Highlights of 2002 California tax changes are briefly discussed below:
IRS Conformity—Beginning with the 2002 taxable year, California conforms to all federal pension and IRA provisions. IRA contribution limit for year 2002 has increased from $2,000 to $3,000 and SEP contribution has increased from 15 percent to 25 percent. California treats all college savings plans under IRC Section 529 the same as federal, whether it is a California or out of state plan. However California has not conformed to federal change that allows an additional 30 percent bonus in addition to Section 179 deduction or extend the net operating loss carry back. California does not allow Section 179 deduction for C corporations.
Net Operating Losses Suspended—California suspends the deduction of net operating loss carryovers by individuals and corporations for the 2002 and 2003 tax years. Taxpayers who were relying on NOL deduction in year 2002 will find themselves with a significant California tax liability. However, the NOL carryover periods have been extended in subsequent years.
Withholding On California Realty Transfers—For disposition of California real property after 2002, new law requires withholding of 3 1/3 percent of gross sales price of any real estate sales by California residents. Exemptions are: sales of principal residence; sales of $100,000 or less; sales that result in a loss if proven by the seller and certain foreclosures.
Estimated Payment Requirements Revised—Beginning with the year 2003 taxable year, the California estimated personal income tax requirements are revised to increase the safe harbor provision from 80 percent to 90percent of the tax shown on tax return and eliminate the withholding safe harbor provisions. A taxpayer whose adjusted gross income exceeds $150,000, prior year safe harbor is 110 percent of prior year tax.
Federal Treatment of S Election—Beginning with the 2002 taxable year, federal S corporations may no longer elect to be treated as C corporation for California corporation franchise tax. Nonresident shareholders of former California C corporations must now pay tax to California on their distributive shares of S corporations.
Governor Proposes Tax Increases—Here are some of the governor’s budget proposals that will affect you:
* Return of the 10- and 11-percent income tax brackets effective Jan. 1, 2003.
* A 1-percent sales tax increase on July 1, 2003; and another 0.125-percent increase on July 1, 2004.
* Modify the new real-estate withholding rules to allow taxpayers to withhold on either 9.3 percent of the gain or 3 1/3 percent of the sales price.
* A mandatory e-file program for the 2004 filing season.
* Many new fee increases
For additional state tax information, you can logon to Franchise Tax Board at www.ftb.ca.gov
Parveen Maheshwari is a Certified Public Accountant. He can be reached at (650) 340-1400 or parveen@cpamax.com