In certain cases described below, California law is more generous than the Federal law
Subtract from Federal income
- Social security benefits: California does not tax social security benefits and equivalent tier 1 railroad retirement benefits.
- Unemployment compensation: California does not tax unemployment compensation
- Paid family program (EDD): While taxable for Federal purposes, it is not taxable by California
- Sick pay received under the Federal Insurance Contributions Act: California excludes from Income the sick pay received from this Act.
- Heath insurance credit: Federal law allows a credit for small employers who provide health insurance for their employees. For Federal purposes, the taxpayer must reduce the insurance deduction for the amount of the credit. For California purposes, the full amount of insurance is deductible.
- Health Savings Accounts (HSA):
Distributions that are not used for qualified medical expenses are included in the Federal gross income. The amount taxable under Federal law, less interests and dividend income previously taxed by California, is to be deducted for California.
- Employee income exclusions for ridesharing fringe benefits: commuter highway transportation and transit passes provided to an employee: while the IRS caps the income exclusion, California law provide an income exclusion for compensation or the fair market value of other benefits (except for salaries & wages) received for participation in a California ridesharing arrangement which includes subsidized parking, commuting in a third-party vanpool, a private commuter bus, a subscription taxi pool and monthly transit passes provided for employees and their dependents.
- California qualified stock options: For qualified stock options issued on or after January 1, 1997 and December 31, 2001, California excludes the income for an individual who has exercised options for no more than 1000 with a fair market value of less than $100,000 determined when the options are granted if the individual earned income for the taxable year from the corporation granting the California Qualified stock options is $40,000 or less.
- Interest income:
Non-California bonds: US obligations (Federal bonds) are taxed by Federal law; California does not tax this interest income
California does not tax interest dividends ( from Mutual funds) paid by a fund attributable to interest received by US obligations or California state or municipal obligations if at least 50% of the fund assets would be exempt from California tax when held by an individual.
- Dividends received from Controlled Foreign Corporations are taxed in California in the year distributed rather than in the year earned.
- Capital gains: California taxes the undistributed capital gain from Regulated Investment Company (RIC) in the year distributed rather than in the year earned.
- Alimony paid: Alimony paid by a nonresident alien that was not deducted on the Federal return is a deduction allowed on the California tax return
- State income tax refund: California excludes from income the state income tax refund while Federal law includes it.
- Gain on disposition of qualified assisted housing: while Federal law does not allow special treatment on such gains, California law permits their deferrals if the proceeds are reinvested in residential real property (other than personal residence) within 2 years of the sale.
- Grants paid to build or retrofit buildings to be more energy efficient: California allows an income exclusion for grants paid to low income individuals. Federal law has no such exclusion.
- California lottery winnings: California does not tax California lottery winnings but taxes lottery winnings from other States.
In certain cases described below, California law is not as generous as the Federal law
Add to Federal income
- Income excluded by US treaties:
- It may be excluded for California only if the treaty specifically excludes the income for state purposes. If the treaty does not, California requires the reporting of adjusted gross income from all sources.
- Canadian registered retirement savings plan (RRSP): RRSP does not qualified as an IRA and therefore does not receive IRA treatment. The US/Canadian treaty allows taxpayer to defer taxation until distribution. California residents must include their RRSP earnings in the year earned.
- Federal form 1040NR for certain nonresident aliens with no dependents requires that only US source income be reported. California requires the reporting of adjusted gross income from all sources.
- Health Savings Accounts (HSA):
- Federal law allows taxpayers a deduction for contributions to an HAS account. Contributions made on behalf of an eligible individual by an employer are excluded from W-2 wages. California does not conform to this provision.
- Federal law allows taxpayers to exclude from gross income the interest and dividends earned on HAS’s. California does not conform and all interest and dividends earned are taxable in the year earned and as a result taxpayer has a California basis in the HAS account.
- Since California does not recognize HAS, a rollover from an MSA (Archer Medical Savings Account) is treated as a distribution not used for qualified medical expense.. For California, the distribution is included in taxable income and the 10% tax applies (R&TC sect 17215).
- Self employed health insurance deduction: California does not allow the deduction for medical coverage of adult children when those adult children provide for more than one-half of their own financial support.
- Tuition & fees deduction: Federal law allows for a deduction from income up to $4,000 for qualified higher education expenses paid. California has not conformed.
- Educator expenses deductions: California does not allow a deduction for teachers, instructors, counselors, principals or aides for K-12 grades.
- Taxable interest income: Federal law does not tax interest from State or local bonds. California taxes the interest from non-California state or local bonds
- Alimony received by a nonresident alien: While Federal law excludes this income, alimony received by a non resident alien must be included on the California return.
- Federal subsidies for prescription drug plans: California does not allow deduction from gross income of certain subsidies for prescription drug plans
- Capital loss carry-backs: Federal law allows a deduction for carry-backs of certain capital loses. California does not.
- Mortgage forgiveness debt relief: California law does not allow exclusion of income from discharge of indebtedness from the disposition of the taxpayer principal residence.
- Gain on the sale of qualified small business stock: While federal law allows the deferral and exclusion of the gain on sale of qualifying small business stock that was held for more than 5 years, California law does not.
Adjustments to Federal Itemized deductions
- Minimum Franchise tax or income tax paid by an S Corporation: while Federal law allow for the deduction of such tax, California disallows this deduction.
- State, local and foreign income taxes paid: California does not allow a deduction for such taxes including amounts paid for Disability insurance (SDI).
- Annual tax paid by a limited partnership: While Federal law allows this tax in deduction, California law does not.
- Other adjustments: include expenses such as for medical & dental, adoption related, mortgage interest credit. Employee business, investment interest, gambling losses, Federal estate tax, generation skipping transfer tax, qualified charitable contributions, health saving account distributions, college access credit and others.
- Pass-through income from partnership, S corp, estates and trusts: income and deductions from pass-through entities may differ due to various differences between Federal and State law. For example the California State minimum franchise tax.
- IRA basis adjustments: There may be differences in the taxable amount of the distribution depending on when the contributions were made. If the taxpayer changes residency status when he first began making contributions to his IRA, or made different deductions for California because of differences between his California and federal self-employment income, he will need to calculate his IRA basis as if he was a California resident for all prior years.
- Roth IRA contributions, conversions and distributions are treated in similar manner by Federal & California, the taxable amount of a distribution may be different due to basis differences.
- NOL due to the differences above, the taxpayer needs to refigure his NOL for California purposes
There are other differences that concern very specific situations that are not indicated in this post.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question