Although we have the new federal Tax Cuts and Jobs Act of 2017 that brings plenty of changes in tax planning and reporting, we need to be aware that state income tax laws may be much different as each state can choose whether or not to conform to the federal changes. This article will touch on several differences between federal and California tax law.
Here is a list of provisions regarding the new federal law that the state of California has not conformed to, including differences to deductions made “above the line” and itemized deductions.
California continues to allow deductions for moving expenses. However, employer reimbursements will be subject to SDI and UI as California law moves closer to conformity with federal law, which has suspended the deduction until 2025.
In regards to alimony payments, California will still allow a deduction for the payor and inclusion in income for the payee. Federal, on the other hand, eliminates the tax deduction for alimony payments for spousal support paid under a divorce instrument executed after December 31, 2018. The recipients will not include as income for federal purposes.
California still does not allow deductions for state, local, foreign, sales and use taxes. However, California does allow deductions for state and local real and personal property taxes and does not conform to the $10,000 limitation placed by federal law.
California continues to allow mortgage interest deductions of up to $1.1 million, $1 million for acquisition debt and $100,000 for home equity indebtedness. Federal law, in contrast, is at a lower dollar limit of $750,000 for acquisition debt and none for equity debt beginning for new loans as of December 15, 2017.
The state continues the 50% limitation on charitable contributions based on federal AGI, while federal law has increased the limit to 60%. Under federal law, taxpayers are no longer able to deduct payments made to institutions of higher education in exchange for the right to purchase tickets for seating at athletic events. California taxpayers will still be able to take the charitable contribution deductions on their California income tax returns.
California continues to allow miscellaneous itemized deductions subject to 2% of federal AGI, while federal law has eliminated these deductions.
The state still allows NOL carrybacks, and the California NOL is not limited to 80% of taxable income. The taxpayer can take all eligible net operating losses in California.
California will most likely not conform to federal law regarding IRC Section 529 plan distributions. The state will not allow nontaxable distributions from the plan for K-12 education expenses or nontaxable rollovers from plans to ABLE accounts.
There are other differences between federal and California law, and we have only discussed a few in this article. If you have any questions regarding these differences or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558 – 9200.