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Taxpayers Should Review Their Withholding to Avoid Tax Bills Next April

Released: June 11, 2009

Sacramento – The Franchise Tax Board (FTB) today advised taxpayers to plan ahead for changes to the state’s personal income tax rates and exemption credits for the 2009 calendar year.

A new tax law raises California’s personal income tax rates by .25 percent, (AB X3 3 Ch. 18 2009). The law also reduces the dependent exemption credit to the same amount of the personal exemption credit—a $210 difference per dependent using 2008 amounts. Some taxpayers may need to increase their wage withholding now to avoid owing taxes next April.

The Employment Development Department (EDD) made new withholding tables available to employers in April, but taxpayers may be under withheld at least from January through April 2009.

The new percentage tax rates will be 1.25, 2.25, 4.25, 6.25, 8.2, 9.55 and 10.55 for California’s income brackets. The Alternative Minimum Tax rate changes from 7 to 7.25 percent.

The new withholding tables factor in the changes for the tax rate increase only, so taxpayers claiming dependent exemption credits may still need to modify their wage withholding on Form DE 4, Employee’s Withholding Allowance Certificate, to make any needed changes to the number of allowances they claim. (For example, the prior DE 4 instructed employees claiming dependents to multiply each dependent by three. The new form instructs employees to multiply dependents by one. This means a married employee with two children may have previously claimed eight allowances. They may now want to change to four.)

Taxpayers who make quarterly estimated tax payments may want to increase their quarterly payments, but they will not receive an underpayment of estimated tax penalty resulting from these changes for the first year. (For example, based on the 2008 tax tables, a couple filing jointly with two dependents and taxable income of $100,000 can expect to pay approximately $670 more next year. The increased tax from the rate increase is $250 and the change to the dependent exemption credit added $420 to the tax liability.)

The 2009 tax brackets, filing requirement thresholds, the standard deduction, and certain credits will be adjusted for inflation based on the California Consumer Price Index (CCPI). FTB typically releases the indexed amounts in late summer. Interested taxpayers should check FTB’s website at ftb.ca.gov for updates.

Editor’s Note: See attached table showing the complete calculation of our above referenced example.

Married Filing Jointly With Two Dependents Example—Based on the 2008 Tax Tables

Without the new tax rates/dependent
exemption credit

With the new tax rates/dependent
exemption credit

Taxable Income $100,000 Taxable Income $100,000
Tax $4,689 Tax $4,689
Taxable Income $100,000
Increase in Tax Rate X 0.0025
Increase Tax $250
Tax $4,689
Increase Tax $250
Total $4,939
Exemptions Amount (816) Exemptions Amount (396)
Total Tax $3,873 Total Tax $4,543