SACRAMENTO — The most frequent errors Californians make on their state income tax returns involve child care tax credits, exclusions of military income and individual retirement account deductions.
The next most common mistakes involve arithmetic errors, copying the taxes owed from the wrong tax table from the back of the taxpayer handbook, and copying the wrong earnings or withholding figures from W-2 wage and tax statements supplied by employers.
Filing for the child care tax credit requires adding an entire extra page to your federal tax return and adds more than a page to the federal Form 1040 instruction booklet.
By contrast, it is a one-line entry on your state Form 540 or 540A (line 53 on page 2 on either form), and is covered with less than 150 words of very simple and clear language in your instruction book.
But despite the relative clarity of instructions for claiming child care tax credits, that was the most frequent error found on 1985 California tax returns, with most errors overstating the tax credit by hundreds of dollars.
The state child care tax credit is 10% of your federal child care tax credit if your adjusted gross income is $20,000 or less, and it is 5% of the federal credit if your adjusted gross income is over $20,000.
One source of confusion is that the federal tax credit is 20% to 30% of actual qualified expenses, depending on income, and the state credit is a percentage of the federal credit, not a direct percentage of the expenses.
But thousands of taxpayers just copied their federal tax credit figures onto their state forms, or claimed 5% or 10% of actual expenses, which resulted in claims that were 5 to 20 times greater than state law allows.
And since these were tax credits--which reduce your taxes on a dollar-for-dollar basis--rather than deductions from income, those errors have an especially heavy impact on your total tax bill.
While most errors involving child care tax credits were caused by misunderstanding of very clear instructions, the next most frequent group of errors involve one of the more complicated parts of the state tax return, the military exclusion.
While military pay is taxed like other ordinary income by the federal government, California allows substantial exclusions from state taxation for active, extended active, retired and reserve military officers.
The confusion comes from slight variations in permitted income exclusions for different categories of military families. The best advice is a careful line-by-line reading of instructions to make sure you are in the right category, backstopped by an inquiry to your military unit, many of which have tax instructions tailored to their specific status.
Errors on deductions for individual retirement accounts, which are the next most frequent mistake on state returns, stem from three major differences between federal and state laws on IRA deductions.
The most important difference is eligibility. Under federal law, anybody can claim an IRA deduction for 1986, so long as the deduction does not exceed the reported income. But you cannot deduct an IRA on your state return if you are an active member of any other pension plan.
The second most important difference between federal and state IRA deductions is the maximums. The maximum annual IRA deductions from federal taxes is $2,000 for individuals, $2,250 for married couples with only one wage earner and $4,000 for couples filing jointly if both work. The comparable maximums on state returns are $1,500 for an individual, $1,750 for one-income couples and $3,000 for two-income couples.
Finally, the state limits IRA deductions to no more than 15% of earned income, which reduces the maximum deductions for individuals earning less than $10,000, one-income couples earning less than $11,666 and two-income couples earning less than $20,000. The only comparable cap on federal IRAs is that the IRA cannot exceed earned income.
Even if you don't qualify for an IRA state tax deduction, the interest on money that you place in a federally approved IRA is sheltered from state taxes until you draw it out for retirement income.
Other common errors on state returns include failure to report all stock dividends and claiming too much depreciation on business investments.
The state taxes every dollar of your stock dividends, while your federal tax form excludes the first $100 for individuals and the first $200 that couples receive.
Most depreciation errors are also caused by differences in federal and state law, since the state never adopted more generous depreciation schedules allowed by federal law.