Proposition 30 Tax Increases
As we reported in our September 2012 issue of Tax News, the 2012 income tax brackets, along with filing requirement thresholds, standard deductions, and certain credits were adjusted for inflation using a process called “indexing.” The indexing rate is based on the inflation rate, as measured by the California Consumer Price Index, for all urban consumers from June 2011 to June 2012. This year the inflation rate measured 1.9 percent.
In addition to the annual indexing process, the 2012 tax rate schedules have also been updated to reflect tax increases due to the passage of Proposition 30.
Among other things, Proposition 30 raises the personal income tax rate on individuals making more than $250,000 per year for the next seven years.
The income tax changes apply retroactively to all income earned or received since January 1, 2012. For tax year 2012, the maximum individual tax rate is 12.3 percent. If the income exceeds $1 million, there is an additional 1 percent mental health tax bringing the top rate to 13.3 percent. The maximum Alternative Minimum Tax rate (AMT) for individuals remains at 7 percent.
The 2012 corporate tax rate is 8.84 percent for corporations other than banks and financial institutions, and 10.84 percent for banks and financial institutions. The AMT rate for corporations is 6.65 percent. The corporate tax rate is 1.5 percent for S corporations other than banks or financial institutions, and 3.5 percent for bank and financial institutions registered as S corporations.
The good news is that taxpayers will not be required to "catch up" for the tax increase in the first three quarters, by increasing the fourth quarter estimate. Taxpayers will also not receive an underpayment penalty to the extent that the underpayment was created or increased by the passage of Proposition 30 (Revenue and Taxation Code (R&TC) Section 19136(2)(g)(1 and 19142(b)(1)).
Therefore, taxpayers may pay the balance due with the return without fear of receiving a notice from us for the penalty. Please be aware, however, that only the portion of the underpayment due to the tax increase will have the penalty waived. For example, if your client was underpaid in the first two quarters and makes a full payment with the tax return, we will still issue the penalty on the first two quarters as this underpayment was not caused by Proposition 30. To request a waiver or reduction of the underpayment of estimated tax penalty due to this new law, included a 5805 with the return and fill out Part 1, question 1 with the explanation that the underpayment is due to Proposition 30.
The complete 2012 tax rate schedules are available on our website.