without payment $23,300 of California sales/use tax. Enter purchases of items with a purchase price of $1,000 or more plus items purchased for use in a trade or business not registered with the State Board of Equalization. 2. Enter the applicable sales and use tax rate. 8% 3. Multiply line 1 by the tax rate on line 2. $1, If your client chooses to estimate the use tax due on individual non-business purchased for less than $1,000 each, enter the total on this line. $-0-5. Add lines 3 and 4. This is your client s total use tax. $1, Enter any sales or use tax your client paid to another state for purchases included in line 1. $-0-7. Subtract line 6 from line 5. This is the total sales/use tax due. $1,864 EXAMPLE Your client purchased out of state items used in his business. His total cost was $43,652 and his California sales/use tax rate is 8%. Use Tax Worksheet 1. Enter purchases from out of state sellers made without payment $43,652 of California sales/use tax. Enter purchases of items with a purchase price of $1,000 or more plus items purchased for use in a trade or business not registered with the State Board of Equalization. 2. Enter the applicable sales and use tax rate. 8% 3. Multiply line 1 by the tax rate on line 2. $3, If your client chooses to estimate the use tax due on individual non-business purchased for less than $1,000 each, enter the total on this line. $-0-5. Add lines 3 and 4. This is your client s total use tax. $3, Enter any sales or use tax your client paid to another state for purchases included in line 1. $-0-7. Subtract line 6 from line 5. This is the total sales/use tax due. $3,492 If your client purchased any of the following items from out of state, s/he should pay the sales/use tax directly to the State Board of Equalization and not on his/ income tax return. - Cigarettes and tobacco products when the purchaser is registered with the State Board of Equalization as a cigarette and/or tobacco products consumer. - Leases of machinery, equipment, vehicles, and other tangible property. - Aircraft - Vessels documented with the U.S. Coast Guard. - Mobile homes or commercial coaches that must be registered annually as required by the Health and Safety Code. 42

50 - Vehicles, vessels, and trailers that must be registered with the Department of Motor Vehicles. SPECIAL CREDITS AND NONREFUNDABLE CREDITS 1. CHILD ADOPTION CREDIT The adopted child must be a citizen or legal resident of the United States and in the custody of a California public agency or a California political subdivision. The credit is 50% of the cost of adopting and includes the following: - Travel expenses for the family - Medical expenses not reimbursed by the insurance provider - Department of Social Services or a licensed adoption agency fees - Expenses from an unsuccessful adoption from a prior year The maximum credit is $2,500 for Any excess credit may be carried over to future years. 2. NONREFUNDABLE RENTER'S CREDIT Your client may qualify to claim the Renter's Credit on their personal income tax return by answering the following questions: 1. Was your client a resident of California for the entire year in 2014? If yes, go to question 2. If no, your client does not qualify. 2. Is your client's California adjusted income $37,768 or less if Single or Married/RDP filing separately; $75,536 or less if Married/RDP filing jointly, Head of Household, or Qualifying Widow(er)? If yes, go to question 3. If no, your client does not qualify. 3. Did your client pay rent for at least half of 2014 on property in California which was his/her principal residence (including mobile home)? If yes, go to question 4. If no, your client does not qualify. 4. Can your client be claimed as a dependent by a parent, foster parent, legal guardian, or any other person in 2014? If yes, your client does not qualify. If no, go to question Did your client live with any other person (such as a parent) who claimed your client as a dependent in 2014 or is your client a minor living with and under the care of a parent, foster parent, or legal guardian? If no, go to question 6. If yes, your client does not qualify. 6. Was the property your client rented exempt from property tax in 2014? If no, go to question 7. If yes, your client does not qualify. 7. Did your client claim the homeowner's property tax exemption in 2014? If yes, your client does not qualify. If no, go to question Was your client single in 2014? If yes, go to question 11. If no, go to question Did your client s spouse/rdp claim the homeowner s property tax exemption anytime during 2014? If no, go to question 11. If yes, go to question Did your client and his/her spouse/rdp maintain separate residences for the entire year in 2014? If no, your client does not qualify. If yes, go to question

51 11. If you are: Single or Married/RDP filing separately the credit is $60, or Married/RDP filing jointly, Head of Household, or Qualifying Widow(er) the credit is $120. Your client must owe a tax to claim this credit. EXCESS CALIFORNIA DISABILITY INSURANCE (SDI) or VOLUNTARY PLAN DISABILITY INSURANCE (VPDI) 1. OVERPAYMENT If taxpayer had two or more employers during the tax year and together they collected more than the specified amount for SDI (or VPDI), the excess amount is refundable on Form 540. The maximum SDI (or VPDI) for 2014 is $1, The amount of SDI (or VPDI) withholdings must appear on taxpayer's W-2. If more than the specified amount of SDI (or VPDI) was withheld by one employer taxpayer must contact that employer for the refund of excess SDI (or VPDI). EXAMPLE Rhonda worked for two employers in Her first employer withheld $ for SDI. Her second employer withheld $ Her total withheld for SDI in 2014 was $1, Enter the total amount of SDI withheld $1, SDI (or VPDI) limit 1, Excess SDI (or VPDI) withheld $ Subtract line 2 from line 3 EXAMPLE Fred worked for two employers in His first employer withheld $ for SDI. His second employer withheld $ His total withheld for SDI in 2014 was $1, Enter the total amount of SDI withheld $1, SDI (or VPDI) limit 1, Excess SDI (or VPDI) withheld $ Subtract line 2 from line 3 PENALTIES AND INTEREST 1. LATE FILING OF RETURN The maximum total penalty for filing the 2014tax return after October 15, 2015, is 25% of the tax not paid. The minimum penalty for filing a tax return more than 60 days late is $135 or 100% of the balance due, whichever is less. 2. DEMAND/FAILURE TO FURNISH PENALTY The Franchise Tax Board may impose a penalty when a taxpayer fails or refuses to furnish information requested by the FTB in writing, or fails or refuses to file a return upon notice and demand that one be filed (referred to as notice and demand/failure to furnish information penalty ). 3. LATE PAYMENT OF TAX The penalty is 5% of the tax not paid when due and an additional 5% for each month or portion of a month the tax remains unpaid. The maximum total penalty is 25% of the tax not paid. 4. INTEREST Interest will be charged on any tax due from the due date to the date paid. Interest will be charged on penalties owed from the date that the taxpayer is billed for them if they are not paid within 10 days. 44

52 5. OTHER PENALTIES There are also penalties that can be imposed for a check returned for insufficient funds, negligence, substantial understatement of tax, and fraud. 6. INSTALLMENT PAYMENTS If your client cannot pay the full amount of taxes owed to the Franchise Tax Board, he/she may ask to make monthly installment payments. However, he/she will be charged an underpayment penalty on the tax not paid by April 15, even if the request for installment payments is granted. Use Form FTB 3567, Installment Agreement Request. 7. COLLECTION FEES The Franchise Tax Board is required to assess collection and filing enforcement cost recovery fees on delinquent accounts. PAID TAX PREPARER'S INFORMATION 1. REQUIREMENTS If you are paid to prepare a tax return for a client you must do the following: - sign the return manually, use a mechanical device, or computer software program - date the return - check the self-employed box in the Paid Preparer s Use Only space on the return - write your preparer tax identification number (PTIN) issued by IRS. Special identification numbers are available for tax preparers filing 2011 income tax. A tax preparer may apply on-line at IRS website or apply by mail using Form W write your employer identification number - print your firm's name or your name - print your address including zip code - give your client a copy of the return for their records - keep a copy of the return for your records A tax preparer should not sign a tax return that was prepared without charge to the client. 2. POWER OF ATTORNEY A power of attorney is a legal document that allows an individual to act on the taxpayer s behalf in matters the taxpayer specifies in the document. Form FTB 3520, Power of Attorney must be completed. The document authorizes the named individual to: - receive confidential tax information, or - act on the taxpayer s behalf for non-tax matters including Homeowner & Renter Assistance and Child Support Collection - represent the taxpayer in matters involving the Franchise Tax Board - sign waivers that extend statutory period for assessment of determination of taxes - execute closing agreements - receive, but not endorse or cash checks issued in payment of any refund of taxes, penalties, or interest - delegate authority or substitute another representative FILING DATE 1. FILING DATE Normally not later than April EXCEPTIONS Normally not later than June 15, if the taxpayer is living or traveling outside the United States. If the taxpayer is a member of the Armed Forces or Merchant Marines stationed outside the United 45

53 States, the deadline for filing is 6 months after taxpayer's return to the United States. If the taxpayer does not owe any tax or has a refund due, the taxpayer automatically has an extension until October 15, 2015 to file the tax return. MAILING THE INCOME TAX RETURN If Your Client Has a Refund or No Amount Due If Your Client Owes FRANCHISE TAX BOARD FRANCHISE TAX BOARD PO BOX PO BOX SACRAMENTO, CA SACRAMENTO, CA AMENDED RETURNS 1. AMENDED RETURNS If your client discovers that s/he made an error to their California income tax return after it was filed, use Form 540X, Amended Individual Income Tax Return, to correct and make changes to the return. 2. FEDERAL INCOME TAX RETURN CHANGES If your client's federal income tax return is examined and changed by the Internal Revenue Service and he/she owes additional tax, your client is required to report these changes to the Franchise Tax Board within six months of the date of the final federal determination. If the changes made by IRS result in a refund due for California, your client must claim a refund within two years of the date of the final federal determination. Your client may either use FTB Form 540X to make any changes to his/her California income tax return already filed, or your client may send copies of the federal changes to: ATTN RAR/VOL MS-F310 FRANCHISE TAX BOARD PO BOX 1998 RANCHO CORDOVA, CA Your client must include a copy of the final federal determination along with all data and schedules on which the federal adjustment was based. Your client does not have to file FTB Form 540X if the changes do not affect his/her California tax liability. ESTIMATED TAX PAYMENTS ESTIMATED TAX PAYMENT REQUIREMENTS Generally, your client must make estimated tax payments if s/he expects to owe at least $500 ($250 if married/rdp filing separately) in tax for 2015 (after subtracting withholding and credits) and the taxpayer expects his/her withholding and credits to be less than the smaller of: - 90% of the tax shown on his/her 2015 tax return. - The tax shown on his/her 2014 tax return including AMT. Your client and his/her spouse/rdp may file either joint or separate payment vouchers. They must make separate estimated tax payments if: - They are separated under a decree of divorce or separate maintenance; or - Your client and his/her spouse/rdp have different taxable years. Individuals who are required to make estimated payments, and whose 2014 adjusted gross income is more than $150,000 ($75,000 if Married/RDP Filing Separately), must figure estimated tax based on the lesser of 90% of their tax for 2015 or 110% of their tax for This rule does not apply to farmers or 46

54 fishermen. ESTIMATED TAX PAYMENTS Period Payment Due Date January 1 through March 31, 2015 April 15, 2015 April 1 through May 31, 2054 June 15, 2015 June 1 through August 31, 2015 September 15, 2015 September 1 through December 31, 2015 January 15, 2016 INSTALLMENT PAYMENTS Installments due shall be 30% of the required annual payment for the 1 st required installment, 40% of the required annual payment for the 2 nd required installment, no installment is due for the 3rd required installment, and 30% of the required installment for the 4 th required installment. FARMERS AND FISHERMEN If at least two-thirds of their gross income for 2014 and 2015 is from farming or fishing they may: Pay all of their estimated tax by January 15, 2016; or File their tax return for 2015 on or before March 3, 2016 and pay the total tax due. In this case, they are not required to make estimated tax payments for FTB Form 5805F, Underpayment of Estimated Tax by Farmers and Fishermen, is to be attached to the front of their California tax return. FAILURE TO MAKE ESTIMATED TAX PAYMENTS If your client does not make the required estimated tax payment, or if s/he underpays any installment, a penalty will be assessed on the portion of estimated tax that was underpaid from the due date of the installment to the date of payment or the due date of their tax return. CLASSIFICATION OF WORKERS COMMON LAW EMPLOYEES Anyone who performs services for you is your employee if you have the right to control what will be done and how it will be done. Based upon the state where you reside, state unemployment insurance (SUI) and state disability insurance (SDI) needs to be deposited with a state tax authority. You are required to furnish your common-law employee a W-2 form. STATUTORY EMPLOYEES If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statue for certain employment tax purposes. Examples include: - A driver that distributes beverages (other than milk), meat, vegetables, fruit, bakery products, or picks up and delivers laundry; if the driver is your agent or is paid commissions. - A full time life insurance salesman. - An individual who works at home on materials or goods that you supply and that must be returned to you. 47

55 - A full-time traveling or city salesperson that works on your behalf and turns in orders to you. - The work performed for you must be the salesperson s principal business activity. STATUTORY NON-EMPLOYEES Direct sellers, companion sitters and qualified real estate agents by law are considered non-employees. They are treated as self-employed. INDEPENDENT CONTRACTORS An individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result. Generally you furnish an independent contractor Form 1099-MISC - documented wages received. If you issue a 1099-MISC and the individual is an employee, you must issue a new Form W-2 and a corrected Form 1099-MISC. Any business or government entity that is required to file a federal Form 1099-MISC for services received from an independent contractor is required to report specific independent contractor information to California Employment Development Department (EDD). This information will be used to locate parents who are delinquent in their child support obligations. Section 530 Relief Requirements (Difference between Federal and California) If your business has been selected for an employment tax examination to determine whether you correctly treated certain workers as independent contractors, you will not owe employment taxes if you meet the following relief requirements: - You had a reasonable basis for not treating your workers as employees - You (and any predecessor business) must have treated the workers and any similar workers as independent contractors - You must have filed Form 1099-MISC for each worker unless the worker earned less than $600. California does not conform to Section 530 Relief Requirements. OTHER NONRESIDENT ISSUES NET OPERATING LOSSES A nonresident is allowed a net operating loss (NOL) deduction carryover for California taxable income based upon California sourced income and deductions, regardless of whether the taxpayer has a NOL in computing total taxable income. If a taxpayer moves into California and had NOL carryovers and was a nonresident of California in prior years, the NOL carryovers need to be restated as if the taxpayer had been a California resident for all prior years. If a taxpayer moves out of California and had NOL carryovers and the taxpayer becomes a nonresident of California, his/her NOL carryovers need to be restated as if the individual had been a nonresident of California for all prior years. PASSIVE ACTIVITIES If a taxpayer has always been a nonresident of California, s/he determines the allowed passive activity losses and suspended losses based only upon California source income and loss items to compute California taxable income. Only California source passive losses carry forward into the following year. If a taxpayer moves into California and had suspended passive losses and was a nonresident of California in prior years, the suspended passive losses need to be restated as if the individual had been a California resident for all prior years. If a taxpayer moves out of California and has suspended passive losses and he/she becomes a nonresident of California, his/her suspended passive losses need to be restated as if the individual had been a nonresident of California for all prior years. 48

56 CODE OF CONDUCT AND RESPONSIBILITIES A tax preparer is defined as a person who, for a fee, assists with or prepares tax returns for another person or who assumes final responsibility for completed work on a return on which preliminary work has been done by another person, or who holds himself or herself out as offering those services. A tax return is defined as a return, declaration, statement, refund claim, or other document required to be made or filed in connection with state or federal income taxes or state bank and corporation franchise taxes. California Registered Tax Preparers A California tax preparer that is not an enrolled agent, CPA, or an attorney must register as a tax preparer with the California Tax Education Council (CTEC). The tax preparer must maintain a $5,000 tax preparer bond issued by a surety company admitted to do business in California. A tax preparer shall provide to the surety company proof that s/he is at least 18 years of age before a bond can be issued. The tax preparer must identify to the surety company all preparers employed or associated with the tax preparer securing the bond. The tax preparer must file an amendment to the bond within 30 days of any change in the information provided in the bond. The tax preparer must not conduct business without having a current surety bond in effect and must cease doing business as a tax preparer upon cancellation or termination of bond until a new bond is obtained. The tax preparer must furnish evidence of a current bond upon the request of any state or federal agency or law enforcement agency. The California registered tax preparer must, prior to rendering any tax preparation services, provide his or her customer, in writing, with the tax preparers name, address, telephone number, and evidence of compliance with the bonding requirement. The tax preparer must not give false or misleading bond information to a consumer, or give false or misleading information to a surety company in obtaining their tax preparer bond. The tax preparer must not make fraudulent, untrue, or misleading statements or representations which are intended to induce a person to use their tax preparation services. The tax preparer must not obtain the signature of a customer to a tax return or authorizing document, which contains blank spaces to be filled in after it has been signed and must not fail or refuse to give a customer, for their own records, a copy of any document requiring the customer s signature, within a reasonable time after the customer signs. The tax preparer must not fail to maintain a copy of any tax return prepared for a customer for four years from the later of the due date of the return or the completion date of the return. The tax preparer must not engage in advertising practices, which are fraudulent, untrue, or misleading, including assertions that the tax preparer bond in any way implies licensure or endorsement of a tax preparer by the State of California. The tax preparer must not violate provisions of Sections or 7216 of Title 26 of the United States Code prohibiting tax preparers from disclosing any information obtained in the business of preparing federal or state income tax returns unless (1) consented to, in writing, by the taxpayer in a separate document; (2) expressly authorized by law; (3) necessary for the preparation of the return; or, (4) pursuant to court order. The tax preparer must not fail to sign a customer s tax return when payment for services rendered has been made and must not fail to return, upon the demand by or on behalf of a customer, records or other data provided to the tax preparer by the customer. A California tax preparer student must apply for their Certificate of Completion within 18 months after completing their 60 hours of qualifying education from an approved provider and the registered California tax preparer must complete, on an annual basis, not less than 20 hours of continuing education from an approved curriculum 49

57 provider. The courses taken must include 3 hours federal tax law update, 10 hours federal tax law topics, 5 hours California tax law, and 2 hours ethics. The California Tax Education Council will suspend, revoke, or deny registration if a California registered tax preparers or a new applicant is found guilty of unprofessional conduct by a government agency or regulatory entity. The California Franchise Tax Board compares the PTIN of the income tax return s preparer with the California Tax Education Council list of California registered tax preparers to ensure that the tax preparer is registered with CTEC, unless the income tax preparer is an enrolled agent, attorney, or a CPA. California tax preparers who are preparing income tax forms for a fee and are not registered with the California Tax Education Council are subject to a penalty. The initial penalty is $2,500. Tax preparers have 90 days to become registered with California Tax Education Council and the penalty will be withdrawn. The penalty increases to $5,000 for subsequent violations. Federal law requires tax preparers who annually prepare more than 10 personal income tax returns to e-file these returns. COMMUNITY PROPERTY Community property is property that the taxpayer, spouse (or RDP/California same sex spouse), or both acquire during their marriage (or registered domestic partnership/same sex marriage in California) while taxpayers are domiciled in California. (Includes the part of property bought with community property funds if part was bought with community funds and part with separate funds). It is property that taxpayer and his or her spouse (or RDP/California same-sex spouse) agree to convert from separate to community property. It is property that cannot be identified as separate property. COMMINGLED PROPERTY If property cannot be specifically identified as separate property, it is considered community property. Separate property must be maintained separately. If the property used for community purposes, or commingled, it could lose the separate property character, overriding any agreements. COMMUNITY INCOME Community income is income from community property, salaries, or pay for services of you, your spouse (or RDP/California same sex spouse), or both during your marriage (or registered domestic partnership/same-sex marriage in California). It is income from real estate that is treated as community property. BEGINNING AND END OF COMMUNITY PROPERTY Community property begins when a man and woman become married. A domestic partnership is established in California when both persons file a Declaration of Domestic Partnership with the California Secretary of State. When the marital community ends due to death of spouse or divorce, the community assets (money and property) are divided SEPARATE PROPERTY Separate property is property that you or your spouse (or RDP/California same-sex spouse) owned separately before your marriage (or registered domestic partnership/same-sex marriage in California. It is money earned while domiciled in a non community property state. It is property either of you received as a gift or inherited separately during your marriage (or registered domestic partnership/same-sex marriage in California). It includes property bought with separate funds. Separate property is property that you and your spouse (or registered domestic partnership/same-sex spouse) agreed to convert from community property to separate property through an agreement valid under California law. 50

58 PRE-NUPTIAL AGREEMENT Separate property is all property declared separate property in a valid agreement (pre-nuptial) entered into before or after registration of the domestic partnership. TAX TREATMENT OF COMMUNITY PROPERTY FOR RDP In the current year, RDPs Brad and Douglas are residents and domiciled in California. Brad earned $15,000 in wages and Douglas earned $30,000. In addition to wages, Douglas inherited stock and receives $5,000 in dividends. The stock is in Douglas name only, and the stock and dividend income is kept separate from community funds. CALIFORNIA JOINT RETURN Brad CALIFORNIA SEPARATE RETURN Brad Douglas Wages $15,000 $7,500 $7,500 Douglas Wages $30,000 $15,000 $15,000 Dividends $5,000 (inherited) $5,000 Total $50,000 $22,500 $27,500 STATUTE OF LIMITATIONS Statute on Assessment of Refunds Income tax refunds are not allowed after 4 years from the original due date. 51

59 SECOND INTERACTIVE REVIEW QUESTIONS 52

60 SECOND INTERACTIVE REVIEW ANSWERS 53

61 FINAL EXAMINATION CALIFORNIA INCOME TAX RELATED Based on 2014 Tax Law 54