Take a close look at the cover of your all-new California income tax brochure. The sea-foam green type and sleek new format are more than just trendy design. They are the tip-off that even greater changes await within.
Indeed, inside the repackaged brochure are a set of entirely new tax forms and regulations that state officials predict will revolutionize how millions of Californians compute their tax obligations.
Many residents are sure to be pleased. For the most part, the new California tax law of 1987 makes the job of completing state tax forms far easier and faster than ever before. However, for a sizable number of residents--specifically, the high-income taxpayers--the new forms and laws mean just one thing: a bigger tax bite.
Perhaps the single most important facet of the new state law, which state officials say is the most sweeping tax revision since the inception of the personal income tax in 1935, is its far-reaching attempt to bring California's taxing practices into conformity with those of the federal government. With some exceptions (discussed below), state exemptions and deductions are now virtually identical to those permitted by the federal government.
Much like the sweeping federal tax legislation of 1986, the state law passed in October, 1987, is designed to broaden the base on which taxes are levied by eliminating or reducing many of the deductions that taxpayers had been entitled to claim, such as state sales tax, consumer debt interest payments and medical bills. In exchange, the state lowered tax rates across the board and cut the maximum rate to 9.3% from 11%.
The bottom line is that lower- and middle-income taxpayers, for the most part, will enjoy a lower tax bill, while upper-income people will probably pay more. According to the state Franchise Tax Board, a hypothetical married couple with one child and $100,000 in gross income can expect its state tax bill to increase 18% for 1987, to $5,832 from $4,944. However, a couple with two children and $35,000 of gross income would pay $471 in 1987 taxes, an 18% savings over the $571 paid in the previous year.
Another important facet of the new law is that it allows more people to use the so-called short form. Accountants say as many as half of the estimated 13 million tax returns that Californians will file this year could be handled on the two-page Form 540A.
Unlike previous years, the short form is not just for taxpayers who do not itemize their deductions. Now the short form can be used by Californians whose income came only from wages and salary, interest, dividends, Social Security and unemployment compensation and who did not pay any estimated taxes during 1987. Taxpayers who received income from IRA accounts, capital gains or rental property are still required to complete the traditional long form, the 540.
"There is no reason for taxpayers to use the long form if they have the standard deductions and income sources," says a Franchise Tax Board spokesman. "We are trying to get the word out. But it's tough to change habits. About 60% of the long forms filed through the end of February could have been done on the short form."
Whether a taxpayer uses the long or short form, completing it will be considerably easier this year.
Because of the new similarity to federal tax laws and the simplified forms, taxpayers no longer have to calculate their adjusted gross income on the state forms, starting with their W-2 wage statements and other income forms. Instead, taxpayers simply copy the "adjusted gross income" figure calculated on the federal forms to the appropriate line of the state form.
Short-form filers are not required to show how they arrived at their income figure. Long-form filers must attach a copy of their federal tax forms to the state return to demonstrate how the income figure was determined.
Because of the relative ease of preparing the state form, state Franchise Tax Board officials are saying that taxpayers--even those who use the services of a professional preparer for their federal forms--may be able to complete the state forms on their own, without additional help.
Accountants, however, dispute the claim, noting that few if any of their profession would agree to prepare only the federal return. "It's half an assignment, and almost no professional would accept it," says Robert A. Brown, a Woodland Hills accountant.
Although state laws are closer than ever to federal taxing policies, there still are differences. And, again to make it easier on the taxpayer, the state has grouped these differences--all tax deductions--together as "California Income Adjustments" in a special portion of the forms.
Included in these adjustments, which are to be added together and then subtracted from the federal adjusted gross income figure, are:
- State income tax refunds and rebates: The state does not consider these payments as income since they were refunds of taxes that Californians had previously paid. The federal government treats them as income.
- Unemployment compensation: The state does not tax these payments. The federal government does.
- Social Security benefits: The state does not tax these benefits. The federal government does tax a portion of them.
- Certain interest payments: The state does not tax interest earned on U.S. savings bonds, Treasury bills and certain other government bonds. The federal government taxes the interest on most government securities.
With deductions and exemptions changing, professionals urge Californians not to overlook the fact that many of the time-honored writeoffs are still available.
Among the more important writeoffs still remaining in California are several tax credits, which reduce the actual taxes owed. Included among these are the renter's credit for those who were renting a residence as of March 1, 1987, and the child-care credit, an allowance for child care for working taxpayers.