California conformity — Gov’s signature expected

Courtesy of Spidell Publishing – www.caltax.com

We are awaiting the governor’s signature on SB 401 (Wolk), which will partially conform California to the federal COD exclusion for principal residences, as well as numerous other changes enacted since January 1, 2005. While the partial COD conformity will be retroactive to taxable years beginning on or after January 1, 2009, most of the other conformity items will not be effective until the 2010 taxable year.

Like the federal exclusion for qualified principal residence debt, the exclusion will apply to discharges occurring on or after January 1, 2009, and before January 1, 2013. However, here are the California differences:

  • Qualified principal residence indebtedness may be limited to $800,000 ($400,000 for married filing a separate return) instead of the federal $2 million ($1 million for married filing a separate return); and
  • The maximum cancellation of debt income (COD) exclusion may be further limited to $500,000 ($250,000 for taxpayers married filing separately).

Some of the other significant conformity provisions, most all of which take effect beginning with the 2010 taxable year, include:

  • Surviving spouse may exclude up to $500,000 if sale of principal residence occurs within two years of death of the spouse;
  • Gain from sale of principal residence attributable to nonqualified use can’t be excluded;
  • Increased penalty for failure to file partnership and S corporation returns (partial conformity);
  • Increased minimum penalty for failure to file individual returns;
  • Waiver of early withdrawal penalty for public safety employees and individuals called to active duty;
  • Kiddie tax age increase; and
  • Inflation-indexing for the active participation limitations on traditional IRA contributions;

Some of the more significant federal provisions to which SBX9 32 does not conform include:

  • HSAs;
  • IRC §529 enhancements, allowing payment for computer equipment and Internet access expenses;
  • S corporation BIG changes;
  • Private mortgage insurance deduction;
  • Depreciation provisions related to bonus depreciation, 15-year property classification for retail, restaurant, and leasehold improvements, and many other recent changes; and
  • Increased §179 expensing election above $25,000.

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