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1997 Annual Report - Personal Income Tax

Introduction

The nearly 12.2 million 1996 California full-year resident personal income tax (PIT) returns filed represent an increase of 0.7 percent, or almost 88,000 returns, from 1995. This total consists of over 5.2 million single filers, nearly 5.0 million married joint filers, over 1.8 million head of household filers, over 156,000 married separate filers, and more than 11,000 surviving spouse filers. Of the nearly 12.2 million returns filed, approximately 1.9 million were Form 540EZ, over 3.5 million were Form 540A (short form), and approximately 6.8 million were Form 540 (long form). Almost 435,000 tax returns were filed electronically in 1997. The amount of self-assessed taxes increased by 11.5 percent, from $18.2 billion to $20.3 billion.

The statewide median adjusted gross income for all filers increased from $24,128 in 1995 to $25,336 in 1996, a 5.0 percent increase from the previous year. For taxpayers filing jointly, the statewide median income increased from $43,006 in 1995 to $46,243 in 1996, a 7.5 percent increase. For the past 25 years, the Bay Area counties of Marin, Contra Costa, San Mateo and Santa Clara have consistently reported the highest median incomes. Marin County had the highest median income for joint returns in 1996, reporting $72,953, while Imperial County had the lowest, reporting $21,547. The highest median income for all filers was also in Marin County, at $34,654.

The largest gains in median income were reported in Santa Clara County, with a 7.8 percent increase for all filers, and Monterey County with an 18.6 percent increase for joint filers. Almost all counties experienced an increase in median income for the "all returns" and "joint returns" categories. The only exception was Trinity County, which experienced a decrease for the "all return" category.

Personal Income Tax: Returns by Income Class*

Adjusted Gross Income Class

Number of Returns

Percent Change

1995 Taxable Year

1996 Taxable Year

5,000

10,000

15,000

20,000

25,000

30,000

40,000

50,000

$100,000

Under

to

to

to

to

to

to

to

to

And Over

$ 5,000

9,999

14,999

19,999

24,999

29,999

39,999

49,999

99,999

Total

1,282,366

1,417,806

1,408,300

1,190,756

998,804

831,253

1,279,207

955,096

2,040,881

680,174

12,084,643

1,254,405

1,395,539

1,316,758

1,158,670

986,187

827,109

1,315,017

981,867

2,144,035

792,614

12,172,201

-2.2

-1.6

-6.5

-2.7

-1.3

-0.5

2.8

2.8

5.1

16.5

0.7

*Totals may not add due to rounding.

Data Sources

The county data presented in Appendix B, Tables 6 and 7, the credit information presented in Table 9, and the voluntary contribution table in this section were derived from FTB tax return master file. The tax return master file includes data from all 1996 individual tax returns. All other tables in this section and in Appendix B were generated from data gathered from a stratified random sample of personal income tax returns filed during the 1997 filing season. This section and the majority of the Appendix B tables summarize only 1996 California resident tax returns filed during 1997. However, part-year resident and nonresident data are summarized separately in PIT Appendix Table 4G.

Sample selection was based on a combination of criteria, including the amount of both state and federal adjusted gross income (AGI) and the relative magnitude of California adjustment items. Information was collected from 91,859 resident returns for the 1996 taxable year.

Indexing

Since 1978 California law has provided for the adjustment of tax brackets, standard deductions and exemption credits to reduce the effect of inflation on average tax rates. The tax brackets were initially adjusted by the percentage of change in the California Consumer Price Index in excess of three percent. Beginning in 1980 the three-percent threshold was removed.

The 1996 inflation adjustment factor was 1.6 percent. This indexing adjustment applies to: exemption credits; standard deductions; some tax credits; limitations on exemption credits and itemized deductions; and the tax brackets.

Adjusted Gross Income (AGI)

California taxpayers are required to compute federal AGI by completing their federal tax return before determining California AGI. To determine federal AGI, taxpayers must subtract federal adjustments from federal income. Once the taxpayer has determined federal AGI, the taxpayer makes California adjustments, both additions and subtractions, to federal AGI to determine California AGI. The chart on page 11 illustrates the process used to arrive at California AGI.

The combined federal income of full-year resident California taxpayers for 1996 was $528.9 billion. Major sources of income included: wages and salaries; dividends; interest; pensions and annuities; capital gains; business income; and distributions from partnerships and S corporations.

Increases were noted for all major sources of income. Of particular note were the increases in wages and salaries of $23 billion (6.4 percent), net sale of capital assets of $12 billion (57.8 percent), and net partnership and S corporation income of $5 billion (39.4 percent).

Reductions to federal income due to adjustments amounted to $6.1 billion and included: payments to tax deferred retirement accounts and self-employed health plans; moving expense; one-half of self-employment tax; penalty for early withdrawal of savings; and alimony paid.

California taxpayers reported total federal AGI of $521.2 billion. From federal AGI, taxpayers subtracted $22.4 billion and added $13.6 billion in California adjustments. Subtractions result from differences between federal and state tax treatment of: state income tax refunds; unemployment compensation; social security benefits; California nontaxable interest income; California lottery winnings; IRA distributions; pensions and annuities; passive activity loss; depreciation and amortization; capital gain/loss and others. Additions result from differences between federal and state tax treatment of: interest on state and municipal bonds issued by a state other than California; net operating loss; passive activity loss; depreciation and amortization; capital gain/loss and others.

For 1996 the total California AGI reported by resident taxpayers was $512.4 billion, a 9.5 percent increase from 1995.

1996 Personal Income Tax Components

Income From All Sources

Minus Exempt Income (examples): Nontaxable Social Security and Railroad Retirement Insurance Proceeds Bequests and Gifts Public Assistance IRA and Keogh Interest Interest on Certain State and Local Government Obligations Scholarships and Fellowships

Equals Gross Income: Salaries and Wages Taxable Interest Dividends Taxable State and Local Income Tax Refunds Alimony Received Business Income or Loss Capital Gain or Loss Taxable IRA Distributions Taxable Pensions and Annuities Rents and Royalties Partnership Income or Loss Estate and Trust Distributions S Corporation Distributions Farm Income Unemployment Compensation Taxable Social Security Benefits Other Income Lottery Winnings.

Minus Adjustments to Income: IRA Contributions One-Half of Self-Employment Tax Self-Employed Health Insurance Deduction Retirement Plan Deductions Penalty on Early Withdrawal of Savings Alimony Paid Moving Expense

Equals Federal Adjusted Gross Income

Minus Federal Income Exempt From State Tax: State Income Tax Refund Unemployment Compensation Taxable Social Security Benefits Nontaxable Interest and Dividend Income Railroad Retirement and Sick-Pay California Lottery Winnings Fringe Benefits IRA Distributions Basis Recovery of IRAs, Pensions and Annuities Passive Activities Differences in Depreciation and Amortization Differences in Capital Gain or Loss Differences in Other Gain or Loss Differences in Net Operating Loss

Plus State Income Exempt From Federal Tax: Interest on State or Municipal Bonds From Other States Fringe Benefits Differences in Passive Activities Differences in Depreciation and Amortization Differences in Capital Gain or Loss Differences in Other Gain or Loss Differences in Net Operating Losses

Equals California Adjusted Gross Income

Minus Deductions California Standard Deduction or Federal Itemized Deductions: Adjusted for Differences in California Medical and Dental Expenses California Income Tax Paid Interest Paid Contributions Casualty and Theft Loss Employee Business Expense Miscellaneous Deductions

Equals California Taxable Income

Multiplied by Applicable Marginal Tax Rate

Minus Tax Credits (Credits are allowable only after applicable limitations based on the tentative minimum tax and/or Alternative Minimum Tax) Personal Dependent Blind Senior Senior Head of Household Jobs Prison Inmate Labor Enterprise Zone Employee Joint Custody Head of Household Low-Income Housing Enterprise Zone and Program Area Hiring and Sales Los Angeles Area Revitalization Zone Hiring and Sales Research Taxes Paid to Other States Dependent Parent Employer Child Care Program and Contribution Prior Year Alternative Minimum Tax Child Adoption Manufacturer Investment Salmon and Steelhead Trout Habitat Restoration Local Area Military Base Recovery Area Disabled Access Enhanced Oil Recovery Miscellaneous Carryovers from Expired Credits

Plus Other Taxes Alternative Minimum Tax Tax on Early Use of IRA, Keogh or Annuity Contract Tax on Accumulation Distributions of Trusts

Equals Total Tax Liability

Minus Prepayments and Payments Withholding Estimated Tax Extensions Excess SDI

Plus Voluntary Contributions

Equals Overpayment or Balance Due

Personal Income Tax: Sources of Adjusted Gross Income*

Item

1995 Taxable Year

1996 Taxable Year

Percent Change

Amount (Millions)

Amount (Millions)

Percent of Total Income

Federal Income:

Wages and Salaries

Interest

Dividends

Pensions and Annuities

Net Business Income

Net Sale of Capital Assets

Net Rent and Royalty Income

Net Partnership and S Corporation Income

Net Estate and Trust Income

Net Farm Income

Net Other Income 1

Total Federal Income

$ 354,879.6

19,365.3

11,182.0

25,718.3

25,959.9

21,187.5

1,249.2

13,226.8

928.1

- 651.5

8,822.0

$ 481,867.2

$ 377,596.7

20,048.0

12,772.2

26,870.3

27,798.7

33,434.8

1,492.5

18,431.6

1,175.2

- 496.0

9,766.9

$ 528,891.0

71.4

3.8

2.4

5.1

5.3

6.3

0.3

3.5

0.2

-0.1

1.8

100.0

6.4

3.5

14.2

4.5

7.1

57.8

19.5

39.4

26.6

23.9

10.7

9.8

Federal Adjustments:

IRA Adjustments

Moving Expense

One-half Self-Employment Tax

Self-Employed Health Insurance

KEOGH/SEP Payments

Penalty on Early Withdrawal of Savings

Alimony Paid

Other 2

Total Federal Adjustments

$ 860.3

125.3

1,799.4

305.9

1,520.0

22.6

1,033.6

190.8

5,857.9

$ 891.7

105.4

1,932.2

335.2

1,645.2

22.8

1,003.3

196.9

6,132.8

3.6

-15.9

7.4

9.6

8.2

1.1

-2.9

3.2

4.7

Total Federal Adjusted Gross Income (AGI) 3

$ 476,736.0

$ 521,204.6

9.3

California Adjustments:

Schedule CA Subtractions

Schedule CA Additions

Total California Adjustments

$ 21,976.7

13,233.2

$ -8,743.6

$ 22,366.8

13,593.8

$ -8,773.0

1.8

2.7

-0.3

Total California AGI Reported

$ 467,992.4

$ 512,431.7

9.5

* Totals may not add due to rounding.

1 Includes all other federal income, miscellaneous taxpayer entries and unclassified amounts.

2 Includes miscellaneous taxpayer amounts.

3 Total Federal AGI does not equal Total Federal Income minus Total Federal Adjustments because it is derived from the state return while federal income and federal adjustments are derived from the federal return.

Deductions

The standard deduction for 1996 was $2,527 for single or married filing separate filers. For married filing joint, head of household and surviving spouse filers, the standard deduction was $5,054. The total amount of standard deductions claimed by resident California taxpayers was $28.1 billion for the 1996 taxable year, which was the same amount claimed by residents for the 1995 taxable year. When a taxpayer deductions exceed the standard deduction, the taxpayer benefits from claiming itemized deductions. However, limitations do apply to some itemized deductions. The medical expense deduction was limited to the amount that exceeded 7.5 percent of AGI. Also, total itemized deductions of high income taxpayers are reduced to some extent according to recapture rules. Beginning in 1991, interest expenses, other than for home mortgages, were eliminated. Miscellaneous itemized deductions were limited to the amount that exceeded 2 percent of AGI. About 4.5 million returns (36.9 percent) filed for the 1996 taxable year included state itemized deductions. The total amount of itemized deductions claimed for 1996 was $74.1 billion, 6.6 percent more than 1995. Of note for 1996 are the significant increases in itemized deductions of state and local income tax of 11.5 percent and mortgage interest of 6.6 percent.

Personal Income Tax: Itemized Deductions by Type*

Type of Deduction

1995 Amount (Millions)

1996

Percent Change

Amount (Millions)

Percent of Total

Medical Deductions

$ 3,308.4

$ 3,657.9

3.8

10.6

Deductible Taxes:

State and Local Income Tax

Real Estate Tax

Personal Property Tax

Other Taxes

Total Taxes

19,413.7

8,296.8

793.9

508.6

$ 29,013.0

21,640.6

8,809.3

869.0

499.0

$ 31,817.8

22.7

9.2

0.9

0.5

33.4

11.5

6.2

9.5

-1.9

9.7

Interest:

Mortgage Interest

Other

Total Interest

40,338.3

2,092.4

$ 42,430.8

43,004.4

2,270.0

$ 45,274.4

45.1

2.4

47.5

6.6

8.5

6.7

Contributions:

Cash

Non-cash

Carryover from Prior Year

Total Contributions 1

6,985.0

2,522.9

1,535.3

$ 9,327.0

7,868.5

3,435.1

2,273.6

$ 11,113.7

8.3

3.6

2.4

11.7

12.6

36.2

48.1

19.2

Casualty and Theft Loss

435.7

200.9

0.2

-53.9

Miscellaneous Deductions

6,035.5

6,628.3

7.0

9.8

Adjustments to Federal Deductions 2

- 2,776.9

- 3,380.0

-3.5

-21.7

Total Federal Itemized Deductions

$ 87,773.5

$ 95,313.0

100.0

8.6

California Adjustments 3

- 18,452.9

- 20,103.7

-8.9

Adjustments to California Deductions 4

- 2,592.1

- 1,069.4

58.7

Total California Itemized Deductions

$ 69,505.4

$ 74,139.8

6.6

* Totals may not add due to rounding.

1 Total does not equal the sum of the detail because total contributions are limited generally to 50 percent of adjusted gross income.

2 This amount is is the result of taxpayers itemizing their deductions for either state or federal purposes, but not both.

3 This amount is composed mostly of state income tax payments not deductible for state purposes.

4 This amount is is the result of taxpayers itemizing their deductions for either state or federal purposes, but not both.

Note: To illustrate the flow of information from the federal tax return to the state return, start with Total Federal Itemized Deductions, add back in the Adjustments to Federal Deductions, then subtract both California Adjustments and Adjustments to California Deductions.

Taxable Income

California taxable income after deductions totaled $421.3 billion in 1996 compared to $381.8 billion in 1995. This represents a 10.3 percent increase.

Tax Credits

The total amount of tax credits used by Californians for 1996 was over $2.1 billion, comparable to 1995. The credits for personal, dependent, senior, and blind exemptions amounted to nearly $1.8 billion and accounted for 83.6 percent of the total tax credits claimed.

Most credits are limited during the computation of alternative minimum tax (AMT). The section below provides information about credit limitations created by AMT.

Special tax credits are employed to either prevent double taxation or to promote economic or societal goals. Appendix B, Table 9 presents a complete enumeration of various tax credits applied for 1996. Note that, unlike data presented elsewhere in this report, information presented in Table 9 was developed from the return processing master file and includes credits reported on returns of nonresident and part-year resident returns. Of more than $391 million of special credits applied as tax reductions, the Other State Tax Credit accounted for $217 million, by far the largest single tax credit. Other tax credits that represented significant tax reductions included the Credit for Prior Year Alternative Minimum Tax ($52 million), Los Angeles Revitalization Zone Credits ($41 million), Manufacturer Investment Credit ($38 million), and the Research Credit ($12 million).

Alternative Minimum Tax

California tax law gives special treatment to some types of income and allows special deductions and credits for some types of expenses. The alternative minimum tax (AMT) is designed to ensure that individuals who take substantial advantage of these provisions pay at least a minimum level of tax. Beginning in 1996, the AMT rate decreased from 8.5 percent to 7 percent.

If a taxpayer is subject to AMT, the AMT is added to the taxpayer regular tax liability. Generally, a taxpayer may be subject to AMT if alternative minimum taxable income (AMTI, defined as taxable income plus AMT adjustments and preferences) totals more than $40,000 for filers who are married filing joint or qualified widow(er); $30,000 for filers who are single or head of household; and $20,000 for filers who are married filing separate. For 1996, there were 42,000 filers who computed $55 million in AMT compared to 161,000 who computed $140 million in 1995. This represents a 73.7 percent decrease in the number of AMT filers and a 61.0 percent decrease in the amount of AMT paid compared to 1995. This was anticipated due to the rate reduction.

California AMT provisions may also increase a taxpayer regular tax, even if AMT is not owed. This may occur because most California tax credits, including exemption credits, are limited by the taxpayer tentative minimum tax (TMT). TMT is the amount of tax calculated by multiplying AMTI minus any AMT exemption amount by 7 percent. Certain credits may reduce the regular tax to TMT; other credits may reduce the regular tax below TMT. A few credits may reduce AMT.

Total Tax Liability

The total tax liability, after credits and other taxes for the 1996 taxable year, was $20.3 billion for 8.4 million returns that reported a tax liability for 1996. This compares to $18.2 billion for 8.2 million returns that reported a tax liability in 1995. The total tax liability increased 11.9 percent from 1995. The number of taxable returns filed increased by 2.8 percent.

Payments, Withholding, Estimated Tax, SDI and Overpayments

For 1996, $14.7 billion in taxes were paid through wage and salary withholding. This is an 8.9 percent increase over the $13.5 billion paid in 1995. Withholding was reported on 9.4 million returns and represented 72.4 percent of the self-assessed total tax liability.

Estimated tax payments of almost $6.7 billion were claimed on 1.2 million returns. This was a 19.2 percent increase from the $5.6 billion paid in 1995.

Claims for excess state disability insurance (SDI) were reported on nearly 370,000 returns and totaled over $35.0 million, averaging $94 per claim.

The amount of overpayments, before any voluntary contributions were made or any credits were applied to 1996 taxes, was $3.5 billion on nearly 7.1 million returns.

Voluntary Contributions

Beginning in 1982, taxpayers were given the opportunity to make donations to the California Election Campaign Fund, via the state tax return. Since 1982 many other special causes have been added to the state tax return, as reflected in the table shown above.

During 1997, legislation was enacted to extend the length of time some of the funds may appear on the state tax return and made certain appropriations with respect to the administration of the funds designated to the various causes. See the "Legislation" portion of this report for more detail.

Of the various political parties receiving donations, the Democratic party received the largest amount of contributions in 1996 of nearly $53,000, down from nearly $61,000 in 1995. The second highest contribution for 1996 was to the Republican party, of nearly $28,000, which was down from a little over $30,000 in the previous year.

Of the remaining voluntary contributions, the highest contributions were to the Endangered Species Account of more than $488,000, and to the State Children Trust Fund of more than $386,000.

Personal Income Tax: Voluntary Contributions*

Contribution
1995 Taxable Year
1996 Taxable Year
Number of Contributors
Amount Contributed
Average Amount Contributed
Number of Contributors
Amount Contributed
Average Amount Contributed
California Election Campaign Fund
American Independent
113
$ 661
$5.85
151
$ 639
$4.23
Democratic
7,287
60,596
$8.32
6,956
52,961
$7.61
Libertarian
186
2,355
$12.66
295
2,972
$10.07
Peace and Freedom
85
699
$8.22
125
761
$6.09
Republican
3,944
30,272
$7.68
3,762
27,597
$7.34
Green
561
5,325
$9.49
996
8,052
$8.08
General Election Fund
5,068
21,959
$4.33
5,155
22,006
$4.27
Reform
n/a
n/a
n/a
116
844
$7.28
Natural Law
n/a
n/a
n/a
57
395
$6.93
Subtotal
17,244
$ 121,867
$7.07
17,613
$ 116,227
$6.60
California Seniors Fund
38,417
183,097
$4.77
36,466
172,719
$4.74
Alzheimer's Disease Fund
48,401
293,146
$6.06
46,597
293,755
$6.30
Endangered Species Account
65,694
524,486
$7.98
62,001
488,292
$7.88
State Children's Trust Fund
64,971
420,299
$6.47
60,524
386,490
$6.39
Breast Cancer Fund
52,243
300,023
$5.74
53,217
309,282
$5.81
Veteran's Memorial Account
22,497
95,599
$4.25
23,702
100,364
$4.23
Firefighter's Memorial Fund
22,926
104,236
$4.55
24,627
116,128
$4.72
Public School Library Fund
50,455
340,246
$6.74
48,641
322,204
$6.62
Olympic Training Fund
274
2,061
$7.52
23
77
$3.35
D.A.R.E. (Drug Abuse Resistance Education) Fund
33,937
155,668
$4.59
31,481
147,605
$4.69
Military Museum Fund
10,163
30,643
$3.02
154
539
$3.50
Subtotal
409,978
$ 2,449,504
$5.97
387,433
$ 2,337,455
$6.03
Seniors Special Fund
5,665
65,071
$11.49
4,999
59,961
$11.99
Total
432,887
$ 2,636,442
$6.09
410,045
$ 2,513,643
$6.13
*The data presented in this table include all types of returns, but do not include administrative cost adjustment. Also, the data in this table were derived from FTB's tax return master file. The tax return master file includes data from all 1996 resident, part-year, and nonresident tax returns. Therefore, the data reflected herein differ from the sample data presented in Appendix B, Table 4A

Refunds, Transfers and Balances Due

The number of refunds issued was 6.8 million, down from 6.9 million in 1996. The refund amount totaled nearly $2.8 billion, an increase of 2.3 percent from the amount refunded in 1995. The average refund issued was $408 per refund return.

Transfers of overpayments to the 1997 taxable year totaled $730 million on nearly 380,000 1996 returns compared to $578 million on 364,000 returns for 1995 that were transferred to 1996.

The number of balance due returns for 1996 was just over 3.4 million compared to 3.2 million in 1995, a 6.8 percent increase. Balances due for 1996 totaled almost $2.5 billion compared to $2.3 billion in 1995, a 7.9 percent increase.

Personal Income Tax: 1986-1996 Returns with Expanded Income1 of $200,000 or More

Taxable Year

Total Returns

Nontaxed Returns

Percent of Total

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

191,758

161,493

140,425

130,807

129,722

121,695

126,543

119,926

111,112

81,644

103,650

510

262

326

254

117

135

167

171

258

266

101

0.3

0.2

0.2

0.2

0.1

0.1

0.1

0.1

0.2

0.3

0.1

1 Expanded income is adjusted gross income plus tax preference income less investment expenses.

* Based on adjusted gross income figures, expanded income figures not available.

High Income Returns

For 1996, 191,758 return filers reported income of $200,000 or more, of which 510 or 0.3 percent had no net tax liability. This represents an increase of 18.7 percent in the number of untaxed high income taxpayers over 1995. The Los Angeles Revitalization Zone Credit was the greatest contributor to tax reductions for these high-income return filers. The addition of the Manufacturer Investment Credit also contributed heavily to tax reductions for this category of taxpayers.

Personal Income Tax: Largest Deduction or Credit on 1996 Nontaxed High Income Returns1

Item

Number of Returns

Percent of Total2

Los Angeles Revitalization Zone Credit

Manufacturer's Investment Credit

Enterprise Zone Hiring, Sales and Use Credit

Miscellaneous Deductions

Other State Tax Credit

Prior Year Minimum Tax Credit

Total Contributions

Mortgage Interest Expense

Casualty Losses

Medical Expense

Research and Development Credit

Residential Rental and Farm Sales Credit

Low-Income Housing Credit

Investment Interest Expense

State Tax Refund Deduction

Total Expenses Deduction

Commercial Solar Credit

Other Special Credits and Deductions

Total

198

88

36

32

28

23

19

14

12

10

9

8

7

7

5

5

4

5

510

38.8

17.3

7.1

6.3

5.5

4.5

3.7

2.7

2.4

2.0

1.8

1.6

1.4

1.4

1.0

1.0

0.8

1.0

100.0

1 Returns with expanded income of $200,000 or more.

2 Totals may not add due to rounding.

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