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California Tax Expenditures

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158
2013
1
Election
Waters Edge Election
N
15004
1700
15/16
2200
16/17
2300
17/18
2400
Qualified corporations may elect to file on a water’s-edge basis. This election allows unitary multinational corporations to compute income attributable to California based on domestic combined reporting rather than worldwide combined reporting. Under the water's-edge provision, a business may elect to compute its California tax by reference to only the income and factors of a limited number of entities. In general, these entities include United States incorporated entities, the United States activities of foreign incorporated entities, and the activities of various foreign entities that are included in the federal consolidated return.{nl}{nl}There is no comparable federal election.
For tax year 2013, we estimate the tax revenue loss due to this election was $1700 billion.
In the 2013 tax year, 15,004 corporations elected to file on a water's-edge combined report basis. Of these, 7,055 were apportioning corporations and the rest were nonapportioning. There are 78,996 apportioning corporations. It is not known how many of these have foreign operations.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/65b88220-ac3a-4796-9b73-bb138c36cf74?download=true&filename=2013_Waters%20Edge%20Election_Distribution_Chart.PNG
The worldwide unitary method is the standard method used by California to estimate the income earned in California by multistate and multinational corporations. Under this method, corporations combine their income from all operations and apportion that income to California based on the portion of a corporation’s worldwide sales that are attributable to California. (Taxpayers in specified qualified industries use a formula based on the portion of the taxpayer’s worldwide sales, property, and payroll that are attributed to California, rather than just the portion of sales). As an alternative, California allows corporations to elect water’s-edge. The water’s-edge method generally mirrors the worldwide method, but, in general, excludes foreign corporations (i.e., it considers only income from United States operations) and it apportions this income according to the portion of a corporation’s United States sales that is attributable to California.{nl}{nl}Corporations choose to elect water’s-edge for a variety of reasons. Some choose water’s-edge because it reduces their tax liability, others because it reduces filing complexity, and others – this group is largely composed of foreign parents – because they do not want to provide financial detail on their foreign operations to California.{nl}{nl} The water's-edge provisions were enacted in response to concerns that the worldwide combined reporting accounting method may improperly attribute some income of multinational corporate groups to California. Worldwide combined reporting was ruled to be constitutionally permissible by the United States Supreme Court in 1983 (Container Corporation of America v. Franchise Tax Board, 463 U.S. 159) for United States-based businesses and in 1994 to non-United States-based businesses (Barclays Bank PLC v. Franchise Tax Board, 512 US 289).{nl}{nl}Individual corporations often have very different tax liabilities under the two reporting methods. Some will owe more under worldwide combination than under water’s-edge, and others will owe less. Under the elective system, many corporations will choose whichever method reduces their tax liability. Therefore, the total tax collected under the elective system is less than would be collected under either pure system. It is the election aspect of the water’s-edge election that generates the tax expenditure. If all California corporations were required to use the same filing method, regardless of whether worldwide combination or water’s-edge was chosen as the method, we would not consider it to be a tax expenditure.
87
2013
1
Credit
Blind Exemption Credit
N
29806
2
15/16
2
16/17
2
17/18
2
This program allows a taxpayer to claim an additional personal exemption tax credit if either the taxpayer or the taxpayer’s spouse is blind (two credits may be claimed if both are blind). Each additional personal exemption credit (adjusted annually for inflation based on the California Consumer Price Index) was $106 in 2013, $108 in 2014 and $109 in 2015.{nl}{nl}While federal law does not allow a credit for a taxpayer who is blind, federal law does allow an additional deduction as explained below.
In tax year 2013, taxpayers claimed $3.2 million in blind exemption credits, lowering their taxes by about $1.7 million.
In tax year 2013, 29,808 PIT returns included this credit.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/82dfcd92-2978-48c9-90e0-25c5fba15e93?download=true&filename=2013_Blind_Exemption_Credit_Distribution_Chart.PNG
Description: 2013 Blind Exemption Credit Chart: Columns: Adjusted Gross Income Class, eturns Reporting Credit, Amount of Credit Claimed (Thousands) : Data : Less than $10,000 3,436 $368.9 : $10,000 to $19,999 4,112 $441.6 : $20,000 to $49,999 8,771 $943.1 : $50,000 to $99,999 8,187 $884.0 : $100,000 to $199,999 3,962 $427.0 : More than $199,999 1,338 $144.9 : Total 29,806 $3,209.5 : Source: 2013 Personal Income Tax Population File and Microsimulation Model Detail may not add to total due to rounding.
This exemption is intended to compensate taxpayers who have increased expenses because they are blind.{nl}{nl}Federal law provides an additional deduction from adjusted gross income for blind taxpayers who do not itemize their deductions. The amount of this deduction is $1,200 for married taxpayers (whether filing separately or jointly) and surviving spouses and $1,500 for single taxpayers and head of household filers. The federal deduction is more consistent with the concept that income spent on blindness-related expenses should not be considered in calculating an individual’s ability to pay taxes. Because of California's highly progressive tax rate structure, a credit provides more tax benefit than a deduction to lower-income taxpayers.{nl}{nl}This credit is effective at reducing the tax liability of blind taxpayers. It is unclear why the Legislature believes that the blind require more assistance than do taxpayers with other types of disabilities, or why a taxpayer should receive the credit if their spouse is blind, but not if another dependent is blind. As with all similar credits, a direct expenditure program to benefit the blind would be an alternative to this credit.
114
2013
1
Exclusion
Federal Government Obligation Interest Exclusion
N
173169
60
15/16
65
16/17
70
17/18
70
Interest earned on debt issued by the federal government is exempt from income tax. Federal law directs the taxation of this provision.Interest earned on debt issued by the federal government is exempt from income tax.{nl}{nl}Federal law directs the taxation of this provision.
In tax year 2013, the amount of federal obligation interest excluded from PIT returns was $685 million. The tax impact of this exclusion was $58 million.
In tax year 2013, 173,000 resident and 64,000 part-year or nonresident PIT returns included the federal obligation interest exclusion.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/6761a20e-2132-42bc-a1bc-abc39d8c33b9?download=true&filename=2013_Federal%20Obligation%20Interest%20Exclusion_Distribution_Chart.PNG
Federal statutes prohibit states from imposing an income tax on interest income from federal debt obligations.
34
2014
1
Exclusion
Federal Government Obligation Interest Exclusion
N
173023
65
16/17
65
17/18
70
18/19
75
Interest earned on debt issued by the federal government is exempt from income tax. Federal law directs the taxation of this provision.Interest earned on debt issued by the federal government is exempt from income tax.{nl}{nl}Federal law directs the taxation of this provision.
In tax year 2014, the amount of federal obligation interest excluded from PIT returns was $716 million. The tax impact of this exclusion was $64 million.
In tax year 2014, 173,000 resident and 49,000 part-year or nonresident PIT returns included the federal obligation interest exclusion.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/1f09d26f-0b2b-40be-921a-2abfc4e61f15?download=true&filename=2014_Federal%20Obligation%20Interest%20Exclusion_Distribution_Chart.PNG
Federal statutes prohibit states from imposing an income tax on interest income from federal debt obligations.
149
2013
1
Exclusion
Social Security Benefits Exclusion
N
1670366
2800
15/16
3400
16/17
3600
17/18
3800
This provides an exclusion from gross income for payments received from the Social Security Administration.{nl}{nl} This provision of California law does not conform to federal law; however, there are also portions of social security benefits excluded from taxation at the federal level.
In tax year 2013, taxpayers excluded $24 billion in social security income from their California PIT returns that was reported and taxable on their federal income tax returns. We estimate the tax impact of this exclusion of social security income to have been $1.5 billion. However, a large portion of social security income, particularly for low-income and middle-income taxpayers, is not taxable at the federal level either and not reported on federal income tax returns. Accordingly, the total amount of social security income excluded from California PIT returns is not known. We estimate the total impact of not taxing social security income at the state level to have been about $2.9 billion for tax year 2013.
In tax year 2013, 1.7 million PIT returns excluded social security income that had been reported on their federal tax returns. The number of taxpayers who had social security income but were not required to report it on either their federal or California returns is not known.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/efc682d6-7b14-4ef2-b178-1f99a9ce1eb8?download=true&filename=2013_Social%20Security%20Benefits%20Exclusion_Distribution_Chart.PNG
Reducing the tax liability of social security recipients is the primary goal of this exclusion. The exclusion is successful in achieving this purpose.{nl}{nl} Social Security is a vehicle for two types of income flows: pension savings and poverty relief. When Social Security first came into existence, the poverty rate for seniors was substantially higher than the overall poverty rate in this country. One goal of the Social Security system is to ensure a minimum level of income support for all participants. To achieve this goal, social security payments are more generous than contributions for many low-income participants. To the extent that social security payments represent poverty relief, it makes sense to exclude these payments from income, just as other types of welfare payments are excluded from income.{nl}{nl} Social security payments also contain a pension plan component that should not be viewed as poverty relief, but rather as a return on contributions invested in the Social Security system. Appropriate tax policy would treat the pension plan component of social security payments the same as other pension income. The comparison between Social Security and other pension plans is complicated by the split contribution system used by Social Security. Some social security contributions are made by employers and are not taxed. Employees make other contributions from after-tax income. It would, therefore, be appropriate to exclude from income benefits equal to the amount of contributions that have already been taxed. Other social security benefits should be included in income. However, since they are not, the exclusion of social security from AGI has a negative impact on horizontal equity. Consider two taxpayers, both receiving $40,000 this year. One earns $40,000 in investment interest. The other earns $20,000 in interest and receives $20,000 from Social Security. With California’s current treatment of social security benefits, the first taxpayer will have to pay tax on the entire $40,000 of interest, while the other taxpayer will only pay tax on the $20,000 of interest received. One potential problem that is eliminated by this exclusion is that the taxation of social security benefits may dissuade some recipients from seeking or retaining employment. This is because the inclusion of social security benefits would push employed recipients into higher marginal tax brackets, reducing the incentive for them to work.
116
2013
2
Election
Head of Household and Qualifying Widower Filing Status
C
2368259
900
15/16
1100
16/17
1100
17/18
1200
Under the Head of Household Program, taxpayers who provide a home for a qualifying relative are eligible for a lower tax rate than is available to single persons or to married persons filing separate returns. The program provides tax relief to heads of households who are single or married but living apart.{nl}{nl}To claim the head of household filing status, a taxpayer must provide the principal home of the qualifying relative for more than one-half of the year. In addition, the taxpayer must pay more than half of the cost of maintaining that household. Single taxpayers who provide the main home for their unmarried child or grandchild can still qualify for the head of household filing status, even if they are not entitled to a Dependent Exemption Credit for the child or grandchild. For example, if a single custodial parent has moved into the home of her widowed father, the father would qualify as a head of household. Otherwise, the taxpayer must be entitled to a Dependent Exemption Credit for the relative to be qualified.{nl}{nl}A qualifying widow(er) is “a taxpayer whose spouse died within two years prior to the taxable year involved and has not remarried, and who provides the main home for a child for whom the taxpayer is entitled to a dependent exemption credit.” Qualifying widow(er)s may claim a larger personal exemption in addition to the lower head of household tax rates.{nl}{nl}This provision of California law conforms to federal law.
This program is estimated to have cost the state $910 million in tax year 2013.
In tax year 2013, 2.4 million resident returns claimed head of household status and about 8,400 resident returns claimed qualifying widow(er) status.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/f0cd4ef7-6748-446a-87da-61e2fbda7dcc?download=true&filename=2013_Head%20of%20Household%20and%20Widower%20Filing%20Status_Distribution_Chart.PNG
The basic structure of the income tax includes a zero percent bracket, in which the first dollars earned each year by a taxpayer are not taxed. The zero bracket is intended to recognize that a certain amount of income is vital for procuring life’s basic needs. As a family increases in size, it becomes more costly to feed, house, and clothe them. The zero bracket, therefore, increases with the size of the family. For prototypical families, when a family increases in size from one member to two members, the taxpayer files a joint return instead of a single return. The joint return provides a much larger zero bracket than the single return. Subsequent increases in family size (e.g., from two members to three) increase the zero bracket only by allowing an additional dependent credit. In 2010, the tax savings from adding another type of dependent was much smaller than the savings from adding a spouse. Allowing head of household status is consistent with the view that the addition of any second member to a household, whether or not the second member is a spouse, generates a substantial increase in the most basic financial needs of the household. Lowering the tax rate for head of household filers provides less traditional two-member households with the same tax benefit level as traditional two-member households.{nl}{nl}This favorable treatment extended to surviving widow(er)s is intended to partially compensate for the potential loss of income. This provision generates inequities between qualifying taxpayers and other taxpayers with the same income.
22
2014
1
Credit
Disability Access Expenditure Credit
N
419
143
Minor
16/17
Minor
17/18
Minor
18/19
Minor
The Disabled Access Expenditure Credit allows small businesses to deduct costs for providing access to disabled persons. The credit is limited to 50 percent of the first $250 of eligible expenses. To qualify for the credit, the business must either have less than $1 million of gross receipts in the previous year or employ no more than 30 full-time employees.{nl}{nl}There is no comparable federal credit.
In tax year 2014, credits in the amount of $31,500 on PIT returns and $11,700 on corporation tax returns were allowed.
In tax year 2014, credits were allowed on 419 PIT returns and 143 corporation tax returns.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/edbb686b-33f6-4a1d-8021-e224b6b9c19c?download=true&filename=2014_Disability%20Access%20Expenditure%20Credit_Deduction_Distribution_Chart.PNG
Description: 2014 Disabled Access Expenditure Credit (PIT) Chart : Columns: Adjusted Gross Income Class, Returns Claiming Credit, Returns Allowing Credit, Amount of Credit Claimed (Thousands), Amount of Credit Allowed (Thousands) : Data : Less than $49,999 26 26 $1.8 $1.8: $50,000 to $99,999 51 51 $5.3 $3.9: $100,000 to $199,999 112 112 $9.8 $9.8: $200,000 to $499,999 123 123 $8.9 $8.9: $500,000 to $999,999 56 56 $3.6 $3.6: More than $999,999 51 51 $3.6 $3.6: Total 419 419 $32.9 $31.5: Source: 2014 Personal Income Tax Population File Detail may not add to total due to rounding.||Description: 2014 Disabled Access Expenditure Credit (Corporation) Chart : Columns: Industry, Returns with Credit, Returns Allowing Credit, Amount of Credit Allowed (Thousands), Percent of Total, Returns, Credit Allowed : Data : Health Care 74 $6.7 51.8% 56.7% , Real Estate 16 $1.3 11.2% 10.8% , Other 53 $3.8 37.1% 32.5% , Total 143 $11.7 100.0% 100.0%: Source: 2014 Business Entity Tax System Extract Detail may not add to total due to rounding.
The purpose of this program is to provide tax relief to taxpayers for their qualified expenditures incurred in complying with the federal Americans with Disabilities Act. This program complements a federal tax credit for 50 percent of qualified expenditures exceeding $250 and up to $10,250. The program is successful at directing resources to the targeted uses; but, since the credit is nonrefundable, it is successful only to the extent that taxpayers have tax liability to offset.{nl}{nl}An obvious alternative to this credit would be to have the state partially or fully subsidize the cost of disabled access retrofits.
102
2013
1
Credit
Disability Access Expenditure Credit
N
463
133
Minor
15/16
Minor
16/17
Minor
17/18
Minor
The Disabled Access Expenditure Credit allows small businesses to deduct costs for providing access to disabled persons. The credit is limited to 50 percent of the first $250 of eligible expenses. To qualify for the credit, the business must either have less than $1 million of gross receipts in the previous year or employ no more than 30 full-time employees.{nl}{nl}There is no comparable federal credit.
In tax year 2013, credits in the amount of $48,000 were allowed.
In tax year 2013, credits were allowed on 463 PIT returns and 133 corporation tax returns.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/89e00e0e-b8e0-43ef-964a-75d60bdabc70?download=true&filename=2013_Disability%20Access%20Expenditure%20Credit_Deduction_Distribution_Chart.PNG
Description: 2013 Disabled Access Expenditure Credit (PIT) Chart : Columns: Adjusted Gross Income Class, Returns Claiming Credit, Returns Allowing Credit, Amount of Credit Claimed (Thousands), Amount of Credit Allowed (Thousands) : Data : Less than $10,000 10 10 $0.7 $0.7: $10,000 to $19,999 5 5 $0.1 $0.1: $20,000 to $49,999 22 22 $1.6 $1.6: $50,000 to $99,999 78 78 $7.2 $6.2: $100,000 to $199,999 124 124 $9.2 $9.1: $200,000 to $499,999 120 120 $9.3 $9.3: $500,000 to $999,999 49 49 $3.2 $3.2: More than $999,999 55 55 $4.1 $4.1: Total 463 463 $35.2 $34.2 : Source: 2013 Personal Income Tax Population File Detail may not add to total due to rounding.||Description: 2013 Disabled Access Expenditure Credit (Corporation) Chart : Columns: Industry, Returns with Credit, Returns Allowing Credit, Amount of Credit Allowed (Thousands), Percent of Total, Returns, Credit Allowed : Data : Food Services 12 $0.7 9.0% 5.0% , Health Care 64 $7.4 48.1% 54.7% , Real Estate 23 $1.7 17.3% 12.9% , Other 34 $3.7 25.6% 27.5% , Total 133 $13.5 100.0% 100.0% : Source: Source: 2013 Business Entity Tax System Extract Detail may not add to total due to rounding.
The purpose of this program is to provide tax relief to taxpayers for their qualified expenditures incurred in complying with the federal Americans with Disabilities Act. This program complements a federal tax credit for 50 percent of qualified expenditures exceeding $250 and up to $10,250. The program is successful at directing resources to the targeted uses; but, since the credit is nonrefundable, it is successful only to the extent that taxpayers have tax liability to offset.{nl}{nl}An obvious alternative to this credit would be to have the state partially or fully subsidize the cost of disabled access retrofits.
76
2014
1
Election
Waters Edge Election
N
13181
2100
16/17
2300
17/18
2300
18/19
2400
Qualified corporations may elect to file on a water’s-edge basis. This election allows unitary multinational corporations to compute income attributable to California based on domestic combined reporting rather than worldwide combined reporting. Under the water's-edge provision, a business may elect to compute its California tax by reference to only the income and factors of a limited number of entities. In general, these entities include United States incorporated entities, the United States activities of foreign incorporated entities, and the activities of various foreign entities that are included in the federal consolidated return.{nl}{nl}There is no comparable federal election.
In the 2014 tax year, we estimate this election to have cost the state $2.1 billion.
In the 2014 tax year, 13,181 corporations elected to file on a water's-edge combined report basis. Of these, 9,524 were apportioning corporations and the rest were nonapportioning. There are 84,798 apportioning corporations. It is not known how many of these have foreign operations.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/6e2c6ad4-8d25-436b-8e8b-8ebeaeaf0a81?download=true&filename=2014_Waters%20Edge%20Election_Distribution_Chart.PNG
The worldwide unitary method is the standard method used by California to estimate the income earned in California by multistate and multinational corporations. Under this method, corporations combine their income from all operations and apportion that income to California based on the portion of a corporation’s worldwide sales that are attributable to California. (Taxpayers in specified qualified industries use a formula based on the portion of the taxpayer’s worldwide sales, property, and payroll that are attributed to California, rather than just the portion of sales). As an alternative, California allows corporations to elect water’s-edge. The water’s-edge method generally mirrors the worldwide method, but, in general, excludes foreign corporations (i.e., it considers only income from United States operations) and it apportions this income according to the portion of a corporation’s United States sales that is attributable to California.{nl}{nl}Corporations choose to elect water’s-edge for a variety of reasons. Some choose water’s-edge because it reduces their tax liability, others because it reduces filing complexity, and others – this group is largely composed of foreign parents – because they do not want to provide financial detail on their foreign operations to California.{nl}{nl}The water's-edge provisions were enacted in response to concerns that the worldwide combined reporting accounting method may improperly attribute some income of multinational corporate groups to California. Worldwide combined reporting was ruled to be constitutionally permissible by the United States Supreme Court in 1983 (Container Corporation of America v. Franchise Tax Board, 463 U.S. 159) for United States-based businesses and in 1994 to non-United States-based businesses (Barclays Bank PLC v. Franchise Tax Board, 512 US 289).{nl}{nl}Individual corporations often have very different tax liabilities under the two reporting methods. Some will owe more under worldwide combination than under water’s-edge, and others will owe less. Under the elective system, many corporations will choose whichever method reduces their tax liability. Therefore, the total tax collected under the elective system is less than would be collected under either pure system. It is the election aspect of the water’s-edge election that generates the tax expenditure. If all California corporations were required to use the same filing method, regardless of whether worldwide combination or water’s-edge was chosen as the method, we would not consider it to be a tax expenditure.
24
2014
2
Deduction
Employee Business and Miscellaneous Expense Deduction
C
2044375
1400
16/17
1600
17/18
1600
18/19
1700
A taxpayer is allowed to deduct from gross income a portion of certain unreimbursed, business-related expenses. These include business expenses such as travel, meals, entertainment, and lodging, as well as, miscellaneous expenses related to producing or collecting taxable income; management, conservation, or maintenance of income-producing property; and tax return preparation fees.{nl}{nl}Currently, 50 percent of meals and entertainment expenses can be deducted, provided that they exceed 2 percent of the taxpayer’s federal AGI.{nl}{nl}This provision of California law conforms to federal law.
In tax year 2014, PIT taxpayers claimed $20 billion in employee business and miscellaneous expense deductions, lowering their taxes by approximately $1.4 billion.
In tax year 2014, 2 million PIT resident returns included a deduction for employee business and miscellaneous expenses.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/2eeec389-6288-4b82-b1e0-52c75841d1fb?download=true&filename=2014_Employee_Business_and_Miscellaneous_Expense_Deduction_Distribution_Chart.PNG
Description: 2014 Employee Business and Miscellaneous Expense Deduction Chart. Columns: Adjusted Gross Income Class (AGIC), Resident Returns Reporting Deduction (Thousands), Amount of Dededuction Claimed by Residents (Millions), Tax Impact of Dededuction* (Millions). Data: Less than $10,000 85.7 $651.3 $8.3 : $10,000 to $19,999 66.3 $337.9 $0.0 : $20,000 to $49,999 430.6 $3,013.9 $39.6 : $50,000 to $99,999 716.3 $5,035.9 $226.0 : $100,000 to $199,999 553.5 $4,415.9 $407.3 : More than $199,999 191.9 $6,213.6 $761.4 : Total 2,044.4 $19,668.4 $1,443.6 Source: Source: 2014 PIT Tax Sample and Microsimulation Model. Detail may not add to total due to rounding. *Includes part-year residents and nonresidents.
The expenses covered by this provision are expenses that employees must incur in order to earn income. In our income tax system, large and unusual expenses that generate income are normally deductible. Expenses that qualify for this deduction are expenses that employers often reimburse, such as business travel. This provision, therefore, works toward restoring equity between otherwise similar taxpayers, some of whose employers reimburse these expenses and others whose employers do not reimburse them. It also creates equity between employees who are not reimbursed for their work-related expenses and the self-employed. The 2 percent floor on expenses limits this benefit to employees who incur significant business related expenses. The floor simplifies the administration of the program.{nl}{nl}The 50 percent limitation of meals and entertainment was imposed because it was felt that many taxpayers were incurring expenditures that exceeded the legitimate business purpose of the tax favored activity. For example, there may be a valid business reason for a lunch expense. Often, the business purpose could be served by meeting at a $10 per person restaurant. The participants may, however, opt to go to lunch at a $30 per person restaurant. Conceptually, in this case, the first $10 per person should be deductible, but the remainder of the cost should be viewed as personal entertainment. The 50 percent rule is an administratively feasible method of addressing this problem.{nl}{nl}Policy alternatives could include changing the types of qualifying expenses for this deduction or changing the 2 percent threshold for claiming the deduction. If this deduction were removed, it is possible that employers would feel pressure to either begin reimbursing their employees for these expenses or increase wages to compensate for the increased tax bill.
67
2014
1
Exclusion
Social Security Benefits Exclusion
N
1760656
3200
16/17
3600
17/18
3800
18/19
4100
This provides an exclusion from gross income for payments received from the Social Security Administration.{nl}{nl} This provision of California law does not conform to federal law; however, there are also portions of social security benefits excluded from taxation at the federal level.
In tax year 2014, taxpayers excluded $26 billion in social security income from their California PIT returns that was reported and taxable on their federal income tax returns. We estimate the tax impact of this exclusion of social security income to have been $1.7 billion. However, a large portion of social security income, particularly for low-income and middle-income taxpayers, is not taxable at the federal level either and not reported on federal income tax returns. Accordingly, the total amount of social security income excluded from California PIT returns is not known. We estimate the total impact of not taxing social security income at the state level to have been about $3.2 billion for tax year 2014.
In tax year 2014, 1.8 million PIT returns excluded social security income that had been reported on their federal tax returns. The number of taxpayers who had social security income but were not required to report it on either their federal or California returns is not known.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/4f5eb190-0a7e-41d8-83fa-51a14716d16b?download=true&filename=2014_Social%20Security%20Benefits%20Exclusion_Distribution_Chart.PNG
Reducing the tax liability of social security recipients is the primary goal of this exclusion. The exclusion is successful in achieving this purpose.{nl}{nl}Social Security is a vehicle for two types of income flows: pension savings and poverty relief. When Social Security first came into existence, the poverty rate for seniors was substantially higher than the overall poverty rate in this country. One goal of the Social Security system is to ensure a minimum level of income support for all participants. To achieve this goal, social security payments are more generous than contributions for many low-income participants. To the extent that social security payments represent poverty relief, it makes sense to exclude these payments from income, just as other types of welfare payments are excluded from income.{nl}{nl}Social security payments also contain a pension plan component that should not be viewed as poverty relief, but rather as a return on contributions invested in the Social Security system. Appropriate tax policy would treat the pension plan component of social security payments the same as other pension income. The comparison between Social Security and other pension plans is complicated by the split contribution system used by Social Security. Some social security contributions are made by employers and are not taxed. Employees make other contributions from after-tax income. It would, therefore, be appropriate to exclude from income benefits equal to the amount of contributions that have already been taxed. Other social security benefits should be included in income. However, since they are not, the exclusion of social security from AGI has a negative impact on horizontal equity. Consider two taxpayers, both receiving $40,000 this year. One earns $40,000 in investment interest. The other earns $20,000 in interest and receives $20,000 from Social Security. With California’s current treatment of social security benefits, the first taxpayer will have to pay tax on the entire $40,000 of interest, while the other taxpayer will only pay tax on the $20,000 of interest received. One potential problem that is eliminated by this exclusion is that the taxation of social security benefits may dissuade some recipients from seeking or retaining employment. This is because the inclusion of social security benefits would push employed recipients into higher marginal tax brackets, reducing the incentive for them to work.
5
2014
1
Credit
Blind Exemption Credit
N
34180
2
16/17
2
17/18
2
18/19
2
This program allows a taxpayer to claim an additional personal exemption tax credit if either the taxpayer or the taxpayer’s spouse is blind (two credits may be claimed if both are blind). Each additional personal exemption credit (adjusted annually for inflation based on the California Consumer Price Index) was $108 in 2014, $109 in 2015 and $111 in 2016.{nl}{nl}While federal law does not allow a credit for a taxpayer who is blind, federal law does allow an additional deduction as explained below.
In tax year 2014, taxpayers claimed $3.8 million in blind exemption credits, lowering their taxes by about $1.6 million.In tax year 2014, taxpayers claimed $3.8 million in blind exemption credits, lowering their taxes by about $1.6 million.
In tax year 2014, 34,180 PIT returns included this credit.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/23bc2d38-5c98-4d8d-8e2a-e2e92adab14b?download=true&filename=2014_Blind_Exemption_Credit_Distribution_Chart.PNG
Description: 2014 Blind Exemption Credit Chart: Columns: Adjusted Gross Income Class, eturns Reporting Credit, Amount of Credit Claimed (Thousands) : Data : Less than $10,000 4,745 $523.5 : $10,000 to $19,999 4,831 $532.6 : $20,000 to $49,999 9,930 $1,098.3 : $50,000 to $99,999 8,574 $951.2 : $100,000 to $199,999 4,391 $487.3 : More than $199,999 1,709 $190.2 : Total 34,180 $3,782.9 : Source: 2013 Personal Income Tax Population File and Microsimulation Model Detail may not add to total due to rounding.
This exemption is intended to compensate taxpayers who have increased expenses because they are blind.{nl}{nl}Federal law provides an additional deduction from adjusted gross income for blind taxpayers who do not itemize their deductions. The amount of this deduction is $1,200 for married taxpayers (whether filing separately or jointly) and surviving spouses and $1,550 for single taxpayers and head of household filers. The federal deduction is more consistent with the concept that income spent on blindness-related expenses should not be considered in calculating an individual’s ability to pay taxes. Because of California's highly progressive tax rate structure, a credit provides more tax benefit than a deduction to lower-income taxpayers.
104
2013
2
Deduction
Employee Business and Miscellaneous Expense Deduction
C
1973177
1200
15/16
1300
16/17
1400
17/18
1400
A taxpayer is allowed to deduct from gross income a portion of certain unreimbursed, business-related expenses. These include business expenses such as travel, meals, entertainment, and lodging, as well as, miscellaneous expenses related to producing or collecting taxable income; management, conservation, or maintenance of income-producing property; and tax return preparation fees.{nl}{nl}Currently, 50 percent of meals and entertainment expenses can be deducted, provided that they exceed 2 percent of the taxpayer’s federal AGI.{nl}{nl}This provision of California law conforms to federal law.
In tax year 2013, PIT taxpayers claimed $18.3 billion in employee business and miscellaneous expense deductions, lowering their taxes by approximately $1.2 billion.
In tax year 2013, 1.9 million PIT resident returns included a deduction for employee business and miscellaneous expenses.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/88351668-c4cd-4d38-a7ab-d9731c8391ef?download=true&filename=2013_Employee_Business_and_Miscellaneous_Expense_Deduction_Distribution_Chart.PNG
Description: 2013 Employee Business and Miscellaneous Expense Deduction Chart. : Columns: Adjusted Gross Income Class (AGIC), Resident Returns Reporting Deduction (Thousands), Amount of Dededuction Claimed by Residents (Millions), Tax Impact of Dededuction* (Millions). : Data: Less than $10,000 : 85.9 $550.2 $6.2 : $10,000 to $19,999 68.6 $300.1 $1.0 : $20,000 to $49,999 419.7 $2,807.6 $56.2 : $50,000 to $99,999 720.8 $4,885.7 $253.9 : $100,000 to $199,999 509.9 $4,158.8 $337.2 : More than $199,999 168.2 $5,631.4 $578.6 : Total 1,973.2 $18,333.9 $1,234.2 : Source: 2013 PIT Tax Sample and Microsimulation Model. Detail may not add to total due to rounding. *Includes part-year residents and nonresidents.
The expenses covered by this provision are expenses that employees must incur in order to earn income. In our income tax system, large and unusual expenses that generate income are normally deductible. Expenses that qualify for this deduction are expenses that employers often reimburse, such as business travel. This provision, therefore, works toward restoring equity between otherwise similar taxpayers, some of whose employers reimburse these expenses and others whose employers do not reimburse them. It also creates equity between employees who are not reimbursed for their work-related expenses and the self-employed. The 2 percent floor on expenses limits this benefit to employees who incur significant business related expenses. The floor simplifies the administration of the program.{nl}{nl}The 50 percent limitation of meals and entertainment was imposed because it was felt that many taxpayers were incurring expenditures that exceeded the legitimate business purpose of the tax favored activity. For example, there may be a valid business reason for a lunch expense. Often, the business purpose could be served by meeting at a $10 per person restaurant. The participants may, however, opt to go to lunch at a $30 per person restaurant. Conceptually, in this case, the first $10 per person should be deductible, but the remainder of the cost should be viewed as personal entertainment. The 50 percent rule is an administratively feasible method of addressing this problem.{nl}{nl}Policy alternatives could include changing the types of qualifying expenses for this deduction or changing the 2 percent threshold for claiming the deduction. If this deduction were removed, it is possible that employers would feel pressure to either begin reimbursing their employees for these expenses or increase wages to compensate for the increased tax bill.
36
2014
2
Election
Head of Household and Qualifying Widower Filing Status
C
2338572
950
16/17
1100
17/18
1100
18/19
1200
Under the Head of Household Program, taxpayers who provide a home for a qualifying relative are eligible for a lower tax rate than is available to single persons or to married persons filing separate returns. The program provides tax relief to heads of households who are single or married but living apart.{nl}{nl}To claim the head of household filing status, a taxpayer must provide the principal home of the qualifying relative for more than one-half of the year. In addition, the taxpayer must pay more than half of the cost of maintaining that household. Single taxpayers who provide the main home for their unmarried child or grandchild can still qualify for the head of household filing status, even if they are not entitled to a Dependent Exemption Credit for the child or grandchild. For example, if a single custodial parent has moved into the home of her widowed father, the father would qualify as a head of household. Otherwise, the taxpayer must be entitled to a Dependent Exemption Credit for the relative to be qualified.{nl}{nl}A qualifying widow(er) is “a taxpayer whose spouse died within two years prior to the taxable year involved and has not remarried, and who provides the main home for a child for whom the taxpayer is entitled to a dependent exemption credit.” Qualifying widow(er)s may claim a larger personal exemption in addition to the lower head of household tax rates.{nl}{nl}This provision of California law conforms to federal law.
In the 2014 tax year, we estimate this election to have cost the state $955 million.
In tax year 2014, 2.3 million resident returns claimed head of household status and about 7,900 resident returns claimed qualifying widow(er) status.
https://data.ftb.ca.gov/api/views/az3r-t4pd/files/a78a8b37-557d-4f81-8f10-596a6c45bb30?download=true&filename=2014_Head%20of%20Household%20and%20Widower%20Filing%20Status_Distribution_Chart.PNG
The basic structure of the income tax includes a zero percent bracket, in which the first dollars earned each year by a taxpayer are not taxed. The zero bracket is intended to recognize that a certain amount of income is vital for procuring life’s basic needs. As a family increases in size, it becomes more costly to feed, house, and clothe them. The zero bracket, therefore, increases with the size of the family. For prototypical families, when a family increases in size from one member to two members, the taxpayer files a joint return instead of a single return. The joint return provides a much larger zero bracket than the single return. Subsequent increases in family size (e.g., from two members to three) increase the zero bracket only by allowing an additional dependent credit. In 2010, the tax savings from adding another type of dependent was much smaller than the savings from adding a spouse. Allowing head of household status is consistent with the view that the addition of any second member to a household, whether or not the second member is a spouse, generates a substantial increase in the most basic financial needs of the household. Lowering the tax rate for head of household filers provides less traditional two-member households with the same tax benefit level as traditional two-member households.{nl}{nl}This favorable treatment extended to surviving widow(er)s is intended to partially compensate for the potential loss of income. This provision generates inequities between qualifying taxpayers and other taxpayers with the same income.

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