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California Conformity

The Tax Cuts and Jobs Act (TCJA) made significant changes that will impact most taxpayers. Probably the most talked about change for individuals relates to itemized deductions. Conventional wisdom for as long as I can remember touted the value of home ownership. The mortgage interest and property taxes were itemized deductions that put many taxpayers over the standard deduction amount. Once this happened, other items became deductible as well such as charitable contributions, broker fees, and unreimbursed business expenses.

Because the Federal standard deduction is almost double its previous amount and certain itemized deductions are no longer allowed for Federal purposes, many taxpayers will no longer file Schedule A, Itemized Deductions, with their Federal income tax returns because the standard deduction will provide a larger write off. This will be the likely scenario for many married taxpayers filing a joint return because the standard deduction is now $24,000 (single and married filing separate, $12,000; head of household, $18,000).

At least your return is more straight forward and you don’t need to keep all those records anymore, right? Sadly, no. The timing of tax payments and charitable contributions may mean you itemize one year and take the standard deduction the next. A calculation will need to be made each year to see which method provides you with the greater benefit.

California residents are in for a bigger surprise. How did this change in the tax law impact your California income tax return? For the most part, the answer will be that the changes will have no impact at all. California does not generally conform to Federal income tax law. California non-conformity will result in many taxpayers who claim the standard deduction for Federal purposes still itemizing deductions for California purposes.

Specific itemized deduction differences include:

• Taxes – limited to $10,000 (combined state income and real property) for Federal purposes, no limit for State (income taxes have
never been deductible for State purposes).
• Entertainment (tickets to sporting events) – not deductible for Federal purposes, allowed for State purposes subject to a 50%
limitation.
• Unreimbursed business expenses – not deductible for Federal purposes, allowed for State purposes subject to a 2% of AGI
limitation.
• Other miscellaneous deductions (broker fees, tax preparation fees) – not deductible for Federal purposes, allowed for State
purposes subject to a 2% of AGI limitation.

As you can see, we will still need all of the information you normally provide to properly prepare your income tax return for 2018 and beyond.