Date of Hearing: March 4, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 153 (

Author:Voepel) – As Introduced Ver:January 7, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: deduction: students

SUMMARY: Increases from $50 to $500 per month the deduction taxpayers who host international exchange students in their home may claim as a charitable contribution deduction. Specifically, this bill:

1. Increases, beginning on or after January 1, 2020, the maximum monthly amount of expenses a taxpayer may claim as a charitable deduction for amounts paid to maintain a K-12 full time non-U.S. student as a member of the taxpayer's household pursuant to a written agreement with a nonprofit organization.
2. Allows a deduction of up to $500 per month by modifying the cross reference to Internal Revenue Code (IRC) Section 170(g)(2)(A), which allows a $50 per month deduction for federal income tax purposes.
3. Limits the increase to when the student's permanent place of residence is not the United States.
4. Takes immediate effect as a tax levy.

EXISTING FEDERAL/STATE LAW:

1. Allows individual taxpayers who itemize deductions to deduct eligible charitable contributions from their income for the taxable year in which the contributions are made.
2. Allows a deduction for amounts paid, of up to $50 per month, by a taxpayer to maintain an individual, who is not a dependent or a relative, as a member of the taxpayer's household while the individual is a full time student, as specified.^[1]
3. Limits eligibility to a student in the twelfth grade or any lower grade (K-12) at an educational organization, as specified, located in the United States.
4. Requires a written agreement between the taxpayer and a "qualified organization" that administers a program to provide educational opportunities for students in private homes.
5. Defines "qualified organization" as specified nonprofit organizations.
6. Prohibits the deduction if the taxpayer receives any money or other property as compensation or reimbursement for maintaining the student in the taxpayer's home.^[2]

FISCAL EFFECT: Pending

COMMENTS:

1. The author has provided the following statement in support of this bill:

This bill is meant to decrease the potential burden to families who believe in doing the right thing and selflessly open up their home to foreign exchange students who wish to benefit from the California educational system. This bill will ensure these families are not blind-sided because of the additional taxes that they are subjected to as a result of the additional "income". This additional tax burden could affect whether or not the families continue to participate with such a program.

1. Committee Staff Comments:
   1. What is the problem? The issue raised is that hosting families of an international student that receive compensation are unaware of the associated personal income tax implications related to that compensation. The author's office indicates that compensation levels vary, and, in some cases, can be substantial.
   2. Does this bill solve the problem? Increasing the charitable deduction amount that may be claimed does not solve the stated problem if the Exchange Program is compensating or reimbursing the taxpayer to host the international student; pursuant to IRC Section 170(g)(2)(B), the charitable deduction cannot be claimed when a taxpayer is compensated or reimbursed for "any" part of the costs of having an international exchange student living with them.
   3. Receiving compensation generally disqualifies eligibility for the charitable deduction: The IRS explains to taxpayers in Publication 526:

In most cases, you can't claim a charitable contribution deduction if you are compensated or reimbursed for any part of the costs of having a student live with you. However, you may be able to claim a charitable contribution deduction for the unreimbursed portion of your expenses if you are reimbursed only for an extraordinary or one-time item, such as a hospital bill or vacation trip, you paid in advance at the request of the student's parents or the sponsoring organization.

• 1. Volunteer host families vs. compensated host families: Increasing the charitable deduction amount would assist a family that hosts an international student on a non-compensated, volunteer basis. Taxpayers that spend their own money for a student's food, transportation, books, tuition, clothing, medical, and entertainment costs may qualify for the deduction for those expenses. Additionally, it is important to note that to benefit from the increased charitable deduction this bill provides, the taxpayer must itemize rather than take the standard deduction.
  2. Limited to international students: This bill does not increase the charitable deduction permitted if the student is a United States resident. The maximum deduction for a U.S. student would remain at $50 per month.
  3. Are Exchange Programs adequately informing host families of the income tax implications? The Counsel on Standards for International Educational Travel (CSIET) recommends that exchange programs treat stipend payments to host families as taxable and issue a Form 1099-MISC in Box 3 – Other Income. And, CSIET also recommends that the Exchange Programs provide host families with a letter explaining that they may take a deduction for their expenses and should discuss with an advisor the most beneficial approach to doing so.
  4. How would a compensated host family deduct their expenses? It appears some taxpayers report the income and expenses under Form 1040 Schedule C "Profit or Loss from a Business" to limit the taxpayer's personal income tax exposure to net income (or net loss).
  5. Federal legislation: In 2015, H.R. 4296, the "Youth Exchange Support Act of 2015" was introduced to amend the IRC to increase from $50 to $400 per month the charitable contribution tax deduction for taxpayers that provide housing and support to a U.S. or international student enrolled in an education program. The increased amount would have been adjusted for inflation for taxable years after 2016, but the bill was not enacted.
  6. Conformity: California typically conforms to federal law with respect to charitable deduction provisions for personal income tax purposes, including those for hosting K-12 students. Nonconformity complicates tax administration.
  7. Sunset date and Section 41: This bill increases a deduction for state income tax purposes. As such, consistent with this Committee's policy on tax expenditures, this bill lacks both: (1) a purpose statement, performance indicators, and data collection provisions; and, (2) a five-year sunset provision.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098

1. IRC Section 170(g)(2)(A). ↑

2. IRC Section 170(g)(2)(B) ↑