Impact of Tax Reform on California Tax Return

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Goal33
Posts: 576
Joined: Sun Apr 12, 2015 12:30 pm

Impact of Tax Reform on California Tax Return

Post by Goal33 » Wed Jan 03, 2018 11:49 pm

1) With the doubling of the standard deduction, the difference between the federal standard deduction and California deduction is pretty large. Can I take the standard deduction on my Federal return, and itemize on the CA state return?

2) Will the 10K SALT limit apply to the CA return, or only the federal?
A man with one watch always knows what time it is; a man with two watches is never sure.

mega317
Posts: 2245
Joined: Tue Apr 19, 2016 10:55 am

Re: Impact of Tax Reform on California Tax Return

Post by mega317 » Thu Jan 04, 2018 12:02 am

1. Yes. I went back just now to verify this. Instructions for CA 540 specifically instruct how to do it.

2. The recently changed tax law is federal only. I haven't done a CA 540 by hand and 2017 was my first full year here, but I'm not aware of such a limit.

User avatar
dmcmahon
Posts: 1870
Joined: Fri Mar 21, 2008 10:29 pm

Re: Impact of Tax Reform on California Tax Return

Post by dmcmahon » Thu Jan 04, 2018 12:26 am

Here’s another question. If you overpay your state income tax, will you still have to pay federal income tax on the refund, even though you didn’t or couldn’t deduct it in the prior year? Asking about (hypotheticaly) overpaying in 2018 and then getting a refund and 1099 in 2019.

User avatar
celia
Posts: 7892
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Impact of Tax Reform on California Tax Return

Post by celia » Thu Jan 04, 2018 12:49 am

I haven't seen anything about changes to CA income tax law yet, but then I wouldn't have expected changes until the feds were done.
Goal33 wrote:
Wed Jan 03, 2018 11:49 pm
1) With the doubling of the standard deduction, the difference between the federal standard deduction and California deduction is pretty large. Can I take the standard deduction on my Federal return, and itemize on the CA state return?
I think you've always been able to do this AFAIK, so I don't know why it would change.
2) Will the 10K SALT limit apply to the CA return, or only the federal?
When looking at the itemized deductions, California has had you back out State Disability Insurance, and state and local income tax, or
General Sales Tax and foreign income taxes. Even if they were to put a limit on the "taxes paid" itemized deductions, a lot of these taxes are not considered anyway. However, if you have a large property tax payment each year, that might easily put you over the 10K limit.

See line 39 here: Schedule CA 540 Adjustments to Federal Itemized Deductions.

ofckrupke
Posts: 484
Joined: Mon Jan 10, 2011 2:26 pm

Re: Impact of Tax Reform on California Tax Return

Post by ofckrupke » Thu Jan 04, 2018 1:01 am

dmcmahon wrote:
Thu Jan 04, 2018 12:26 am
If you overpay your state income tax, will you still have to pay federal income tax on the refund, even though you didn’t or couldn’t deduct it in the prior year? Asking about (hypotheticaly) overpaying in 2018 and then getting a refund and 1099 in 2019.
It was already the law that only the portion of a state income tax refund (thus, representing a prior year overpayment) assignable to a benefit (an actual reduction in prior year federal tax liability relative to the hypothetical of not having overpaid by said portion) is federally taxable. Google "tax benefit rule recovery".
Anyway, there's no change to this rule, which should answer your question.

User avatar
dmcmahon
Posts: 1870
Joined: Fri Mar 21, 2008 10:29 pm

Re: Impact of Tax Reform on California Tax Return

Post by dmcmahon » Thu Jan 04, 2018 1:18 am

ofckrupke wrote:
Thu Jan 04, 2018 1:01 am
dmcmahon wrote:
Thu Jan 04, 2018 12:26 am
If you overpay your state income tax, will you still have to pay federal income tax on the refund, even though you didn’t or couldn’t deduct it in the prior year? Asking about (hypotheticaly) overpaying in 2018 and then getting a refund and 1099 in 2019.
It was already the law that only the portion of a state income tax refund (thus, representing a prior year overpayment) assignable to a benefit (an actual reduction in prior year federal tax liability relative to the hypothetical of not having overpaid by said portion) is federally taxable. Google "tax benefit rule recovery".
Anyway, there's no change to this rule, which should answer your question.
Thanks. I was worried that a greater level of precision in my estimated payments was going to be needed. Previously the main problem was with AMT. You couldn’t claim the payment against AMT, yet the refund was taxable income.

ofckrupke
Posts: 484
Joined: Mon Jan 10, 2011 2:26 pm

Re: Impact of Tax Reform on California Tax Return

Post by ofckrupke » Thu Jan 04, 2018 11:12 am

dmcmahon wrote:
Thu Jan 04, 2018 1:18 am
Previously the main problem was with AMT. You couldn’t claim the payment against AMT, yet the refund was taxable income.
If in a previous year you paid AMT, then only some if any of a state refund in the subsequent year would likely be taxable on form 1040 line 10. [the exact taxable portion is determined by trial and error, recalculating the previous-year federal taxes in both forms 1040 and 6251 as though less state tax had been paid in the previous year and claimed on Schedule A to see how much (if any) of the state tax overpayment produced a $ benefit on federal tax.] Thereafter, in calculating/checking AMT for the subsequent year, only the taxable part of the refund, the number reported on subsequent-year form 1040 line 10, would get entered as a negative number on form 6251 line 7 as well.

So the issue you raise is/was mainly a factor in a transition between an AMT previous year and a non-AMT subsequent year. Like many other taxpayers, I will make this transition in 2017 and 2018; in accelerating several years of charitable gifting into 2017, I took care to confirm by calculation that the resultant decrease in 2017 state tax liability should not cause any of the projected increase in my state tax refund to be federally taxable in 2018. [A very stable income improves confidence in such calculation.]

User avatar
CAsage
Posts: 931
Joined: Sun Mar 27, 2016 6:25 pm

Re: Impact of Tax Reform on California Tax Return

Post by CAsage » Thu Jan 04, 2018 3:29 pm

Going forward, I anticipate taking the standard deduction in even years (2018+) and then itemizing only on the CA state return in odd years. I will make the October payment only for property taxes next year, and then in 2019 pay 1.5 years worth (as I did in 2017). And probably choose to feed my shiny new Charitable Giving DAF in odd years too, possibly every 4th year. My taxes are quite simple.... The new brackets do mean a lot bigger Roth conversions.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

Post Reply