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And now the detail: a closer look at California's Partial Tax Conformity.

The June issue of California CPA went to press just days after Coy. Davis signed two partial tax conformity bills. The article, "Partial Conformity," on Page 27 contained a few snippets about the new laws. Following is a more complete discussion of the enacted provisions.

Individual Taxes

California will conform to the following federal provisions:

* Maximum allowable contributions to traditional and Roth IRA accounts will increase to $3,000 for 2002; $3,000 for 2002-04; $4,000 for 2005-07; and $5000 for 2008, with post-2008 limits to be inflation-adjusted in $500 increments.

* Sec. 401(k), Sec. 403(b) and Sec. 457 plan maximum contributions are now equal to federal limits. The contribution limits are: $11,000 for 2002, $12,000 for 2003, $13,000 for 2004, $14,000 for 2005 and $15,000 for 2006. As with IRA limits, the post-2006 maximums will be inflation-adjusted in $500 increments. (Sec. 457 covers deferred compensation plans for governmental employees.)

* Individuals may contribute to both Sec. 401(k) and Sec. 457 plans.

* Sec. 457 plans may be rolled over.

* Individuals 50 and older may contribute an additional $500 to traditional and Roth IRAs for the years 2002-05, and an additional contribution of $1,000 for 2006 and after.

* The maximum contribution to a Coverdell Savings Account (formerly an Educational IRA) is $2,000 for 2002 and subsequent years; and the income limits for married couples have been increased. Parents now may use these accounts to pay for primary and secondary educational expenses, as well as college.

* Sec. 529 plan withdrawals to pay education expenses no longer will be taxable for state income tax purposes.

* Publicly traded stock contributed to a private foundation results in a charitable deduction for the stock's market value.

* Charitable contributions of appreciated property no longer will result in an alternative minimum tax preference item for the difference between market value and the taxpayer's basis.

* The safe harbor for individual estimated tax payments (including withholding, if any) will increase from 80 percent to 90 percent, and includes the AMT tax. The provision provides that no penalties will be assessed for underpayment of estimated taxes owed prior to April 15, 2003, if the underpayment is due to this change in the law.

* Public employees will be allowed to roll over Sec. 457 deferred compensation plan proceeds to purchase service credits with those proceeds.

* Unrelated to legislation, back in 2000, the Board of Equalization reversed the FTB and granted head-of-household filing status to a lesbian, who supported her partner and her partner's biological child. (Appeal of Helmi Hisserich, as outlined in Spidell's California Taxletter September 2000). This decision is now dead, per a FTB attorney who spoke at this spring's CalCPA Committee on Taxation meeting. Someone brought a writ of mandamus, telling the FTB not to apply the ruling. The plaintiff won at trial, and no one appealed.

Areas of Nonconformity

California is not conforming to the following federal provisions:

* The credit for retirement plan contributions for taxpayers with incomes under $50,000 (married filing jointly) and $25,000 (single);

* The increase in the amount of childcare expenses allowed for that credit; or

* Student loan interest deduction liberalizations.

Business Provisions

California will conform to the following federal provisions:

* All corporations with a valid S corporation election now must be an S corp. for California purposes. This is effective for taxable years beginning on or after Jan. 1, 2002. There is a provision for transitional relief for C corporations that made estimated tax payments for their 2002 taxable year.

* Discharge of indebtedness of an S corp. Cancellation of debt (COD) income is not includible in income if the taxpayer is in bankruptcy, or to the extent the taxpayer is insolvent. The taxpayer's, including an S corp.'s, tax attributes (e.g. basis in assets) must be reduced by the amount of COD income.

In 2001, the U.S. Supreme Court had ruled that S corp. shareholders did not have to reduce their stock basis by COD income. However, Congress legislatively reversed this decision, and California has conformed to this latter provision.

* Businesses are denied deductions for: Club dues for membership in any business, pleasure, social, athletic, luncheon, sporting, airline or hotel club; lobbying expenses; and compensation in excess of $1 million per year for the chief executive or to any of the other four highest paid officers of a publicly held corporation.

* Corporations will be allowed to make contributions to education plans.

Business Nonconformity

California businesses will not be able to conform to the following:

* The federal 30-percent bonus depreciation; or

* The federal government's credit of up to $500 for small employers who set up retirement plans.

Leonard W. Williams, CPA, is a Sunnyvale-based sole practitioner. He is a member of CalCPA's Committee on Taxation, an A/CPA Tax Division member and a former Peninsula Chapter president Williams can be reached at williams@lwwilliamscpa.com.
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Article Details
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Author:Williams, Leonard W.
Publication:California CPA
Article Type:Brief Article
Geographic Code:1U9CA
Date:Jul 1, 2002
Words:812
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