This bill would take effect immediately as a tax levy.

The Personal Income Tax Law imposes taxes based upon taxable income of individuals, estates, and trusts at specified rates from 1% to 9.3%, as provided.

This bill, for taxable years beginning on or after January 1, 2018, would eliminate the income tax rates on specified taxable income below $100,000, as provided.

The Personal Income Tax Law presumes that an individual who spends in the aggregate more than 9 months of a taxable year in this state is a resident unless the presumption is overcome.

This bill would revise that presumption to provide that an individual who spends in the aggregate more than 6 months and one day of a taxable year in this state is a resident unless the presumption is overcome.

Existing income tax laws require every individual taxable under the Personal Income Tax Law that has certain amounts of adjusted gross income, or gross income, to make a return to the Franchise Tax Board. Existing law provides that specified required documents contain, or be verified by, a written declaration that is made under the penalty of perjury.

This bill would require those individuals taxable under the Personal Income Law, who file as nonresidents or part-time residents or who own real property within the state, to file an informational affidavit with the Franchise Tax Board that includes specified information about his or her contact with the state. By requiring the affidavit to be attested to under penalty of perjury, the bill would create a crime, thereby imposing a state-mandated local program.

The Personal Income Tax Law imposes a tax on the entire taxable income of a resident taxpayer and on taxable income of nonresidents derived from sources within the state. For purposes of computing taxable income, gross income of a nonresident includes only gross income from sources within this state.

This bill would provide that for a nonresident who owns property within California, taxable income means the product of the percentage of the taxable year spent in California, as determined by the affidavit described above, multiplied by all items of gross income and deductions, regardless of source.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1352 (Stone) - Personal income taxes: credit: ABLE account contributions

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1352 would create a tax credit for contributions to CalABLE accounts, as specified.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $5 million in 2018-19, $11 million in 2019-20, and $14 million in 2020-21. FTB’s costs to implement the bill have yet to be determined.

Background:

Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently $61 billion annually.

Congress authorized the Achieving a Better life Experience Act (ABLE) of 2014, which provides parents of people with disabilities a way to save tax-free for their children’s future needs. Qualified ABLE programs are administered by the states that invest contributions on behalf of the taxpayers. Individuals can be named the beneficiary of only one ABLE account if he or she has been blind or disabled before age 26. Taxpayers can then contribute up to $15,000 each year to any ABLE account.

Under current law, contributions to an ABLE account are not tax-deductible. However, all investment earnings remain untaxed as long as money withdrawn from the account is used for “qualified disability expenses,” such as medical treatment, education, special-needs transportation, and assistive technology. If money is withdrawn from an account for something other than qualified disability expenses, then the beneficiary is subject to additional tax: an income tax on the portion of the withdrawal that is not considered principle, and an additional 10 percent penalty tax.

A key feature of ABLE accounts is that the first $100,000 in an account is not treated as personal assets of the beneficiary. This is important for individuals receiving assistance — such as Medicaid, housing aid, Supplement Security Income — because federal law bars individuals with more than $2,000 of financial assets from receiving assistance. Thus, beneficiaries can have up to $100,000 in their ABLE account and still receive federal assistance.

In 2015, the Legislature enacted a pair of complementary bills (SB 324, Pavley, and AB 449, Irwin) to comprehensively implement ABLE accounts in California. The State generally conforms to the federal tax treatment of ABLE accounts as of January 1st, 2015. The most prominent departure concerns the penalty for withdrawls not used for qualified disability expenses: as previously mentioned, the federal penalty is 10 percent, whereas the State’s penalty is 2.5 percent. The CalABLE program was expected to launch in spring of 2018. However, CalABLE recently announced that program implementation will be delayed.

Proposed Law:

This bill would allow a tax credit, for taxable years 2019 through 2023, in an amount equal to 20 percent of a qualified contribution, as defined, not to exceed $750.

Staff Comments:

Based on the State Treasurer’s CalABLE projections, FTB assumes that $43 million will be contributed to CalABLE accounts in 2019. Applying a 20 percent credit percentage would result in $8.6 million in credits generated in 2019. By 2023, FTB expects that the amount of contributions would grow to $75 million, resulting in $15 million of credits generated. FTB assumes that the taxpayer’s tax liability would exceed the amount of the credit and the entire credit amount would be used in the year generated.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Personal income taxes: deductions

Creates three above the line deductions for expenses related to the care of a dependent parent, dependent stepparent, or dependent child with special needs.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives to either compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that but for the tax credit, they would otherwise not do. The Department of Finance is required to annually publish a list of tax expenditures, currently totaling around $61.3 billion per year.

Unlike deductions and exemptions, which reduce the amount of earnings that are taxed, tax credits are applied after the taxable income is calculated. Tax credits reduce — dollar for dollar — the amount of taxes owed.

Above the line deductions. Both federal and state laws allow for the deduction of certain expenses from gross income when calculating adjusted gross income (AGI). Some examples include moving expenses, education loans, certain ordinary and necessary trade and business expenses, and alimony. These are known as “above the line” deductions. Unlike other deductions, such as charitable deductions and mortgage interest deductions, all taxpayers with these types of expenses may take the corresponding deduction. In other words, the taxpayer does not need to itemize their deductions to obtain the benefit of that particular deduction.

Both state and federal law provide taxpayers with many deductions, exemptions, credits, and tax-free savings vehicles to pay for their dependent parents, children, or children with special needs. These include:

• The federal dependent exemption;
• The state Dependent Exemption Credit;
• The federal Child Tax Credit;
• The federal Child and Dependent Care Credit;
• The state Child and Dependent Care Expense Credit;
• Both the federal and state medical expense deductions; and
• ABLE (Achieving a Better Life Experience) accounts.

Dependent exemption. Federal law provides a dependent exemption for each claimed dependent — such as a child or an aging parent — which is deducted from AGI to reduce a taxpayer’s taxable income. The dependent exemption is phased out for high income taxpayers and is indexed to inflation annually. In the 2017 taxable year, the exemption is $4,050. However, on December 22^nd, 2017, President Trump signed HR 1, which enacted fundamental changes to the federal income tax, which included eliminating the dependent exemption for taxable years that begin after December 31^st, 2017, and before January 1^st, 2016.

Dependent Exemption Credit. State law does not provide a dependent exemption, but rather a credit. Unlike federal law, the exemption is not deducted from AGI. Instead, it is a credit against the taxpayer’s taxable income. Similar to federal law, the amount of the Dependent Exemption Credit is indexed to inflation annually: its current amount is $353. The credit is nonrefundable and may not be carried over to future years. Additionally, the Dependent Exemption Credit begins to phase out once a taxpayer’s federal AGI exceeds a certain amount.

Child Tax Credit. The federal Child Tax Credit (CTC) is a nonrefundable tax credit — equal to $1,000 — for taxpayers who claim a qualifying dependent child. To qualify for CTC, the child must be under 17 and be a U.S citizen. CTC is phased out by $50 for each $1,000 above the following AGI thresholds:

• $75,000 for taxpayers who are single;
• $55,000 for taxpayers who are married and filing separately; and
• $110,000 for taxpayers who are married and filing jointly.

Federal law also allows some families to receive another tax credit if CTC exceeds the taxpayer’s tax liability. If the family has at least three children and earned at least $3,000, the taxpayer is eligible for a refundable credit (the “Additional Child Tax Credit”) equal to 15 percent of their earned income.

H.R 1 modified the Child Tax Credit for taxable years beginning after December 31^st, 2017, and before January 1^st, 2026. H.R 1 doubles the Child Tax Credit to $2,000, and allows taxpayers to claim a $500 nonrefundable credit for dependents that do not qualify as children under tax law. To claim the Child Tax Credit, taxpayers must include the child’s Social Security Number. Additionally, H.R 1 increased the AGI phase-out thresholds to:

• $400,000 for taxpayers who are married filing jointly; and
• $200,000 for all other taxpayers.

The state does not conform to the Child Tax Credit and has no comparable credit other than the dependent exemption credit.

Child and Dependent Care Credit. The federal Child and Dependent Care Credit is a nonrefundable tax credit, equal to a portion of the taxpayer’s qualifying child or dependent care expenses. To obtain the credit, the taxpayer must incur employment-related expenses to provide care for a qualifying child or dependent. Employment-related expenses are expenses incurred by the taxpayer for the taxpayer to be gainfully employed such as day care expenses or adult day care expenses. A qualifying child or dependent must be either under 13 years old, or mentally incapable of taking caring of himself or herself.

The credit amount is equal to the applicable percentage (from 20 percent to 35 percent) times the employment-related expenses paid. The applicable percentage is determined by the taxpayer’s adjusted gross income (AGI). For example, a taxpayer with an AGI of $15,000 or less uses the highest applicable percentage (35%) while a taxpayer with an AGI of $43,000 or more uses the lowest applicable percentage (20%). The employment-related expenses are also limited. If a taxpayer has one qualifying dependent, the taxpayer is limited to $3,000 of employment-related expenses. If the taxpayer has two or more qualifying dependents, the taxpayer is limited to $6,000 of employment-related expenses.

Child and Dependent Care Expense Credit. Existing state law provides a tax credit similar to the federal credit. The state’s credit — entitled Child and Dependent Care Expense (CDC) Credit — conforms to both the federal credit percentage and the federal expenses cap. The CDC Credit is computed by first applying the federal credit percentage (20 to 35 percent) to the lesser of: the state expenses cap (ex. $3,000 for one dependent or $6,000 for two or more dependents); the California employment-related expenses paid; or the California earned income.

Then, the applicable CDC Credit percentage is applied. The percentage varies based on the taxpayer’s AGI.

If AGI is: CDC Credit Percentage:

$40,000 or less 50%

Over $40,000 but not over $70,000 43%

Over $70,000 but not over $100,000 34%

Over $100,000 0%

Medical expense deductions. Federal law allows taxpayers to deduct unreimbursed qualified medical expenses — such as preventative treatment, surgeries, and dental care — that exceed 7.5 percent of the taxpayers AGI. If the taxpayers pay for their dependent parents, dependent stepparents, or dependent children’s medical expenses, they can deduct those unreimbursed expenses as well. For example, Jane has an AGI of $45,000 and medical expenses of $5,475. Her AGI threshold is $3,375 ($45,000 AGI x 7.5 percent.) Thus, Jane could deduct $2,100 ($5,475 in medical expenses - $3,375 which is her AGI threshold) — of her medical expenses. The state conforms to the federal unreimbursed medical expense deduction as of January 1^st, 2015.

ABLE accounts. Congress authorized the Achieving a Better life Experience Act (ABLE) of 2014 which provides parents of people with disabilities a way to save tax-free for their children’s future needs. Qualified ABLE programs are administered by the states that invest contributions on behalf of the taxpayers. Individuals can be named the beneficiary of only one ABLE account if he or she has been blind or disabled before 26. Taxpayers can then contribute up to $15,000 each year to any ABLE account.

Contributions to an ABLE account are not tax-deductible. However all investment earnings remain untaxed as long as money withdrawn from the account is used for “qualified disability expenses” such as medical treatment, education, special-needs transportation, assistive technology, housing, etc. If money is withdrawn from an account for something other than qualified disability expenses than the beneficiary is subject to additional tax: an income tax on the portion of the withdrawal that is not considered principle, and an additional 10 percent penalty tax.

A key feature of ABLE accounts is that the first $100,000 in an account is not treated as personal assets of the beneficiary. This is important for individuals receiving assistance — such as Medicaid, housing aid, Supplement Security Income — because federal law bars individuals with more than $2,000 of financial assets from receiving assistance. Thus, beneficiaries can have up to $100,000 in their ABLE account and still receive federal assistance.

Governor Jerry Brown authorized California to set up the CalABLE accounts in 2015. The state generally conforms to the federal tax treatment of ABLE accounts as of January 1^st, 2015. The most prominent modification the state makes is it reduced the 10 percent penalty tax for withdrawals not used for qualified disability expenses to 2.5 percent. The CalABLE program was expected to launch in spring of 2018. However, CalABLE recently announced that program implementation will be delayed beyond spring of 2018.

The author would like to create another tax expenditure for expenses taxpayers incur to take care of their dependent parents, dependent stepparents, and/or dependent children with special needs.

Proposed Law

Senate Bill 1352 creates three above the line deductions. Specifically, SB 1352:

1. Creates a deduction for expenses — that are greater than $5,000 and less than $30,000 — related to the care of a dependent parent or stepparent who can no longer care for themselves.
2. Creates a deduction for expenses — that are greater than $5,000 and less than $30,000 — related to the care of a dependent child with special needs.
3. Creates a deduction for contributions to a qualified trust fund — not to exceed $30,000 — that is established to pay for the care and medical expenses of a dependent child, dependent parent, or dependent stepparent.

SB 1352 caps all three deductions for taxpayers who have gross incomes of $125,000 or more — in the case of single filers — or gross incomes of $250,000 or more — in the case of joint filers.

State Revenue Impact

According to the FTB, SB 1352 results in revenue losses of $3.7 billion in 2018-2019, $8.7 billion in 2019-20, and $11 billion in 2020-21.

Comments

1. Purpose of the bill. According to the author, “Many families across California are struggling to pay for the care of a loved one with special needs. One study conducted by the University of Southern California and Boston Children’s Hospital noted that the increased costs could be as high as $6,400 per year. One such way for families to help alleviate the cost of care is donations to ABLE (Achieving a Better Life Experience) accounts. ABLE accounts are federal savings accounts that allow taxpayers to put money aside that can be used to pay for “qualified disability expenses”. Senator Stone proposes to further help families out with SB 1352, which would give anyone who donates to an ABLE account a tax credit. As proposed to be amended, SB 1352 would give a 20% tax credit for the contributions made to an ABLE account, with the maximum credit being $750.”

2. Scope? SB 1352 creates three brand new tax expenditures to help families care for their loved ones. However, both federal and state laws already allow taxpayers numerous credits, deductions, exemptions, and tax-free savings accounts for this same purpose. More tax expenditures make filing tax returns more complex, causing dissatisfaction among taxpayers. Is it necessary to create three new tax expenditures to accomplish the same goal that existing tax expenditures and tax-free savings accounts aim to address? The Committee may wish to amend SB 1352 to create one new tax expenditure designed to help families care for children with special needs.

3. What about ABLE? To promote greater simplicity for taxpayers, the Committee may wish to expand on one of the already existing programs the federal and (soon to be) state governments administer to help those caring for special needs children: ABLE accounts. These accounts are tax-free savings accounts that help taxpayers prepare for their special needs children’s future costs. Since taxpayers contribute to federal ABLE accounts already, and the state’s CalABLE accounts will be launching soon, the state could help taxpayers by providing a credit for the contributions made. The Committee may want to amend SB 1352 to create a tax credit equal to 20% of the contribution made to an ABLE or CalABLE account in lieu of the credits proposed in the bill.

4. Cap it? Existing tax law provides various credits, deductions, exclusions, and exemptions for certain taxpayers. Since these items are enacted to accomplish some governmental purpose and have a cost — in the form of foregone revenues — state law refers to them as "tax expenditures." SB 1352 creates three new tax expenditures resulting in $3.7 billion in foregone General Fund revenue in the first year alone. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. To help mitigate the impact on the General Fund, the Committee may wish to amend SB 1352 to lower the cap on the deduction, or credit.

5. Section 41. On September 29, 2014, Governor Brown signed SB 1335 (Leno, 2014), which added R&TC Section 41. SB 1335 recognized that the Legislature should apply the same level of review used for government spending programs to tax preference programs, including tax credits. Thus, Section 41 requires any bill introduced on or after January 1, 2015 that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve. In addition, Section 41 requires detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives. The Committee may wish to amend SB 1352 to include both a sunset date and detailed performance indicators.

6. Related legislation. Assembly Bill 2309 (Fong) creates a tax deduction for contributions to ABLE accounts. It is currently pending in the Assembly Appropriations Committee.

Support and Opposition

(5/3/18)

Support: Best Buddies.

Opposition: Unknown.

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