Partial conformity: highlights from CalCPA's TaxTalk listserve.

• Author: Williams, Leonard W.
• Position: Tax - California Society of Certified Public Accountants responds to proposed changes in the 2001 California federal tax act - Brief Article

California CPA went to press just days after Coy. Davis signed two bills that conform to some, but not all, of the changes in the 2001 federal tax act.

The bills, AB 1122 (Corbett) and SB 657 (Scott) feature the following:

* The increased allowable contributions for IRAs, 401(k)s, 403 and 457 plans now are permitted for California income tax purposes.

* Conformity to the catch-up provisions allowing additional retirement plan contributions for people over 50.

* California is not conforming to the credit for retirement plan contributions, a federal credit oriented toward taxpayers with incomes under $50,000(MFJ) and $25,000 (single).

* California is not conforming to the federal government's credit of up to $500 for small employers who set up retirement plans.

* California now permits an increased $2,000 contribution to Coverdell Savings Accounts (formerly called Education IRAs); and the income limits for married couples have been raised. Also, parents may use those accounts to pay for primary and secondary schools, in addition to college expenses.

* Sec. 529 plan withdrawals will no longer be taxable for California income tax purposes, which conforms to the federal change.

* The child care expenses allowed for that credit did not increase for California income tax purposes as they did for federal income tax purposes.

* Student loan deductions liberalized by the federal government were not changed for California income tax purposes.

* In addition to these changes, several tax-conformity related bills still are winding through the legislature.

California's Conformity Practice

California only conforms by statutory enactment, it does not conform automatically. California currently conforms to the January 1998 IRC and only has selectively conformed since then.

Although automatic conformity may seem appealing, it does have drawbacks. States that have automatically conformed now face a lot of red ink because of the 2002 IRC changes.

Some more history is that the CalCPA Committee on Taxation, in the late 1970s or early 1980s, proposed that the California income tax merely be made a percentage of the federal income tax. The reasoning was that operating two parallel--but not quite identical--tax systems seemed like an abysmal waste. Although the CalCPA Board of Directors allowed the COT to pursue this, it went no where with the Legislature.

Part of the legislative opposition was turf protection, but partly it was based on the fact that Uncle Sam...