Do the New Federal Tax Laws Effect Californians?
The simple answer? Federal tax changes do affect Californians. The complicated answer is yes, and the effect varies throughout much of the rest of the country, too.
It’s Not That Easy of an Answer
Some states fell into line with the sweeping, and sometimes confusing, changes to the federal tax code. And others, like California did not. California state legislators refused to come to any agreement on adopting all of the Republican’s new changes in the federal tax code to the state tax code. In fact, it was 2015, the last time California conformed.
For Californians, that does not mean we are off the hook. It simply means we face our own complicated California tax codes for our state filing, while we must adhere to the new laws when filing our federal tax return. Sound complicated? It is.
Where Do the Feds and California Agree?
Let’s start with the places where California actually did adopt aspects of the federal tax law, dubbed the Tax Cuts and Jobs Act of 2017.
Medical Expense Deduction
California conforms to the federal deduction, allowing a medical deduction threshold of 7.5% of Adjusted Gross Income (AGI). It used to be 10% of AGI. This means, if your adjusted gross income is $50,000, you can now tally your unreimbursed medical expenses and deduct anything over $3,750, rather than the $5,000 threshold, as dictated by the prior tax law. So, this is a better deal. This is also retroactive to the 2017 tax year, unlike most other provisions in the bill.
Investment Income Limit for Earned Income Tax Credit
California conforms to the $3,500 limitation of investment income with modifications. In prior years, the investment income level was lower, as in 2015, when it was $3,400. In 2018, to qualify for the Earned Income Credit, your investment income which includes interest, dividends, capital gains and royalties must be less than $3,500.
This one area where California conforms, yet does not conform.
California conforms to the charitable tax deductions, but it does not conform to the 10% federal increase.
That’s it for the most part. Now, let’s look at where the state and feds split.
Where the Feds and California Go Their Separate Ways
California does not conform with the elimination of the personal exemption or the dependent exemptions.
California continues to allow personal exemption tax credits:
- $118 Single or Head of Household (HOH)
- $237 for Joint or Widow(er)
- $367 for each dependent
California did not adopt the federal changes to the standard deduction amounts.
California maintains different standard deduction amounts for each filing status.
- $4,401 Single
- $8,802 Joint, HOH, Widow(er)
The feds adopted new, seemingly higher deductions, but in reality, they did not double the deductions as it has been suggested. Yes, the standard deduction went from $6,500 to $12,000, yet, at the same time, they eliminated the personal deduction. As an example, last year, a single payer would have been entitled to a $6,500 standard deduction in addition to a $4,150 personal exemption, for a total of $10,650 in income exclusions. Now, the deduction is simply $12,000, more but clearly not double.
The good news is, California does not require residents to take the standard deduction on their state tax return if they have taken it on their federal return. The following table shows the federal tax law change to the standard deduction.
Miscellaneous Itemized Deductions
California does not conform to the suspension of miscellaneous itemized deductions by the feds.
Unreimbursed employee expenses are no longer allowed. This includes expenses incurred through your work that are job related but not reimbursed, like certain supplies or tools, dues and subscriptions, even uniforms you may be required to wear and job search expenses.
California allows miscellaneous itemized deductions subject to the 2% of AGI.
Please take note, that even though the federal tax law is not allowing these itemized deductions, if you track and calculate them, you can deduct them on your California return.
California does not conform to the suspended deduction.
California allows deductions of moving expenses or exclusions of reimbursement from income.
Real Estate and Property Tax Deduction
California allows the full deduction of real estate and property taxes paid by the filer.
The federal tax law puts a cap on the amount that can be deducted.
On your California tax return, interest on up to $1 million in mortgage debt can still be deducted – IF – the mortgage is on a first or second home purchase. You can also still deduct interest on up to $100,000 in home equity debt if it was not used to improve or purchase a home.
The federal tax law dictates that the limits are much lower or non-existent for mortgage interest deductions. On your federal return, the $750,000 limit in interest on mortgage debt is much lower, and on home-equity debt, the interest paid cannot be deducted at all.
Qualified Business Income
California does not conform to the new federal deduction for certain businesses.
New Federal Provision
Under certain circumstances a deduction of 20% of certain qualified business income is allowed. This includes income earned by sole proprietorships, LLCs, partnerships, and S corporations.
Deductions That are Gone
We already covered a number of deductions that have changed or been eliminated. Gone are these deductions for the 2018 tax year:
· Casualty and theft losses (except those incurred due to a federally declared disaster)
· State and local taxes
· Tax preparation expenses
· Employer-subsidized parking and transportation reimbursement
Itemizing may be a thing of the past for most households.
Itemizing deductions will still be important for some, but as indicated above even though a number of major deductions are still allowable, the raising of the standard deductions could make itemizing a futile exercise for literally millions of filers. Approximately 70% of taxpayers took standard deductions in 2014, and almost 90% of taxpayers are projected to take standard deductions in 2018.
Tax Breaks for Education
Although attempts were made to reduce or eliminate a number of education tax breaks, in the end the bill left them alone. The Student Loan Interest Deduction is still in place, as well as the Lifetime Learning Credit, along with the exclusion for graduate school tuition waivers.
For anyone with children in private school or for those who incur the expense of tutoring for children in grades K-12, the 529 college savings plan has been expanded so you can use the money from that account for those expenses.
Corte Madera Tax Planning and Preparation Services
The new tax law changes and the government shutdown that includes diminished staffing for the IRS may feel daunting. As a taxpayer, you may still be seeking answers to questions about how to prepare for April’s filing date. At Proactive Tax Solutions, our experienced staff is staying up to date on all the ways the federal and state tax laws impact individuals and businesses.
Contact us today at our Corte Madera office to schedule an appointment to go over any of your questions or concerns.