GSTTI-2020-CaliTaxLawUpdates (5 hours) Flashcards
(25 cards)
In an effort to improve the earthquake safety of his home, Perry Powell spends $500 to anchor the water heater in his basement. He receives a $250 rebate from the California Residential Mitigation Program that was taxable on his Federal income tax return. Perry can exclude what amount of the rebate from his income on his California state income tax return?
A. $0
B. $125
C. $250
D. $500
C. $250
EXPLANATION
For taxable years beginning on or after January 1, 2015, taxpayers can exclude from gross income any amount
received as loan forgiveness, grant, credit, rebate, voucher, or other financial incentive issued by the California Residential Mitigation Program or the California Earthquake Authority to assist a residential property owner or occupant with expenses paid, or obligations incurred, for earthquake loss mitigation.
Which of the following statements is not true regarding estimated tax payments?
A. If the taxpayer is a military servicemember not domiciled in California, he or she does not include his or her military pay in his or her computation of estimated tax payments
B. Taxpayers with 2019 California adjusted gross income equal to or greater than $1,000,000 (or $500,000 if married/RDP filing separately), must figure estimated tax based on their tax for 2019
C. A taxpayer must make estimated tax payments even if he or she is a nonresident or new resident of California in 2019 and did not have a California tax liability in 2018
D. To avoid an estimated tax penalty, taxpayers are required to pay 30% of the required annual payment for the 1st required installment
C. A taxpayer must make estimated tax payments even if he or she is a nonresident or new resident of California in 2019 and did not have a California tax liability in 2018
Erin receives and accepts a permanent job offer in Spain. She and her spouse sell their home in California, pack all of their possessions and move to Spain on May 5, 2019. Their children also relocate to Spain on the same date. They lease an apartment and enroll the children in school in Spain. They both obtain a driver’s license from Spain and make numerous social connections in their new home. They have no intention of returning to California. Which of the following statements is true?
A. Both Erin and her spouse are considered part-year residents of California
B. The entire family are considered full-year California residents
C. Erin is considered a part-year resident, but her spouse is considered a full-year resident
D. Erin is considered a full-year resident, but her spouse is considered a part-year resident
A. Both Erin and her spouse are considered part-year residents of California
Jason Golden is a business executive and resides in Washington with his family. Several times each year, he travels to other states for business purposes. His average stay is one or two weeks, and the entire time spent in California for any taxable year does not exceed six weeks. Jason’s family usually remains in Washington while he is traveling for business purposes. Which of the following statements applies to Jason?
A. Jason is not a California resident because his stays in California are temporary or transitory in nature
B. Jason is a California resident because he does business in California
C. Jason is a resident but is not taxed on his income from California sources
D. Jason is a California resident based on safe harbor rules
A. Jason is not a California resident because his stays in California are temporary or transitory in nature
EXPLANATION
Temporary or Transitory Purpose
The regulations contain several examples of temporary or transitory purpose. They state that “the
underlying theory is that the state with which a person has the closest connection during the taxable year
is the state of his residence.” California law specifically provides that an individual whose permanent home
is in California, but who is absent from the state for an uninterrupted period of at least 546 days under an
employment-related contract, will generally be considered to be outside the state for other than a temporary or transitory purpose and, therefore, will not be treated as a resident subject to California tax. A return to California for not more than 45 days during a taxable year will not affect the nonresident status of such an individual. The same rules will apply to a spouse who accompanies such an individual.
Steve is a California resident who lives and works as a computer consultant in Walnut Creek, CA. He earned $75,000 while working for XYZ LTD in 2019. Steve additionally had a contract job from ABC Co. based in Arizona. His contract earnings totaled $17,000 in 2019. What amount is Steve’s total California resident income in 2019?
A. $75,000
B. $83,500
C. $90,000
D. $92,000
D. $92,000
Karla bought a virtual assistant device online for $200, including shipping, and had it sent to her home. However, she was not charged tax during the purchase. Karla reviews the California City & County Sales & Use Tax Rates and determines her local rate is 8.0%. What amount of Use Tax does Karla owe on her California state income tax return for this purchase?
A. $0
B. $4
C. $8
D. $16
D. $16
EXPLANATION
California’s sales tax generally applies to the sale of merchandise, including vehicles, in the state. California’s use tax applies to the use, storage, or other consumption of those same kinds of items in the state. Generally, if sales tax would apply when the taxpayer buys physical merchandise in California, use tax applies when he or she makes a similar purchase without tax from a business located outside the state. For these purchases, the buyer is required to pay use tax separately.
Generally, if the item would have been taxable if purchased from a California retailer, it is subject to use tax. For example, purchases of clothing, appliances, toys, books, furniture, or CDs would be subject to use tax.
Purchases not subject to use tax include food for human consumption such as peanut butter and chocolate. Electronically downloaded software, music, and games are not subject to tax if no tangible storage media is obtained. The taxpayer uses the California City & County Sales & Use Tax Rates website to determine the applicable tax rate for the place in California where the item is used, stored, or otherwise consumed and applies it to the total purchase price. For personal purchases, this is usually the taxpayer’s home address.
The taxpayer should include handling charges. However, shipping charges are generally not taxable when
items are shipped by common carrier or U.S. Mail, the invoice separately states charges for shipping, and
the charge is not higher than the actual cost for shipping.
All of the following are true regarding the 2019 California Earned Income Tax Credit (CalEITC) except:
A. The CalEITC is refundable
B. The taxpayer, his or her spouse, and any qualifying children must each have a Social Security number issued by the Social Security Administration that is valid for employment
C. The taxpayer’s investment income, such as interest, dividends, royalties, and capital gains cannot exceed certain limits for the entire tax year to qualify for the CalEITC
D. Self-employment income cannot be used to qualify for the CalEITC
D. Self-employment income cannot be used to qualify for the CalEITC
EXPLANATION
California offers its own Earned Income Tax Credit (CalEITC). This credit is offered in addition to the existing Federal EITC. The CalEITC is “refundable,” meaning that the taxpayer will receive a refund if the amount of the credit is greater than the tax he or she owes. For 2019, this credit is available to California households with California maximum earned income of less than $30,000 regardless of the number of qualifying children. The maximum amount of investment income to remain eligible for the credit is $3,828.
For the CalEITC, eligible sources of earned income are W-2 wages, self-employment income, salaries, tips and other employee compensation subject to California withholding. The 2017 tax year was the first time self-employment income can be used to qualify for CalEITC. For taxable years beginning on or after January 1, 2018, the age limit for an eligible individual without a qualifying child is revised to 18 years or older.
Rosalinda Guzman applies for a College Access Tax Credit (CATC) reservation on October 31, 2019. Her proposed contribution is $10,000. The California Educational Facilities Authority (CEFA) grants a $5,000 credit reservation on November 7. Rosalinda makes a $10,000 contribution to the fund on November 22, 2019. CEFA sends the credit certification to Rosalinda on December 1. Rosalinda may claim a College Access Tax Credit for what amount on her California tax return?
A. $0
B. $4,000
C. $5,000
D. $10,000
C. $5,000
EXPLANATION
For taxable years beginning on and after January 1, 2017 and before January 1, 2023, the College Access Tax Credit (CATC) is available to entities awarded the credit from the California Educational Facilities Authority (CEFA). The credit is 50% of the amount contributed by the taxpayer for the taxable year to the College Access Tax Credit Fund. The amount of the credit is allocated and certified by the CEFA.
Ernie Brooks lived and worked exclusively in California until he retired on December 31, 2019. He moved to Nevada on January 1, 2020. His former California employer pays its employees on the 5th of every month. On January 10, 2020, Ernie received in the mail his last paycheck of $4,000 from his former California employer. What amount of the compensation is taxable by California?
A. $0
B. $2,000
C. $3,000
D. $4,000
D. $4,000
A divorce decree showed Ron Fowler was to provide $2,000 a month of “family support” to his ex-spouse. No amount of the family support is designated as child support. What amount of the payment is considered alimony?
A. $0
B. $1,000
C. $1,500
D. $2,000
D. $2,000
EXPLANATION
If the divorce decree or separation instrument provides for family support but no amount of the family
support is designated as child support, then the entire payment is considered alimony. This can be a common source of mistakes made by taxpayers who assume any payments made to an ex-spouse are deductible. California treats an RDP the same as a spouse. Consequently, the Franchise Tax Board treats alimony payments between RDPs the same as alimony payments between spouses.
The California treatment of pension and annuity income is generally the same as the Federal treatment. For example, California and Federal law are the same regarding all of the following except:
A. The “General Rule”
B. The “Simplified General Rule” (sometimes called the “Safe Harbor Method”)
C. Social Security and railroad retirement benefits
D. IRA Rollovers
C. Social Security and railroad retirement benefits
EXPLANATION
The California treatment of pension and annuity income is generally the same as the Federal treatment. For example, California and Federal law are the same regarding:
➢ The “General Rule.”
➢ The “Simplified General Rule” (sometimes called the “Safe Harbor Method”).
➢ IRA Rollovers.
➢ Roth IRAs.
➢ Archer Medical Savings Accounts (MSAs).
➢ Coverdell Education Savings Accounts (ESAs).
➢ Current-year IRA deductions.
➢ Lump-sum credit received by Federal employees.
➢ California Achieving a Better Life Experience (ABLE) Accounts.
However, there are differences between California and Federal law for:
➢ Social Security and railroad retirement benefits.
➢ Retirees using the “Three-Year Rule” whose annuity date was after July 1, 1986, and before January 1, 1987.
➢ Some prior-year IRA deductions.
➢ Health Savings Accounts (HSAs)
Terrence Gallo worked 10 years in Texas, moved to California and worked an additional 5 years for the same company. Terrence retired in California and began receiving a $10,000 annual pension, which is attributable to his services performed in both California and Texas. Terrence is taxed on what amount of his pension on his California income tax return?
A. $0
B. $2,500
C. $5,000
D. $10,000
D. $10,000
EXPLANATION
California residents are taxed on ALL income, including income from sources outside California. Therefore, a pension attributable to services performed outside California but received after the taxpayer became a California resident is taxable in its entirety by California.
A resident of California’s IRA distribution is fully taxable if his or her IRA contributions were fully deductible. If his or her IRA contributions were partially or fully nondeductible, then the nondeductible contributions are not taxed when they are distributed. The taxpayer’s basis is the amount of which of the following?
A. Nondeductible contributions
B. California compensation
C. Federal deduction
D. Required minimum distributions
A. Nondeductible contributions
EXPLANATION
A resident of California’s IRA distribution is fully taxable if his or her IRA contributions were fully deductible. If his or
her IRA contributions were partially or fully nondeductible, then the nondeductible contributions are not taxed when they are distributed. The taxpayer’s basis is the amount of his or her nondeductible contributions. How the taxpayer recovers his or her basis depends on when his or her nondeductible contributions were made.
Olga Robles sold three properties (parcels) within the same escrow agreement. Property A is sold for $50,000, property B is sold for $10,000, and property C is sold for $60,000. Which of the following statements is true regarding Olga’s real estate withholding on the sale of the three properties?
A. Since the total sales price exceeds $100,000 and the properties are sold in one escrow, withholding is required
B. Even though the total sales price exceeds $100,000 and the properties are sold in one escrow, withholding is not required
C. Real estate withholding is not required as each property sold for less than $100,000
D. California does not require real estate withholding for individuals
A. Since the total sales price exceeds $100,000 and the properties are sold in one escrow, withholding is required
EXPLANATION
Sales of multiple parcels and/or family units (duplex, triplex, etc.) within the same escrow agreement constitute one transaction for purposes of determining the withholding requirements. Withholding is required where the combined sale price of all parcels exceeds $100,000, even though the sales price of each separate parcel in the same escrow transaction is under $100,000.
Unless an exemption applies, all of the following are subject to real estate withholding: ➢ Individuals. ➢ Corporations. ➢ Partnerships. ➢ Limited liability companies (LLC). ➢ Estates. ➢ Trusts. ➢ Real estate investment trusts (REIT). ➢ Relocation companies. ➢ Bankruptcy trusts and estates. ➢ Conservatorships.
Chloe lived in Redding and accepted a job in San Diego. Under an accountable plan, her employer reimbursed her for her actual traveling expenses from Redding to San Diego and the cost of moving her furniture to San Diego. Chloe’s employer included her moving expense reimbursement of $3,200 on her Form W-2, box 12. However, Chloe’s allowable moving expenses were $3,900. What amount can she deduct as moving expenses on her Schedule CA (540)?
A. $0
B. $350
C. $700
D. $3,200
C. $700
EXPLANATION
The Tax Cuts and Jobs Act provides that for tax years beginning after December 31, 2017 until January 1, 2026,
the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who
move pursuant to a military order and incident to a permanent change of station.
California continues to allow deductions for moving expenses. However, employer reimbursements will be subject to SDI and UI as California law moves closer to conformity with Federal law, which has suspended the deduction until 2025.
During 2019, Elsa paid $800 interest on a qualified student loan. Her 2019 modified adjusted gross income (MAGI) is $50,000 and she is filing a joint return. Elsa must reduce her student loan interest deduction by what amount?
A. $0
B. $200
C. $400
D. $600
A. $0
EXPLANATION
Under both California and Federal law, an above-the-line deduction is allowed for interest due and paid on qualified education loans up to a maximum of $2,500 per tax year. Student loan interest is the interest paid during the year on a qualified student loan (this includes both Federal and private loans) and includes both required and voluntary interest payments. For 2019, tax law permits taxpayers with less than $85,000 in modified adjusted gross income for a single filer or $170,000 for joint filers to deduct up to $2,500 in Federal student loan interest payments each year.
A taxpayer may be entitled to claim a credit for excess SDI (or VPDI) only if he or she meets which of the following conditions?
A. He or she had two or more employers during 2019
B. He or she received more than $118,371 in wages
C. The amounts of SDI (or VPDI) withheld appear on his or her W-2 Forms
D. All of the above
D. All of the above
EXPLANATION
An income-tax credit is allowed for any excess employee contributions for disability insurance under the
Unemployment Insurance Code. The 2019 SDI withholding rate is 1% (.01). The rate includes Disability
Insurance (DI) and Paid Family Leave (PFL). The SDI taxable wage limit is $118,371 for each employee
per calendar year. The maximum amount withheld for each employee is $1,183.71. The 2019 DI/PFL
maximum weekly benefit amount is $1,252.
In other words, if an employee worked for more than one employer during the year, the employee is entitled to recover any amounts withheld from his or her wages in excess of the tax on the maximum wage limit (amount over $1,183.71 withheld in 2019). If the employee files an income tax return, the employee recovers any such excess by claiming credit on his or her return. If the claim is disallowed, the employee may file a protest within 30 days with the Employment Development Department (EDD).
Which of the following is a false statement regarding the taxation of gambling winnings and losses in California?
A. California law allows gambling losses only to the extent of reported gambling income
B. California does not tax California lottery winnings
C. California does not tax lottery winnings from other states
D. There may be a difference between California and Federal taxable gambling income
C. California does not tax lottery winnings from other states
EXPLANATION
California excludes California lottery winnings from taxable income. There is no exclusion for lottery winnings from other states. They are taxable by California. California and Federal laws allow gambling losses only to the extent of reported gambling income. If the taxpayer reduced gambling income for California lottery income, he or she may need to reduce the losses included in the Federal itemized deductions.
Arthur is a California resident. He was ordered to pay $2,000 in alimony and $3,000 in child support to his former spouse. He meets all the requirements when paying his support. What amount can Arthur take as a deduction for these payments on his Schedule CA (540)?
A. $0
B. $1,000
C. $2,000
D. $3,000
C. $2,000
EXPLANATION For CA, if the taxpayer receives alimony payments, he or she must report it as income on his or her California return.
For CA, if the taxpayer pays alimony to a former spouse/RDP, he or she is allowed to deduct it from his or her income on his or her California return.
NOTE: For Federal Tax, Alimony and separate maintenance payments are no longer deductible
for any agreement executed or
modified after December 31, 2018.
Jeffery and Rosemary are married with three children ages 12, 9 and 7. They filed a joint return and had a modified adjusted gross income of $174,000 in 2019. Which of the following is permissible under California law?
A. They can contribute $2,500 per child to a Coverdell Education Savings Account (CESA)
B. Earnings on CESA contributions are excluded from gross income and distributed tax free provided they are used for children’s qualified education expenses
C. The money they save in a child’s CESA can be used only for college tuition
D. Jeffery and Rosemary have modified adjusted gross income that allows them to only make a partial CESA contribution
B. Earnings on CESA contributions are excluded from gross income and distributed tax free provided they are used for children’s qualified education expenses
EXPLANATION
Under both California law and Federal law joint filers with modified adjusted gross income below $220,000 ($110,000 for single filers) may contribute up to $2,000 per child per year to a Coverdell Education Savings Account (CESA).
Earnings on contributions will be excluded from gross income and be distributed tax-free provided that they are used to pay the child’s post-secondary education expenses or a child’s elementary or secondary education expenses. A Federal election to waive the application of the exclusion, or the lack of such an election, is binding for California purposes. For 2019, the $2,000 annual contribution is phased out for joint filers with modified adjusted gross income of $190,000 to $220,000, and for single filers with modified adjusted gross income of $95,000 to $110,000.
Distributions from a Coverdell ESA that exceed the child’s qualified higher education expenses in a tax year
are generally subject to income tax and to an additional tax of 2½% (figured in Part II of FTB Form 3805P -
Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts).
The contributions to a Coverdell ESA are not tax deductible, but money deposited in the account will grow tax-free until distributions are taken. If the distribution from an account is not more than the beneficiary’s qualified educationexpenses, the beneficiary will not owe Federal income taxes. Eligible educational institutions can be either postsecondary schools or an eligible elementary or secondary school. This would apply to a college, university, vocational school, or other postsecondary educational institution that is eligible to participate in a student aid program administered by the Department of Education. This would also include virtually all accredited, public and nonprofit
postsecondary institutions.
Greg Murphy is a California resident. He is 35 years old and a single taxpayer. In 2019, he has salary of $36,000, U.S. Treasury interest income of $700, and dividend income of $600. Also, Greg uses the standard deduction for both Federal and California tax purposes. What is Greg’s California standard deduction?
A. $0
B. $1,100
C. $4,537
D. $9,074
C. $4,537
EXPLANATION
The 2019 California standard deduction for a head of household, a surviving spouse, or a married couple filing a joint return is $9,074. For single filers or married/RDP filing separately, the deduction is $4,537. The minimum standard deduction for dependents is $1,100. Both Federal and California law limit the standard deduction of a person who is claimed as a dependent.
Which of the following exceptions allow a tax preparer to disclose confidential information concerning a client without their written consent?
A. There is no exception, written consent is always required
B. Based on the tax preparer’s individual judgment of the situation
C. In response to an official inquiry from a Federal or State government regulatory agency
D. To gain the confidence of a new prospective client and highlight the practitioner’s abilities as a preparer
C. In response to an official inquiry from a Federal or State government regulatory agency
EXPLANATION
A tax preparer is prohibited, except in specified circumstances, from disclosing confidential information concerning a client or a prospective client without obtaining the client’s written consent. Exceptions to this prohibition are disclosures made by a tax preparer:
➢ In compliance with a subpoena or a summons enforceable by an order of court.
➢ Regarding a client or prospective client to the extent the tax preparer reasonably believes it is necessary to
maintain or defend him or herself in a legal proceeding initiated by the client or prospective client.
➢ In response to an official inquiry from a Federal or State government regulatory agency.
➢ To another tax preparer in connection with a proposed sale or merger of the tax preparer’s professional
practice.
➢ To another tax preparer to the extent necessary for purposes of professional consultations.
➢ To organizations that provide profes
All of the following actions constitute penalties, subject to fines and other disciplinary action, applicable to California Tax Return Preparers (CRTP) except:
A. Failure to file mandatory electronic returns
B. Submitting non-privileged records and information to the Franchise Tax Board (FTB)
C. Promotion of an abusive tax shelter
D. Understatement of tax liability as a result of reckless conduct
B. Submitting non-privileged records and information to the Franchise Tax Board (FTB)
EXPLANATION
See “Tax Preparer Penalties” on pg 5-5 of doc 20205HourCTEC.pdf
The general time limit for Franchise Tax Board (FTB) to assess additional California state income and franchise taxes is provided by Section 19057 of the Revenue and Taxation Code. Which of the following statements is true regarding the Statute of Limitations on Assessments?
A. The law generally requires the FTB to mail a proposed deficiency assessment to the taxpayer within four years after the filing date of the taxpayer’s return
B. Assessments are never allowed after the general time limit expires
C. When determining the time limit, returns filed before the original due date of a personal income tax return are considered as filed on that specific date
D. If the taxpayer did not file an income tax return, the FTB has two years from the original due date to assess the tax
A. The law generally requires the FTB to mail a proposed deficiency assessment to the taxpayer within four years after the filing date of the taxpayer’s return
EXPLANATION
The law generally requires the FTB to mail a proposed deficiency assessment to the taxpayer within four years after the filing date of the taxpayer’s return. Returns filed before the original due date of a personal income tax return (April 15 of the year after the tax year) are considered as filed on the original due date (Revenue and Taxation Code Section 19066).
