This course qualifies for 15 hours of California tax law for those who have prepared returns from another state and have moved to California and will prepare California tax returns. A completed “Experience in Lieu of Education” needs to be submitted to CTEC and the application can be found on the CTEC website. This course will discuss the differences between the state and the federal tax laws, as well as what California conforms to.
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Chapter 1: CA Compiling Taxpayers Information
The California tax return does not follow the federal return line-by-line, as established by the following:
- California subtracts the exemption amount from the tax owed.
- California did not conform to the TCJA with respect to not being able to claim an exemption for dependents.
- California begins by gathering the taxpayer’s and spouse’s personal information.
- If the couple’s status is a registered domestic partner (RDP) or same sex married couple (SSMC), you will enter the spouse’s information on Form 540.
The information needed to complete the state return is:
- First and last name as found on SSN or ITIN.
- Address (including city, state, and zip).
- Date of birth.
- Prior name (if the taxpayer or spouse filed a prior California return with a different last name).
California does not conform to most of the federal Tax Cuts and Jobs Act changes. A tax practitioner needs to understand state tax law to make sure that the taxpayer is receiving all the credits and paying the correct amount of tax.
Chapter 2: CA Standard Deductions, Dependents and Filing Status
California did not conform to most of the federal Tax Cuts and Jobs Act changes. Subsequently, as a California tax preparer, you will need to make sure your software allows for the personal exemptions as required to complete the California state return.
As you have already seen, filing statuses can get very complicated at the Federal level. Unfortunately, it gets even more complicated when you include filing statuses at the state level as well. As previously stated, state law governs many aspects of the filing, like whether a taxpayer is married or legally separated under a divorce or separate maintenance decree. It is important for California tax preparers to know their state’s laws to prepare their clients’ returns as accurately and professionally as possible.
Chapter 3: CA Income
Although California does not conform to certain provisions of the Internal Revenue Code, it does conform in the following ways:
- The “general rule.”
- The “simplified general rule,” or the “safe harbor method.”
- IRA rollovers.
- Roth IRAs.
- Archer MSAs.
- Coverdell ESAs.
- Current-year IRA deductions.
- Lump-sum credits received by federal employees.
Chapter 4: CA Interest and Dividends
Most interest income taxable by federal standards is also taxable by the state of California. There are a few exceptions, however, including the fact that California exempts interest income for U.S. obligations. In California, adjustments are not made for exempt-interest dividends. Certain mutual funds are qualified to pay an exempt-interest dividend if at least 50% of their assets consist of tax-exempt government obligations. The portion of the exempt-interest dividend should be shown on the annual statement from the mutual fund. If the California exempt-interest dividend amount is different from the federal amount, an adjustment will be required.
Chapter 5: CA Tax Credits and Payments
Although a variety of California tax credits are available to help the taxpayer reduce their tax liability, California does not conform to all the credits that can be claimed on the federal return. This chapter will cover FTB Form 540, lines 40-48. California refers to this section as “Special Credits”. A tax preparer is responsible for ensuring (to the best of his or her knowledge) that the taxpayer is filing a true and accurate return by asking the client detailed questions and doing as much research as necessary.
Chapter 6: CA Adjustments to Income
In this chapter, you will learn what adjustments need to be made to California income and where to enter it on 540 Schedule CA. You will first review a few items from Part I, Section A, Income. Then, you will review Part I, section B, Adjustments to Income. The chapter will conclude by presenting a few items from Part II, Adjustments to Federal Itemized Deductions.
Chapter 7: CA Itemized Deductions
The Tax Cuts and Jobs Act made some changes to the Internal Revenue Code (IRC) that California did not adopt. California does conform with IRC regulations established on and before January 1, 2015. Because of these changes California residents will need to make adjustments on their 540 Schedule CA to account for the differences between state and federal tax law.
Chapter 8: CA Other Taxes and Taxpayer Penalties
The Franchise Tax Board (FTB) is the agency responsible for collecting state personal income taxes in California. The revenues FTB collects are placed in the state’s general fund to help pay for items, such as roads, parks, law enforcement, and schools. California’s state income tax system is based on the principle of voluntary compliance. Voluntary compliance is a system of taxation that relies on individual citizens to properly report their income, calculate their tax liability, and file their tax returns timely.
Chapter 9: CA Capital Gains and Losses
California law complies with federal law regarding capital gains and losses and requires no adjustments to complete the state return. If the California basis of the taxpayer’s assets differs from the federal, adjustments would be required using the California Schedule D. The capital gains tax rates are the same for both California and federal law. The amount of capital loss limitation for California taxpayers is also the same as the federal limitation.
Chapter 10: CA Business Income
This chapter will present the differences between the way federal tax law treats business income and the way California tax law treats it. This includes self-employment income, rental income, self-employment tax, withholding issues for self-employed nonresidents, common law employees, statutory employees, and contractors.
Chapter 11: CA Depreciation
California law has not always conformed to federal law regarding depreciation methods, special credits, or accelerated write-offs. In general, California law conforms to the Internal Revenue Code as of January 1, 2015; however, recovery periods and basis on which depreciation is calculated may be different from the amounts used for federal purposes. Reportable differences occur if the asset was placed in service at the following times:
- Before January 1, 1987: California disallowed depreciation under the federal Accelerated Cost Recovery System (ACRS). Continue to calculate California depreciation in the same manner as in prior years for those assets.
- On or after January 1, 1987: California provides special credits and accelerated write-offs that affect the California basis for qualifying assets. California does not conform to all the changes to federal law enacted in 1993. Therefore, the California basis or recovery period may be different for some assets.
For more information regarding California and federal law than will be provided here, visit the FTB website and search for the term “conformity”. Additional information can be found in FTB Publication 1001, Supplemental Guidelines to California Adjustments; the instructions for Schedule CA (540 or 540NR); and the Business Entity tax booklets.
Chapter 12: CA Electronic Filing
California conforms to the federal guidelines regarding electronic filing and the importance of safeguarding the taxpayer’s personal identification information. However, California has systems in place to perform these duties at the state level, and it is important for California tax professionals to know them and how they are different. For more information, see California Revenue & Taxation Code Sections 18621.9 and 19170.
Chapter 13: CA Extensions and Amendments
If taxpayers are unable to file their California individual tax return by the due date, they may be able to qualify for an automatic six-month extension of time to file by electronically filing or mailing Form 3519 to the FTB. If the taxpayer has filed a return and realizes that a mistake was made, he or she would have to file an amended return using Schedule X.
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