California Tax Relief For 2000 And Beyond

By Victor S. Sy, CPA

California's booming economy prompted our Legislators and Governor to enact a multibillion-dollar tax relief package.  Let's discuss the main provisions to see how they can save you some state taxes.

Refundable Child And Dependent Care Credit

1.   What used to be a nonrefundable credit (could not generate a refund if your tax is zero) many moons ago, has become a refundable credit (even if your tax is zero).

2.   Taxpayers with Adjusted Gross Income (AGI) of $40,000 or less get the maximum rate of 63% of federal AGI.  The rate gradually decreases to 53%, 42%, and is phased out when AGI reaches $100,000.  3.   Remember that this state credit is based on your federal AGI from form 1040 that you file with the IRS.

Homeowners' And Renters' Assistance (HRA) Payments

1.   New state law provides a $154-million one-time property tax rebate for seniors and disabled individuals.

2.   This translates to a maximum payment of $816 per homeowner and $600 per renter (a 150% increase from last year).

3.   About 75,000 homeowners and 400,000 renters could benefit from this provision.

4.   The filing period for HRA claims was changed to July 2 through October 15 for the year 2000 but the Franchise Tax board will continue to accept claims through June 30, 2001.

5.   If you already filed your 2000 forms using the old lower rates, you don't have to amend.  The FTB will automatically increase your refund.

6.   The income level to qualify for assistance remains at the 1999 levels of $33,993 for total household income and $61,806 for gross household income.

7.   Remember that amounts for 2000 claims are based on 1999 property taxes and rents.

Teachers' Retention Credit

1.   New state law provides credits of $250 to $1,500 to qualified credentialed teachers.

2.   The credits are based on years of service as teachers ($250 from four to less than six years, $500 from six to less than 11 years, $1,000 from 11 to 20 years, and $1,500 for 20 or more years).

3.   The credit is limited to 50% of the difference between the tax imposed on income from all sources and income without the teaching revenue.

4.   The credit is nonrefundable and cannot be carried over.

5.   A "credentialed teacher" is one who has a clear professional or preliminary credential as determined by a state commission.

6.   The taxpayer must work as a teacher in a public or private elementary, secondary, vocational or technical school.

7.   This provision will benefit about 300,000 public school teachers and about 40,000 private school teachers.

Long-Term Care Givers

1.   New law provides a credit of $500 for each applicable individual for whom the taxpayer provides long-term care.

2.   An applicable individual is one who is certified by a physician who is unable to perform at least three activities of daily living, has long-term care needs for at least 180 consecutive days, and has certification on record for at least 39-1/2 months before the due date of filing the tax return (no extensions).

3.   An applicable individual can be the taxpayer, the spouse or dependent.

4.   A taxpayer who claims the credit must provide the name and I.D. number of both the applicable individual and physician.  Failure to provide such data will result in the disallowance of the credit.  (It is interesting to note the disallowance will result in a bill rather than the typical notice of assessment so that you have no right to challenge the deficiency).

5.   It is also interesting to note that the caregiver and the person receiving care can be the same person.  That one single individual who fits both characters can receive the care, get paid for it, and even potentially deduct the medical expenses.  No kidding.

Employer-Provided Graduate Tuition Exclusion

1.   California expands the $5,250 federal exclusion for employer-provided undergraduate tuition assistance to include graduate education.

2.   California's exclusion is permanent whereas the federal version sunsets on December 31, 2001.

3.   The tuition assistance must be included in the W2 federal wage box but not in the state wage box.  This will complicate W2's with two different gross wages but we need not complain when such new provisions give us extra tax breaks.

NOL Carry-Forward Increases

1.   Old California law limited deductions for carrying over net operating losses from your business to 50% (100% for federal).

2.   New law increases this percentage to 55% for 2000 and 2001, 60% for 2002 and 2003, and 65% for 2004 and beyond.  This has a positive impact on businesses that incurred losses during their first few years of operations.  They can now use these losses to offset income generated in later years.

3.   The carry-forward period doubles from five to 10 years starting in 2000.

4.   New and small businesses retain their preferential NOL treatment.

Research And Development Credit Increases

1.   California's R&D credit increases from 12% to 15% (versus federal credit of 20%) effective in 2000.

2.   The elective three-tier alternative incremental R&D also increases from 80% to 90% of federal percentages.

For more information, Sy may be reached at 626-744-0200.