2002 Tax Law Changes

Differences Between California and Federal Law
In general, California law conforms to the Internal Revenue Code (IRC) as of January 1,2001. Therefore, California has conformed to the income tax changes made to the IRC by the federal Internal Revenue Service Restructuring and Reform Act of 1998 (Public Law 105-206), the Tax and Trade Relief Extension Act of 1998 (Public Law 105-277), the Surface Transportation Revenue Act of 1998 (Public Law 105-178), the Ricky Ray Hemophilia Relief Fund Act of 1998 (Public Law 105-369), the Ticket to Work and Work Incentives Improvement Act of 1999 (Public Law 106-170), the Miscellaneous Trade and Technical Corrections Act of 1999 (Public Law 106-36), the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (Public Law 106-519), the Consolidated Appropriations Act of 2001 (Public Law 106-554), and to technical corrections made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16). However, there are continuing differences between California and Federal law. California has not conformed to some of the law changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (Public Law 107-16) or the federal Job Creation and Worker Assistance Act of 2002 (Public Law 107-147).

Teacher Retention Credit - The Teacher Retention Credit is suspended for tax year 2002. In addition, there are no carryover provisions for this credit.

Natural Heritage Preservation Tax Credit - is suspended for the fiscal year July 1, 2002 through June 30, 2003.

Child and Dependent Care Expenses Refundable Credit/Treatment of never married persons - Parents who are not married are treated the same as divorced or separated parents for purposes of the California Child and Dependent Care Expenses Credit. For more information, please refer to the instructions for form FTB 3506.

Net Operating Loss (NOL)
For taxable years beginning in 2002 and 2003 the NOL carryover deduction is suspended. Taxpayers may continue to compute and carryover an NOL during the suspension period. The deduction for disaster losses is not affected by the NOL suspension rules.

The carryover period for suspended losses is extended by two years for losses incurred before January 1, 2002 and by one year for losses incurred after January 1, 2002, and before January 1, 2003.

After the suspension period, the Net Operating Loss deduction will be allowed at 100%. For more information get form FTB 3805V.

Withholding on Real Property Sales - Effective January 1, 2003, the 3 1/3% withholding requirement for transfers of California real property is expanded to include sales made by California residents. Exemptions from the withholding requirements will be allowed for transactions involving like-kind exchanges and involuntary conversions. For individuals, waivers from the withholding requirement are limited to transactions where there has been a loss on the sale of property.

Tax on Early Distributions - Federal and California law provide for an additional tax on early distributions from annuity plans, self-employed plans, Individual Retirement Arrangements (IRAs), and Modified Endowment contracts. The additional tax is imposed only on the amount of the distribution that is includible in income. For California purposes, the additional tax rate is 2 1/2%.

Penalty Waiver - A waiver of penalties is provided for the underpayment of tax with respect to any law enacted during the 2002 calendar year. To request a waiver of underpayment of estimated tax penalty, get form FTB 5805, Underpayment of Estimated Tax by Individuals.

Additional First-Year Depreciation - California has not conformed to the Federal Job Creation and Worker Assistance Act of 2002 provision that allows taxpayers to take an additional first-year depreciation deduction and AMT depreciation adjustment for property placed in service after September 10, 2001.

New California Income Exclusions for Domestic Partners: Effective January 1, 2002, several taxpayer benefits are extended to apply to a taxpayer's "domestic partner " and the domestic partner's dependent(s) for medical expenses and health insurance benefits that occur on or after January 1,2002. These benefits include:

The exclusion from gross income for employer-provided accident and health insurance,
An exclusion from gross income for medical expense reimbursement if the expense was not previously deducted,
Medical expenses deductible as an itemized deduction,
Long-term health care insurance deductible as a medical expense, and
A deduction by self-employed individuals for health insurance costs paid for themselves, their spouses, and dependents. The deduction may not exceed the net earnings from the trade or business in which the insurance plan is established.

The deductions are taken as an adjustment on the Schedule CA (540) or Schedule CA (540NR).

Holocaust Restitution Payments - An exclusion is provided for holocaust reparations received by eligible individuals, their heirs, or estate for holocaust restitution payments, distributions or excludable trust.

Energy Rebates -An exclusion is allowed for vouchers, rebates or other financial incentives received from the California Energy Commission, the Public Utilities Commission, or a local publicly owned utility for the purchase or installation of specified energy production systems.

Military Service Benefits - Extensions of time are provided to members of the National Guard ordered into active service by the Governor of California or active federal service by the President of the United States for emergency purposes and to reservists called to active duty. The extensions apply to, among other things, court proceedings, contract obligations, rental agreements, taxes or assessments, and health or medical insurance. In addition, California allows an exemption from taxes to any California taxpayer who dies on active duty with any branch of the armed forces of the United States.

New Voluntary Contributions Fund -You may make voluntary contributions to the Asthma and Lung Disease Research Fund.

New Federal Conformity Items

California now treats a C corporation as an S corporation if it is also an S corporation for federal purposes. Therefore, the difference in estimated tax payments based on C corporation status to S corporation status should be reported on Form 540 line 39 and Long Form 540NR, line 49. In addition, taxpayers must include a statement received from the corporation showing the date(s) and amount(s) of payments made on their behalf.
Disallowance of club dues.
Disallowance of lobbying and political expenses.
California has conformed to the Victims of Terrorism Tax Relief Act of 2001 to allow victims who have died as a result of the terrorist attacks of September 11, 2001, the anthrax incidents in 2001, as well as the Oklahoma City bombing that occurred on April 19, 1995, a forgiveness of their state tax liability for the year immediately preceding the incident and all subsequent tax years until the date of death. This will result in a forgiveness of tax liability for tax years 2000 and 2001 for victims of the September 11, 2001 or anthrax incidents, and a forgiveness for tax years 1994 and 1995 for the Oklahoma city bombing victims. For more information, get Form 540X, Amended Individual Income Tax Return and instructions. In addition, with respect to either a declared disaster or terrorist or military action occurring on or after September 11, 2001, you may receive an extension of up to one year to file a tax return and/or make estimated tax payments.

Head of Household Filing Status
For information, see FTB Pub.1540.