Tax Season Toolkit: everything you need to navigate through the busy season.

As the holiday season turns into tax season, bringing the promise of constant, adrenaline-fueled deadlines, CPAs can be excused for turning a sentimental eye to winter. But never fear! CalCPA's annual Tax Season Toolkit is here to help.

As you meet with clients, research what's new in the tax codes and update your software to provide the best service you can, spring ahead and confidently meet the only season that's never late or early--tax season.

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California Tax Tips

No Conformity Bill Means More CA Differences

Some of the new non-conforming items as a result of the lack of a conformity bill this year include:

1. Charitable contributions fail to conform, but this is virtually immaterial because the Federal requirements set the higher standard. Federal law requires receipts or cancelled checks for all charitable contributions for 2007; California only requires taxpayers to meet the pre-2007 law.

2. California doesn't allow a deduction for mortgage insurance premiums as a mortgage interest expense.

3. HSA, FSA and IRAs. California doesn't allow tax free rollovers of HSA or FSA accounts into IRAs, creating taxable income and possibly an early withdrawal penalty. Indeed, California doesn't conform to health savings accounts at all.

4. California doesn't conform to the indexing of AGI requirements for IRAs (Spidell's CA Taxletter, Page 147, October 2007). Consequently, the taxpayer may have a different deductible amount for Federal income tax purposes than for California income tax purposes. However, this isn't new. There were different upper limits in the early days of IRAs and Keoghs.

5. Kiddie tax differences. The Internal Revenue Code applies the kiddie tax under age 18 for 2007, and under age 24 for students in 2008. California's limit remains at age 14.

6. California still doesn't permit the unlimited deduction of rental losses of real estate professionals.

   Other Tax Legislation Enacted, A Partial List

   SB 87: California has repealed the Teacher Retention Tax Credit

   AB 897: This act eliminates the requirements for certain federally tax-exempt entities to apply for California income tax exemption by allowing 501c(3) organizations to submit a copy of the IRS tax exemption notice to the FTB to establish California income tax exemption. 501c(3) organizations would no longer be required to file an exemption application with FTB or submit a $25 filing fee.

   Filing individual taxpayers as married filing separately

   There's generally no advantage to filing married individuals as married-filing-separately because of the community income, deductions and credits that must be reported on each separate return.

   However, there has been an added impetus to computing the taxes both ways because of the 1 percent surtax (called the Mental Health Services Tax) on taxable incomes of more than $1 million because a taxable income of, for example $1.6 million on a joint return turns into only $800,000 on each of MFS returns.

   Oftentimes, though, since whatever filing status is used on the Federal Form 1040 must also be used on the California Form 540, with few exceptions, the additional taxes paid on the Federal return exceed the savings from filing MFS for California.

   The only way to know for sure it do the return both ways. Computer programs are capable of doing that if the input is coded correctly.

   Reminders of Protective Claims/Amended returns to be filed

1. Tax practitioners have been filing protective claims requesting refunds of the gross receipts LLC "fee" (but not the $800 annual tax), pending the outcomes of the Yentas and Northwest cases in the California courts. The California Legislature is attempting to circumvent these claims via AB 198, which would not allow full refunds if the current LLC fee provision is ruled unconstitutional. As of press time, the fate of AB 198 is unknown.

2. The other matter necessitating protective claims is the California provision that otherwise tax-free state and municipal bond interest is taxable to California residents when the source of the interest is a non-California instrument. This matter is on...