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New tax info for Californians

Efforts to close the budget gap have resulted in several changes to income tax rates by state legisl

Posted: August 14, 2009 9:00 p.m.
Updated: August 15, 2009 4:55 a.m.
 

California lawmakers have made several changes to individual income tax rates and collection schedules this year in their attempts to close multibillion dollar budget deficits.

They include a 0.25 percent increase in the personal income tax rate, accelerated collections for quarterly filers, greater withholding for all wage-earners and a decrease in the dependent care credit.

The changes will affect all 13 million tax returns, although some taxpayers will be affected more than others. Some began earlier this year, while others will take effect soon.

Here are some questions and answers about the changes, including what workers should know about their individual state income tax rate and whether they should change their withholding in advance of next year’s tax-filing deadline.

Q: How much has the individual state income tax rate increased?

A: In April, California began imposing a 0.25 percent rate increase on individual income taxes. That means individuals earning more than $47,055 but less than $1 million are now taxed at a rate of 9.55 percent.
The state’s millionaires are now being taxed at a rate of 10.55 percent, among the highest in the nation. The tax increase will expire at the end of 2010.

Q: What are the changes to deductions?

A: California lowered its dependent care credit from $309 to $99 per dependent, meaning families with children will be able to deduct less. The child credit is now the same as the personal credit.
Combined with the income tax hike, families will notice a difference on their taxes. For example, a couple with two children making $100,000 a year will pay $670 more in the 2009 tax year (an extra $250 because of the increase in their tax rate and $420 more because of the lowered dependent care exemption, according to the California Franchise Tax Board.)

Q: Are more changes coming?
A: Yes. Starting this November, the state will require employers to withhold 10 percent more in state taxes from wage earners. The move is a permanent change that is expected to artificially inflate state revenue by $1.7 billion through June 2010 and help ease the state’s immediate cash shortage.

Technically, it’s not considered a tax increase because workers will be able to get the money back when they file their tax returns.

But accountants are advising people to consider increasing their exemptions next year in order to avoid overpaying taxes to the state. For example, the same couple earning $100,000 a year will have $5,433 taken out of their paychecks by the state over a 12-month period under the 10 percent accelerated withholding even though they really owe $4,939.

Individuals who file quarterly estimated income taxes, such as the self-employed or those who generate significant income from stock options and dividends, also must speed up their tax payments. Starting Jan. 1, 2010, the state will require them to pay 70 percent of their estimated taxes during the first six months of the calendar year, up from 60 percent. The move is intended to increase the amount of money collected during the final two quarters of the state’s fiscal year, which runs from July 1 to June 30.

Under the new quarterly schedule, tax filers making estimated payments will pay 30 percent in the first quarter, 40 percent in the second, nothing in the third and 30 percent in the fourth.

It represents a permanent change from the current schedule for estimated tax payments (30 percent in the each of the first two quarters and 20 percent in each of the final two quarters).

Q: How should taxpayers react?
A: Johanna Sweaney Salt, a certified public accountant with Kaufman, Schmid, Gray & Salt LLP in Claremont, recommends workers take two actions:

For the rest of this year, workers who do not want to be stuck with an unexpected tax bill next year or one that is higher than anticipated should make sure their employers are withholding enough on their state income taxes. That’s because the 0.25 percent personal income tax hike went into effect in the second quarter of 2009 but applies retroactively to January.

In 2010, Sweaney Salt said employees may want to increase their exemptions to offset the state’s 10 percent accelerated wage withholdings. She said it doesn’t make financial sense to lend the state money when it could be earning interest in a savings account.

“I’d rather have that than give the government an interest-free loan,” she said.

Q: Are there any steps couples with children can do to counteract the effect of the lowered dependent credit?
A: No. But they can try to increase personal income exemptions and credits.

Q: Where can I get help?
A: Consult your tax adviser to find out how much more you will have to pay as a result of the 0.25 percent income tax hike.

Workers should check their most current pay stubs to make sure their employers are getting it right.

Taxpayers also should determine whether they should increase the number of exemptions next year so they don’t overpay the state throughout the year.

The California Employment Development Department, which instructs employers on tax withholdings, posts an online worksheet for people to calculate their state tax liabilities. Go to http://www.taxes.ca.gov/DE4.xls (Excel required).

 

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