Ca Preparer Heads Up

[Tax Prep by Deb]

I had a client in the office this week who I had already prepared his return. He came for me to help him send the payment. His return was filed back in February. When I went to reprint his voucher's the state amount had changed. I looked and looked and finally found the California return made an adjustment to the amount that was deducted on his 1040 for 1/2 of his self-employment tax. The best that I could tell is that it adjusted it to compensate for the 2% stimulus, however instead of deducting it it added it. I over rode the adjustment so that his payment would match what had already been filed. I didn't think any more about it until I looked at mine. Likewise it made the same adjustment. I Tried to reason it out but it made absolutely no sense to me, but figured if he got a notice that we made a mistake I would take care of it as it wouldn't amount to a hole lot.

When I got home today, I had a check in the mail for my own California income tax return. They refunded me 11.00. Thinking it might be due to the adjustment made in error (which I honestly believe is an ATX error) I pulled up an ammended return of my tax return, deleted the adjustment, and guess what? You're right, the difference was 11.00.

So look at your self employed returns and see if CA is adjusting it. If so I believe you may be getting a call from your clients, at least they should be happy that it results in a refund.

Deb!

[JRS]

I can't remember when, but I got this note from the FTB in early March after I had done a couple of C's. They just got their few bucks this week.

"Self-Employment Tax Deduction

The federal 2010 Tax Relief Act increased the amount of self-employment tax that may be deducted in computing federal adjusted gross income. California has not conformed to this change. For state income tax purposes, taxpayers may only deduct 50 percent (50%) of the self-employment tax paid in computing state adjusted gross income.

The majority of self-employed taxpayers have not yet filed their 2011 tax return. We have updated forms and instructions and contacted all software companies to make this update. Make sure your tax preparation software allows for the Schedule CA line 27 adjustment if necessary. The following example shows how to compute this deduction:

Self-Employment Taxes Paid, Form 1040 line 56(or 1040NR line 54) $2,000

Federal Deduction Allowed, Form 1040/1040NR, line 27 $1,150

Less: California Deduction Allowed, 50% of self-employment taxes paid $1,000

Schedule CA, line 27 (column adjustment $ 150

Important: Self-employed taxpayers who have already filed a return using the higher federal rate do not need to file an amended return. In order to reduce taxpayer burden, FTB is sending a letter to a limited number of taxpayers based on available information and considering the time and effort involved to revise this deduction. The letter will include an explanation of the issue, proposed corrected amounts, and allow taxpayer response before issuing a tax bill. Taxpayers who have already filed and are not contacted by FTB do not need to file an amended return."

[Tax Prep by Deb]

But my return did include the adjustment. However I received a refund. The adjustment is exactly the difference between claiming the federal amount less any adjustment. So did CA make a mistake on my return?

[jainen]

>>did CA make a mistake on my return?<<

Maybe, but without knowing any details I guess it more likely you made the adjustment an extra time while your software already did it automatically.

For our esteemed colleagues across the country, this is an example of how silly California taxes are. Almost nothing except pensions are treated the same way in California as on the federal return, until the state legislature passes a conformity bill later on. For 2011 the feds offer self-employed a small break similar to the reduction in employee FICA. This noble state, which shouldn't care about Social Security taxes one way or another, doesn't agree. So the Line 27 deduction is little smaller for the state return, which makes AGI a little higher, which makes itemized deductions a little smaller, which makes our fees a little higher.

[Tax Prep by Deb]

I still don't know exactly what has taken place, however I did look at my return again, and it appears that maybe what they refunded was the penalty for underestimating my taxes. The penalty is exactly the amount they refunded. I looked at the worksheet again and I feel based on it I did owe the money, but for now I'm going to cash the check and if I get a notice reversing it, I will pay it back. It's only 11.00 but it still puzzles me.

Deb!