The Personal Income Tax Law, in modified conformity with federal income tax laws, generally allows various deductions in computing the income that is subject to taxes imposed by that law, including a deduction for qualified retirement contributions. Existing federal law, the Consolidated Appropriations Act, 2023, among other things, expanded the deduction for qualified retirement contributions by indexing catch-up limitations for persons 50 years of age or older to inflation, increasing catch-up limits for persons 60 to 63 years of age, inclusive, and increasing contribution limits for simple plans, as defined.

This bill would conform state law to the above-referenced changes to federal law.

Existing law requires any bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives that the tax expenditure will achieve, detailed performance indicators, and data collection requirements.

The bill would also include additional information required for any bill authorizing a new tax expenditure.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law, in modified conformity with federal income tax laws, generally allows various deductions in computing the income that is subject to taxes imposed by that law, including a deduction for qualified retirement contributions. Existing federal law, the Consolidated Appropriations Act, 2023, among other things, expanded the deduction for qualified retirement contributions by indexing catch-up limitations for persons 50 years of age or older to inflation, increasing catch-up limits for persons 60 to 63 years of age, inclusive, and increasing contribution limits for simple plans, as defined.

This bill would conform state law to the above-referenced changes to federal law.

Existing law requires any bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives that the tax expenditure will achieve, detailed performance indicators, and data collection requirements.

The bill would also include additional information required for any bill authorizing a new tax expenditure.

This bill would take effect immediately as a tax levy.

 THIRD READING  

Bill No: SB 1499

Author: Glazer (D)

Amended: 4/3/24

Vote: 21- Urgency

SENATE REVENUE AND TAXATION COMMITTEE: 6-0, 4/10/24

AYES: Glazer, Dahle, Ashby, Bradford, Dodd, Padilla

NO VOTE RECORDED: Skinner

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/16/24

AYES: Caballero, Jones, Ashby, Becker, Bradford, Seyarto, Wahab

SUBJECT: Personal Income Tax Law: deferred compensation: retirement account catch-up limits: contributions

SOURCE: Author

DIGEST:

This bill conforms state law to changes made by the Consolidated Appropriations Act to contribution limits for various retirement accounts.

ANALYSIS:

Existing law:

1. Allows various income tax credits, deductions, exemptions, and exclusions.
2. Does not automatically conform state tax law to changes in federal tax law, except for specific retirement provisions, so the Legislature must enact statute to affirmatively conform state tax law to any federal changes to the Internal Revenue Code.
3. Conforms, currently, to the Internal Revenue Code as of January 1, 2015 (AB 154, Ting, Chapter 359, Statutes of 2015).

This bill:

1. Conforms state law to the Consolidated Appropriations Act to expand the deduction for qualified retirement contributions by indexing the catch-up limitations for persons 50 years or age or older, increasing the catch-up limits for persons age 60-63 and increasing the contribution limits for SIMPLE IRA plans.
2. Contains provisions to comply with the requirements of Revenue and Taxation Code Section 41.

Background

Retirement Contributions. Taxpayers are generally able to claim a deduction on their tax returns for the amount contributed to their individual retirement account (IRA). For 2024, taxpayers can contribute to a traditional IRA up to $7,000 if under the age of 50 or $8,000 for those 50 or older by the end of the tax year, which allows for “catch-up contributions.”

Taxpayers cannot contribute more than their taxable compensation (salary and benefits) for the year. Contributions may be made during the tax year and up to the filing due date of a tax return. Taxpayers can deduct their full contribution, part of it, or none. Taxpayers’ deduction will depend on if they are covered by a retirement plan at work or not and their filing status.

SIMPLE IRA. A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is an employer-sponsored retirement plan, similar in some ways to a regular IRA such as 401(k) or 403(b) accounts. A SIMPLE IRA has the same rules as a regular IRA, but SIMPLE IRAs are easier to implement because they have lower start-up and administrative costs than many other retirement plans. Employers may contribute either a flat 2% of pay, regardless of whether the employee contributes, or match employee contributions dollar-for-dollar up to 3% of your pay. In 2024, the contribution limit is $15,500, but those over 50 can contribute $3,500 more to catch up.

Consolidated Appropriations Act, 2023. The Consolidated Appropriations Act, enacted by Congress on December 23, 2022, and signed by President Biden on December 29, 2022, made three changes to retirement contribution thresholds:

• Annually indexes for inflation the $1,000 IRA catch-up limit for individuals age 50 and older, commencing in the 2024 taxable year.
• Increases the catch-up limit amount for qualified defined contribution plans for individuals who are age 60 and not age 64 before the close of the taxable year to be the greater of $10,000 or 150 percent more of the regular applicable dollar amount in 2024. For SIMPLE IRA plans, the catch-up limit is increased to the greater of $5,000 or 150 percent more of the regular applicable dollar amount in 2025. CAA also annually indexes these limits for inflation beginning starting in the 2026 taxable year.
• Increases the contribution amount, including catch-up contributions, by 10 percent for SIMPLE plans for an employer with less than 25 employees. This change also allows a large employer with more than 25 employees who received at least $5,000 in compensation in the preceding year to provide a matching four percent or three percent employer contribution

California automatically conforms to changes to most retirement provisions, including contribution limits; however, it does not automatically conform to provisions that address whether taxpayers can deduct contributions or exclude distributions for state tax purposes. Unless the state conforms, taxpayers may have to include in income any contributions that exceed the pre-CAA limits, and distributions from contributions in excess of the limit may become taxable when distributed. While the law will not disqualify any retirement plans, nonconformity will likely result in mismatches in the taxpayer’s retirement account basis

Related/Prior Legislation

SB 454 (Ochoa Bogh, 2023) was identical to this bill, and was held under submission on the Senate Appropriations Committee’s suspense file.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, the Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $7.9 million in 2024-25, $6.6 million 2025-26, and $8.9 million in 2026-27. FTB’s costs to implement the bill would be minor and absorbable.

SUPPORT: (Verified 5/16/24)

None received

OPPOSITION: (Verified 5/16/24)

None received

ARGUMENTS IN SUPPORT: According to the author, “More than nine years have elapsed since California last enacted an omnibus date change federal conformity bill. The more time passes, the harder it is for taxpayers, tax practitioners, and the Franchise Tax Board to account for different treatment between federal and state for the same issue or item, which makes tax administration harder for everyone. SB 1499 conforms state law to three recent changes in retirement accounts, where differences between federal and state tax treatment can result in significant frustration.”

Prepared by: Colin Grinnell / REV. & TAX. / (916) 651-4117

5/17/24 11:56:29

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SENATE COMMITTEE ON APPROPRIATIONS

Senator Anna Caballero, Chair

2023 - 2024 Regular Session

SB 1499 (Glazer) - Personal Income Tax Law: deferred compensation: retirement account catch-up limits: contributions

Bill Summary:

SB 1499 would conform state law to changes made by the Consolidated Appropriations Act to contribution limits for various retirement accounts.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $7.9 million in 2024-25, $6.6 million 2025-26, and $8.9 million in 2026-27. FTB’s costs to implement the bill would be minor and absorbable.

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 exceed $87 billion annually.

Taxpayers are generally able to claim a deduction on their tax returns for the amount contributed to their Individual Retirement Account (IRA). California generally conforms to federal law when it comes to deduction limits. For 2024, taxpayers can contribute to a traditional IRA up to $7,000 if under the age of 50 or $8,000 for those 50 or older by the end of the tax year (catch-up contributions). Taxpayers cannot contribute more than their taxable compensation for the year. Taxpayers’ deductions will depend on (1) whether they are covered by a retirement plan at work, and (2) their tax filing status.

A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is an employer-sponsored retirement plan, similar in some ways to a regular IRA such as 401(k) or 403(b) accounts. A SIMPLE IRA has the same rules as a regular IRA, but SIMPLE IRAs are easier to implement because they have lower start-up and administrative costs than many other retirement plans. Employers may contribute either a flat 2 percent of pay, regardless of whether the employee contributes, or match employee contributions dollar-for-dollar up to 3 percent of your pay. In 2024, the contribution limit is $15,500, but those over 50 can contribute $3,500 more to catch up.

The Consolidated Appropriations Act (CAA), signed by President Biden on December 29, 2022, made three changes to retirement contribution thresholds:

• Annually indexes for inflation the $1,000 IRA catch-up limit for individuals age 50 and older, commencing in taxable year 2024.
• Increases the catch-up limit amount for qualified defined contribution plans for individuals who are age 60 and not age 64 before the close of the taxable year to be the greater of $10,000 or 150 percent more of the regular applicable dollar amount in 2024. For SIMPLE IRA plans, the catch-up limit is increased to the greater of $5,000 or 150 percent more of the regular applicable dollar amount in 2025. CAA also annually indexes these limits for inflation beginning starting in taxable year 2026.
• Increases the contribution amount, including catch-up contributions, by 10 percent for SIMPLE plans for an employer with less than 25 employees. This change also allows a large employer with more than 25 employees who received at least $5,000 in compensation in the preceding year to provide a matching four percent or three percent employer contribution

California automatically conforms to changes to most retirement provisions, including contribution limits; however, it does not automatically conform to provisions that address whether taxpayers can deduct contributions or exclude distributions for state tax purposes.

Proposed Law:

This bill would conform state law to the CAA to expand the deduction for qualified retirement contributions by (1) indexing the catch-up limitations for persons 50 years or age or older, (2) increasing the catch-up limits for persons age 60-63, and (3) increasing the contribution limits for SIMPLE IRA plans.

Related Legislation:

SB 454 (Ochoa Bogh) was identical to this bill, and was held under submission on the Suspense File of this Committee.

Staff Comments:

The revenue losses cite above are the aggregate impact of all three proposed changes. FTB’s estimates are a proration of the Joint Committee on Taxation revenue estimates as published on December 22, 2022.

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SENATE COMMITTEE ON REVENUE AND TAXATION

Senator Steven Glazer, Chair

2023 - 2024 Regular

Personal Income Tax Law: deferred compensation: retirement account catch-up limits: contributions

Conforms state law to changes made by the Consolidated Appropriations Act to contribution limits for various retirement accounts.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives either to 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 annually to publish a list of tax expenditures, currently totaling around $87 billion per year.

Conformity. State law does not automatically conform to changes in federal tax law, except for specific retirement provisions. Instead, the Legislature must affirmatively conform to federal changes, which it can do in two different ways. First, the Legislature can pass an individual tax bill that conforms to a specific federal provision, such as the Regulated Investment Company Modernization Act (AB 1423, Perea, 2011). Second, the Legislature can enact one omnibus bill to provide state law conforms to federal law as of a specified date. Currently state law generally conforms to federal tax law as of January 1, 2015 (AB 154, Ting, 2015).

Retirement Contributions. Taxpayers are generally able to claim a deduction on their tax returns for the amount contributed to their individual retirement account (IRA). For 2024, taxpayers can contribute to a traditional IRA up to $7,000 if under the age of 50 or $8,000 for those 50 or older by the end of the tax year, which allows for “catch-up contributions.”

Taxpayers cannot contribute more than their taxable compensation (salary and benefits) for the year. Contributions may be made during the tax year and up to the filing due date of a tax return. Taxpayers can deduct their full contribution, part of it, or none. Taxpayers’ deduction will depend on if they are covered by a retirement plan at work or not and their filing status.

SIMPLE IRA. A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) is an employer-sponsored retirement plan, similar in some ways to a regular IRA such as 401(k) or 403(b) accounts. A SIMPLE IRA has the same rules as a regular IRA, but SIMPLE IRAs are easier to implement because they have lower start-up and administrative costs than many other retirement plans. Employers may contribute either a flat 2% of pay, regardless of whether the employee contributes, or match employee contributions dollar-for-dollar up to 3% of your pay. In 2024, the contribution limit is $15,500, but those over 50 can contribute $3,500 more to catch up.

Consolidated Appropriations Act, 2023. The Consolidated Appropriations Act, enacted by Congress on December 23, 2022, and signed by President Biden on December 29, 2022, made three changes to retirement contribution thresholds:

• Annually indexes for inflation the $1,000 IRA catch-up limit for individuals age 50 and older, commencing in the 2024 taxable year.
• Increases the catch-up limit amount for qualified defined contribution plans for individuals who are age 60 and not age 64 before the close of the taxable year to be the greater of $10,000 or 150 percent more of the regular applicable dollar amount in 2024. For SIMPLE IRA plans, the catch-up limit is increased to the greater of $5,000 or 150 percent more of the regular applicable dollar amount in 2025. CAA also annually indexes these limits for inflation beginning starting in the 2026 taxable year.
• Increases the contribution amount, including catch-up contributions, by 10 percent for SIMPLE plans for an employer with less than 25 employees. This change also allows a large employer with more than 25 employees who received at least $5,000 in compensation in the preceding year to provide a matching four percent or three percent employer contribution

As noted above, California automatically conforms to changes to most retirement provisions, including contribution limits; however, it does not automatically conform to provisions that address whether taxpayers can deduct contributions or exclude distributions for state tax purposes. Unless the state conforms, taxpayers may have to include in income any contributions that exceed the pre-CAA limits, and distributions from contributions in excess of the limit may become taxable when distributed. While the law will not disqualify any retirement plans, nonconformity will likely result in mismatches in the taxpayer’s retirement account basis.

The author wants to bring California into conformity with regard to contributions made to retirement accounts and conform to some of the provisions in the Consolidated Appropriations Act

Proposed Law

Senate Bill 1499 conforms state law to the Consolidated Appropriations Act to expand the deduction for qualified retirement contributions by indexing the catch-up limitations for persons 50 years or age or older, increasing the catch-up limits for persons age 60-63 and increasing the contribution limits for SIMPLE IRA plans.

The bill contains provisions to comply with the requirements of Revenue and Taxation Code Section 41

State Revenue Impact

According to the Franchise Tax Board, SB 1499 results in revenue losses of $7.9 million in 2024-25, $6.6 million in 2025-26, and $8.9 million in 2026-27.

Comments

1. Purpose of the bill. According to the author, “More than nine years have elapsed since California last enacted an omnibus date change federal conformity bill. The more time passes, the harder it is for taxpayers, tax practitioners, and the Franchise Tax Board to account for different treatment between federal and state for the same issue or item, which makes tax administration harder for everyone. SB 1499 conforms state law to three recent changes in retirement accounts, where differences between federal and state tax treatment can result in significant frustration.”

2. Revenue loss. Existing tax law provides various credits, deductions, exclusions, and exemptions for certain taxpayers. Since these items are enacted to accomplish some governmental purpose and determined to have a cost — in the form of foregone revenues — state law refers to them as "tax expenditures." This bill would create a new tax expenditure, costing the General Fund in foregone revenue. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to consider whether SB 1499 is worth the tradeoff of spending cuts and/or raising taxes.

3. Fitting in. California’s general conformity date of January 1, 2015, means the state has not conformed to many changes in federal law made since that date. The Legislature has enacted several bills in the meantime conforming to some specific federal changes, such as, among others:

• Conform with modifications to specific changes made in the Tax Cuts and Jobs Act to pay for a new Young Child Tax Credit and enhanced Earned Income Tax Credit (AB 217, Burke, 2019).
• An income exclusion for loans forgiven under the Paycheck Protection Program, among other changes (AB 1577, Burke, 2020).

SB 1499’s conformity ensures taxpayers with retirement accounts have consistent tax treatment between federal and state law, including avoiding mismatches in the basis of their accounts. However, the state has not yet conformed to many other federal changes, and taxpayers and tax practitioners often find different treatment for the same item of income between federal and state taxes frustrating.

4. Section 41. Section 41 of the Revenue and Taxation Code requires any bill enacting a new tax expenditure to contain, among other things, specific goals, purposes, and objectives that the tax expenditure will achieve and detailed performance indicators, along with data collection and reporting requirements (SB 1335, Leno, 2014). To satisfy these requirements SB 1499 states that its purpose is to conform state law to changes in federal law in order to reduce complications relating to mismatches in basis of retirement accounts for federal income tax purposes compared to state income tax purposes. To measure its impact, the bill directs the Legislative Analyst’s Office to prepare an annual report which must be provided no later than October 1, 2025, to the Legislature that estimates the number of taxpayers making the contributions to retirement accounts as a result of this bill, to the extent data is available.

5. Related legislation. The Committee will also consider SB 1191 (Padilla) at its April 10th hearing, which conforms state law to specific parts of Internal Revenue Code sections added by the Inflation Reduction Act relating to renewable energy development.

Support and Opposition

(4/5/24)

Support: None submitted.

Opposition: None submitted.

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