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NONRESIDENT - ROUNDING TAX RATE PERCENTAGE

PURPOSE OF BULLETIN

To inform staff that the 2006 nonresident tax forms instructions for line 23 will include the following language:

"In this computation, FTB rounds the tax rate to four digits after the decimal. If your computation is different, you may receive a notice due to the difference in rounding. Contact us at (800) 852-5711, if you disagree with this notice."

BACKGROUND

In 2002, FTB implemented AB 1115, which changed the method for nonresidents and part-year resident taxpayers to determine their California tax by applying a prorated tax rate percentage. Currently, FTB rounds the tax rate percentage to 4 digits after the decimal, which is an acceptable business practice. However, by limiting the tax rate to 4 digits after the decimal, some taxpayers may pay more tax than if the full percentage was applied.

Example

AFFECTED LINES ON FORM 540NR

The following lines will be affected on both the Long and Short Form 540NR:

  • Line 23 - CA Tax Rate (tax rate percentage)
  • Line 24 - CA Tax Before Exemption Credits

TAXPAYERS WHO DON'T ROUND, AND RECEIVE A RETURN INFORMATION NOTICE

The system automatically rounds to four digits and adjusts the tax liability, which generally results in a Return Information Notice. If a taxpayer used the extended tax rate and receives a notice due to the difference they should contact FTB and we make the adjustments to their account.

A comparison of the Tax Liability Calculation:

Calculation With rounding to 4 Places Without Rounding
Tax on Total Taxable Income
CA Total Taxable Income (TI) (540NR, line 22)
Tax Rate (Tax on TI, Total TI)
Prorated Tax on Total Taxable Income
Difference in Tax
$11,919
,150,000
.0795
$11,925
+$6
$11,919
,150,000
.07946
$11,919

 

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