Senate Bill 1233 (Lockyer), as enacted on October 3, 1997, made the following changes to California law:
SUBJECT: 1997 Tax Relief Act
Section 17054 of the Revenue and Taxation Code is amended.
This act increases the dependent exemption credit amount to $120 for each dependent for the 1998 taxable year and to $222 for each dependent for 1999 and later taxable years. The increased dependent exemption credit will not be adjusted for inflation for the 1999 taxable year. The dependent exemption credit continues to be limited to the amount by which regular tax before credits exceeds tentative minimum tax and continues to phase out at federal adjusted gross income levels over the amounts listed below:
| Filing Status | AGI (1996) |
| Single/Married Filing Separate | $114,152 |
| Head of Household | $171,228 |
| Married Filing Joint | $228,305 |
NOTE: This act chaptered out the changes made to Section 17054 by Senate Bill 455 (Stats. 1997, Ch. 611). However, since this act and SB 455 were double-joined and this act contained the same provisions as SB 455, the enactment of this act preserved the provisions of SB 455.
Section 17062 of the Revenue and Taxation Code is amended.
This act increases the alternative minimum tax (AMT) exemption deductions and exemption phase-out amounts for the 1998 tax year to the amount that they would have been if they had been indexed since their enactment in 1987. This act also provides that the AMT exemption deductions and exemption phase-out amounts will continue to be indexed in future years.
NOTE: This act chaptered out the changes made to Section 17062 by Senate Bill 455 (Stats. 1997, Ch. 611). However, since this act and SB 455 were double-joined and this act contained the same provisions as SB 455, the enactment of this act preserved the provisions of SB 455.
NOTE: This act chaptered out the changes made to Section 17062 by Senate Bill 1106 (Stats. 1997, Ch. 604).
Section 17085.8 is added to the Revenue and Taxation Code.
This act conforms state law to the 1997 federal Taxpayer Relief Act by providing that the 10% tax on early withdrawals from an IRA does not apply to distributions from an IRA if the taxpayer uses the funds to pay for "qualified higher educational expenses" or for "first-time home buyer expenses." Qualified higher education expenses uses the same definition used for Education IRAs discussed below.
First-time homebuyer withdrawals must be used to buy, build, or rebuild a home within 120 days of distribution. A "first home" is the principal residence of the taxpayer or the spouse, child, grandchild, or ancestor of the taxpayer. Acquisition costs include any usual or reasonable settlement, financing, or other closing cost. A first-time home buyer is an individual (and spouse, if married) who must not have an ownership interest in a principal residence during the two-year period ending on the date the new home is purchased. The maximum amount of IRA distribution a taxpayer may receive in a lifetime and use for first-time homebuyer expenses is $10,000.
Section 17152 of the Revenue and Taxation Code is amended.
This act conforms California law to the 1997 federal Taxpayer Relief Act as it relates to the exclusion of gain from the sale of a principal residence and the reporting of real estate transactions for the sale of a taxpayer’s principal residence occurring on or after May 7, 1997. These provisions replace the once-in-a-lifetime exclusion of $125,000 and the rollover of gain from the sale of principal residence provisions.
Under this act, a taxpayer generally is able to exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. The exclusion is allowed each time a taxpayer selling a principal residence meets certain eligibility requirements, but generally no more frequently than once every two years. Gain shall be recognized to the extent of any depreciation allowable with respect to the rental or business use of such principal residence. To be eligible for the exclusion, a taxpayer must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange.
In the case of joint filers not sharing a principal residence, an exclusion of $250,000 is available on a qualifying sale of the principal residence of one of the spouses. Similarly, if a single taxpayer who is otherwise eligible for an exclusion marries someone who has used the exclusion within the two years prior to the marriage, the couple is allowed a maximum exclusion of $250,000. Once both spouses satisfy the eligibility rules and two years have passed since the last exclusion was allowed to either, the taxpayers may exclude $500,000 of gain on their joint return.
NOTE: This act chaptered out the changes made to Section 17152 by Senate Bill 5 (Stats. 1997, Ch. 610). However, since this act and SB 5 were double-joined and this act contained the same provisions as SB 5, the enactment of this act preserved the provisions of SB 5.
Section 17210.6 is added to the Revenue and Taxation Code.
This act conforms state law to the 1997 federal Taxpayer Relief Act by increasing the federal "AGI threshold levels" for phasing out the $2,000 IRA deduction and by changing the definition of active participation in an employer-sponsored retirement plan.
Beginning in 1998, the phase-out limits are increased as follows:
For married taxpayers filing joint
| For taxable years beginning in: | The phase-out range is: |
| 1998 | $50,000 - $ 60,000 |
| 1999 | $51,000 - $ 61,000 |
| 2000 | $52,000 - $ 62,000 |
| 2001 | $53,000 - $ 63,000 |
| 2002 | $54,000 - $ 64,000 |
| 2003 | $60,000 - $ 70,000 |
| 2004 | $65,000 - $ 75,000 |
| 2005 | $70,000 - $ 80,000 |
| 2006 | $75,000 - $ 85,000 |
| 2007 and thereafter | $80,000 - $100,000 |
For single taxpayers
| For taxable years beginning in: | The phase-out range is: |
| 1998 | $30,000 - $40,000 |
| 1999 | $31,000 - $41,000 |
| 2000 | $32,000 - $42,000 |
| 2001 | $33,000 - $43,000 |
| 2002 | $34,000 - $44,000 |
| 2003 | $40,000 - $50,000 |
| 2004 | $45,000 - $55,000 |
| 2005 and thereafter | $50,000 - $60,000 |
No deduction is allowed for married taxpayers filing a separate return if the individual is an active participant in an employer-sponsored retirement plan.
Additionally, an individual will not be considered an active participant in an employer-sponsored retirement plan merely because the individual’s spouse is an active participant for any part of the tax year. This change allows most homemakers the full $2,000 IRA deduction regardless of whether the spouse is an active participant in an employer-sponsored retirement plan. A special phase-out limit applies to individuals who are not active participants but whose spouses are active participants. The maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, phases out at AGI between $150,000 and $160,000.
Section 17273 of the Revenue and Taxation Code is amended.
This act provides language to keep the state deduction for self-employed health insurance at the 25% level by providing that the federal increased deduction for self-employed health insurance from 25% in 1993 to 30% in 1995 and 40% for 1997 graduating up to 100% for 2007 does not apply. However, since this provision is operative for taxable and income years beginning on or after January 1, 1998, the enactment of date-change conformity by Senate Bill 455 (Stats. 1997, Ch. 611), operative January 1, 1997, had the effect of increasing the self employed health insurance deduction to 40% for 1997.
NOTE: This act chaptered out the changes made to Section 17273 by Senate Bill 455 (Stats. 1997, Ch. 611), which would have provided that the federal increased deduction does not apply to taxable and income years beginning on or after January 1, 1997.
Section 17507.4 is added to the Revenue and Taxation Code.
This act conforms California law to the 1997 federal Taxpayer Relief Act by providing that individual retirement account (IRA) assets may be invested in certain platinum coins and in any gold, silver, platinum, or palladium bullion of a fineness equal to or exceeding the minimum fineness required for metals which may be delivered in satisfaction of a regulated futures contract subject to regulation by the Commodity Futures Trading Commission. This provision does not apply unless the bullion is in physical possession of the IRA trustee.
Section 17507.6 is added to the Revenue and Taxation Code.
This act conforms California law to the 1997 federal Taxpayer Relief Act as it relates to "Roth IRAs."
Beginning in 1998, this act provides for a new type of IRA, called a Roth IRA. A Roth IRA differs from other IRAs in that the tax advantages are "backloaded." Contributions to a Roth IRA are not tax deductible. Instead, the IRA earnings (e.g., interest and dividends) are distributed tax free (if certain requirements are met). To be treated as a Roth IRA, the account must be designated as such when it is established. The contribution limit of $2,000 per year is coordinated with other IRAs (all IRA contributions in any one year cannot exceed $2,000 in aggregate). A 6% penalty applies to any contribution in excess of $2,000. Unlike other IRAs, an individual may make contributions to a Roth IRA after the individual’s age of 70½.
Roth IRAs also are subject to AGI limitations. The maximum amount allowed for a Roth IRA contribution is phased out for single taxpayers with AGI between $95,000 and $110,000 and for married taxpayers filing joint with AGI between $150,000 and $160,000. If after applying the phase-out limitations, the computed allowable contribution is less than $200 but more than zero, a $200 contribution is allowed.
Distributions from a Roth IRA are not included in gross income and are not subject to the 10% early withdrawal tax if certain requirements are met. The individual must have held the Roth IRA for a five-year period beginning with the first year in which a contribution was made to the Roth IRA and ending with the end of the fifth year after the contribution. In addition, the distribution must meet one of the four following requirements:
- made on or after the date the individual obtains age 59½.
- made to a beneficiary (or the individual’s estate) on or after the individual death.
- attributable to the individual being disabled.
- made for "qualified first-time home buyer expenses" (as defined above).
Additionally, holders of a Roth IRA do not need to start receiving distributions by the age of 70½, as do holders of other types of IRAs.
If a nonqualified distribution is made from a Roth IRA, the distribution is first treated as made from contributions (that were not deductible). No portion of a nonqualified distribution is treated as attributable to earnings, or is includible in gross income, until the total of all distributions exceeds the amount of total contributions.
This act also permits the "rollover" of a non-Roth IRA into a Roth IRA if the taxpayer’s AGI for the year does not exceed $100,000 (computed without regard to the rollover distribution) and the taxpayer is not married filing separate. The $2,000 annual contribution limit does not apply to rollovers. The rollover of an ordinary IRA into a Roth IRA requires the taxpayer to report the ordinary IRA distribution in gross income. However, if the ordinary IRA is contributed to the new Roth IRA within 60 days of the distribution the 10% early withdrawal tax will not apply. If an ordinary IRA is rolled into a Roth IRA before January 1, 1999, the amount that is includible in gross income may be included ratably over a four-year period. This act permits a rollover into or between Roth IRAs more than one time a year.
This act requires a regular IRA rollover to be held in a Roth IRA for five years to avoid a premature withdrawal penalty and to use the ratable income inclusion rules.
Section 18037.6 is added to the Revenue and Taxation Code.
This act conforms California law to the 1997 federal Taxpayer Relief Act by providing that the rollover of gain from the sale of a principal residence provisions does not apply. Instead, the new provisions for the treatment of gain from the sale of a principal residence applies (see Section 17152 above).
Section 18510 of the Revenue and Taxation Code is amended.
This act updates the provisions that the determination of gross income for the purposes of determining filing requirements to reflect the new exclusion for gain of principal residence (see Section 17152 above).
NOTE: This act chaptered out the changes made to Section 18510 by Senate Bill 5 (Stats. 1997, Ch. 610).
Section 19184 of the Revenue and Taxation Code is amended.
This act provides for a penalty of $50 for each failure of the trustee of an Education IRA (see Section 23712 below) to file information reports.
This act also provides for a penalty of $50 for each failure of the trustee of a medical savings account to file information reports.
NOTE: This act chaptered out the changes made to Section 19184 by Senate Bill 455 (Stats. 1997, Ch. 611).
Section 23712 is added to the Revenue and Taxation Code.
This act conforms California law to the 1997 federal Taxpayer Relief Act as it relates to Education IRAs. Taxpayers with modified AGI below $150,000 ($95,000 for single taxpayers) may contribute up to $500 per year per beneficiary to an Education IRA. Like Roth IRAs, contributions to an Education IRA are not deductible. Earnings on contributions can be distributed to beneficiaries tax free, provided the earnings distributed are used to pay for "qualified higher education expenses." The exclusion from the beneficiary’s gross income is not available in any year that a federal Hope credit or federal Lifetime Learning credit is claimed.
The $500 maximum amount a taxpayer can contribute to an Education IRA is phased-out for married taxpayers with modified AGI between $150,000 and 160,000, and $95,000 and $110,000 for single taxpayers. Modified AGI is the taxpayer’s AGI for the year increased by gross income excluded under the federal foreign earned income or other nondomestic earned income exclusion. After applying the phase-out limitations, if the computed allowable contribution is less than $200 but more than zero, a $200 contribution is allowed. Like other IRAs, a 6% penalty applies to excess contributions. The limitation applies to each contributor; therefore, an individual may be the beneficiary of several different Education IRAs.
Qualified higher education expenses include tuition, books, supplies and equipment required for enrollment or attendance of the designated beneficiary at an eligible educational institution. Qualified higher education expenses include, with certain limitations, room and board. An eligible educational institution is generally an accredited, postsecondary educational institution that is eligible to participate in the Department of Education student aid program.
An Education IRA is a tax-exempt trust and must be designated as such at the time it is created. The trust instrument must provide that:
- no contribution will be accepted by the Education IRA after the beneficiary attains age 18.
- except in the case of rollover contributions, annual contributions to the Education IRA may not exceed $500.
- all contributions must be made in cash.
- the trustee must be either a bank or other person that demonstrates an ability to properly administer the trust.
- no portion of the trust’s assets will be invested in life insurance contracts.
- the assets of the trust will not be commingled with other property, except in a common trust or investment fund.
- upon the death of the beneficiary, any trust balance will be distributed to the beneficiary’s estate within 30 days.
Any amount in an Education IRA may be rolled over into another Education IRA with the same beneficiary or for the benefit of a member of the original beneficiary’s family. This provision allows any residual assets in an Education IRA, after the beneficiary finishes his or her education, to be transferred to another family member. A family member is defined to include ancestors, lineal descendants of the taxpayer and the lineal descendants of the taxpayer’s ancestors (e.g., uncles, aunts, nieces and nephews).
This act requires the trustee of the Education IRA to file information reports with the department.
Under this act, Education IRAs are required to distribute all of the IRA’s assets to the beneficiary within 30 days of the date the beneficiary becomes 30 years of age. These distributions would be subject to the same tax rules as other distributions.
Section 23802 of the Revenue and Taxation Code is amended.
This act chaptered out the changes made by Senate Bill 5 (Stats. 1997, Ch. 610) relating to the S corporation tax rate increase, thereby maintaining the 1.5% rate. SB 5 would have increased the S corporation tax from 1.5% to 1.6% for income years beginning on or after January 1, 1997, 1.65% for income years beginning on or after January 1, 1998, 1.7% for income years beginning on or after January 1, 1999, and 1.6% for income years beginning on or after January 1, 2000, and thereafter. This act makes a nonsubstantive technical change to the S corporation rate section as it read on January 1, 1997.
This act, as a tax levy, went into immediate effect and its provisions apply to taxable and income years beginning on or after January 1, 1998.
This act will not require any reports by the department to the Legislature.