Ask Rande 10,000+

http://latimes.com/business/la-000001236...

Top 666. Jan 6, 2002 2:45 PM

» bob90245 - Lawmakers may take back retirement changes

If you're looking to boost your retirement contributions this year, read this LA Times article first.

"Millions of Californians won't be able to take full advantage of new federal tax incentives to save for retirement and their children's education unless state lawmakers change the state's tax code."

"California is among more than a dozen states that have tax rules that don't mesh with the new federal tax law. Workers in these states are in a bind. They can't enjoy the boosted retirement and education savings limits without running afoul of state law and owing more state--and in some cases federal--income taxes."

-- posted by bob90245

Top 667. Jan 6, 2002 8:08 PM

» pjstack - Re: Lawmakers may take back retirement changes

In response to message posted by bob90245:

I can understand why contributions that are tax deductible will be bollixed up, but how about increasing your contribution to a Roth IRA? Those contributions are not tax deductible and so I can't see why California would either care (or know) about them.

Am I missing something? Rande (Super CPA), please comment. Thanks. pjstack.

-- posted by pjstack

Top 668. Jan 6, 2002 10:02 PM

» oneputt - Re: Lawmakers may take back retirement changes

In response to message posted by pjstack:

Good question. Same with the edu-IRA since both the Roth and the edu-IRA are post tax dollars I can't see that CA matters. Either way governor Gray-out is disgrace, I can hardly wait until he is gone, long gone.

Rande, thanks again in advance.

Randy

-- posted by oneputt

Top 669. Jan 7, 2002 6:02 AM

» Rande - CA Retirement Plans

It's true, CA is yet to conform to last year's federal tax law which boosts the statutory limits on contributions to qualified employer plans and personal IRAs. You would think that it wouldn't impact Roth IRAs since the contributions aren't deductible, but there could be penalties for contributing more than the maximum allowed. For taxable accounts, even without the potential penalties you'd wind up with a colossal headache trying to track dual basis for federal and state purposes. There's really only one solution -- the CA legislature must conform to the federal law regardless of the short-term fiscal impact. In fact, two bills are being offered this year to provide such conformity. One is by Assemblyman John Campbell, R-Irvine. The other is by Sen. Jack Scott, D-Pasadena.

-- posted by Rande

Top 670. Jan 7, 2002 6:33 AM

» Rande - Re: CA Retirement Plans

In response to message posted by Rande:

Here's more information and a good letter from Spidell:

http://www.caltax.com/

Breaking News in California Taxes
Pension Nonconformity: The ugliest words in California
(December 19, 2001)

--------------------------------------------------------------------------------

An enormous burden is falling on the shoulders of California's taxpayers -- your clients -- and it's only going to get heavier. California and its residents face dire consequences unless legislators do something conform state tax law with the new federal pension law.

Spidell Publishing will not sit by and ignore this problem. We have written to the California Legislature about it, and we encourage other tax professionals to do the same. Contact your state representatives and demand that they do their job of protecting the interests of all Californians by conforming the Revenue and Taxation Code to the pension provisions of the federal Economic Growth and Tax Relief Reconciliation Act of 2001.

Below is the letter written by Spidell Publishing to our assembly member and state senator, as well as the chairs of the Assembly and Senate Committees on Revenue and Taxation. Please feel free to adapt it to express your own point of view. We have also provided you with a link to where you can find your own legislators' addresses: www.leginfo.ca.gov/yourleg.html

___________________________

December 19, 2001

Re: Nonconformity

Dear Elected Representative,

This is in response to your November 30, 2001, letter requesting alternatives to federal conformity legislation. As you may know, Spidell Publishing, Inc., has been a strong proponent of conformity legislation since the company was founded in 1975. Over the years, we have tried to point out the pitfalls of nonconformity to tax professionals and California's elected leaders. Although there are costs associated with federal conformity, there are also costs associated with federal nonconformity. You can look to both a taxpayer's compliance burden (including moving out of California to gain relief) and a tax administrator's audit, legal and collection burden to see exactly how failing to conform to federal law costs the state money.

Some California taxpayers avoid the compliance burden altogether by simply following federal law. At Spidell, we call this "de facto" conformity. Certain taxpayers are willing to take a potential hit in the form of an assessment if the FTB audits them, rather than try to comply with the almost incomprehensible California tax burden of nonconformity. Granted, some taxpayers are unwary of the multitude of state and federal differences, and unknowingly complete their tax returns incorrectly. But some taxpayers make a "business decision" of exclusively following federal law, taking their chances at audit roulette.

California has been without an omnibus conformity bill for four years. During most of that time, the state's coffers were bursting with money. Yet, the Legislature failed to enact a major conformity bill. Now, the state's coffers are dry, and California is faced with a massive federal pension reform to which it must react. It is also faced with a federal estate tax repeal that will cost California millions of dollars. If the Legislature could not manage to enact a conformity bill and address the estate tax situation during the state's good fiscal times, it is difficult to believe that there is momentum to enact appropriate legislation in bad fiscal times. With this said, we will not address the prior four years of federal legislation to which California has not conformed, but are limiting our comments to the federal pension provisions enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-17).

We believe that there is NO ALTERNATIVE to conforming the federal pension provisions. There is too much at stake for the common, everyday worker and employer if California fails to follow federal law in the pension area. This is especially true with the federal administrative pension provisions (the top-heavy rule modifications, vesting schedules, deemed IRAs under employer plans, option to treat elective deferrals as after- tax Roth contributions, purchase of service credit in governmental defined plans and the like).

We believe that anything short of full conformity to the 2001 changes to the federal pension rules will hurt millions of Californians by denying them pension benefits and subjecting middle- and lower-income taxpayers to a hidden tax increase (see item 4 below). Any sentiment that pension conformity will only help the wealthy is completely incorrect. Here is a short list of problems California taxpayers and the state will encounter if the Legislator and governor fail to enact conformity legislation.

Taxpayers will pay tax on all the money they contribute to a 401(k) or deferred compensation pension plan. An employee who puts $500 into a deferred compensation plan will pay tax on that $500 to California. This is because, if the plan is disqualified, ALL contributions will be thrown into California wage income.

All contributions made by an employer on behalf of an employee will be immediately taxable to the employee. This is despite the fact that the employee cannot have access to the money and the amounts are not fully vested for five years. For example, an employee who earns $20,000 per year and whose employer contributes $500 to his pension plan will have California wages of $20,500 ($20,000 cash wages and $500 pension plan). He must pay California tax on this money, despite the fact that he will lose up to 80 percent of it if he leaves the company prior to becoming fully vested.

Taxpayers must keep track of the California basis in the pension. Because the taxpayer paid tax on the pension/deferred compensation contribution, he or she now has a basis in the contribution. This basis is recovered when the pension is distributed, creating complexity for the average retired taxpayer.

Failure to conform is not only a current tax increase, but also a hidden future tax increase. An employee who fails to keep track of the pension basis will pay tax on it again. This is particularly onerous for elderly or lower income taxpayers who are unable to engage the services of a tax professional to track the basis.

Pension conformity is most hurtful for lower- and middle-class taxpayers. It is a common misconception that pension conformity will only help wealthy taxpayers. This is absolutely untrue for two reasons. First, as previously stated, it is the lower- and middle-income taxpayer who is less sophisticated and has more limited professional assistance. This individual will pay tax twice on his or her own money: first when it is earned and again when it is paid. Second, the pension benefits are designed to benefit rank and file employees. Highly compensated (or wealthy) employees benefit from nonqualified stock options, special deferred compensation plans and golden parachutes. None of these benefits are impacted by the pension changes.
Pension nonconformity discourages talented workers from coming to California. Failing to conform adds more fuel to the fire that California is an unfriendly tax state. It also encourages taxpayers to leave the state and seek work elsewhere.

Failure to conform discourages employers from taking advantage of the new benefits and helping their employees. If California fails to conform, many businesses will keep their current plans in place for a short period, denying additional benefits to California employees that other states will allow by not taxing the pension contributions.

Failure to conform hurts women. The "Fairness for Women" provisions allow taxpayers who have reached age 50 to contribute extra amounts to their deferred compensation for their retirement. This provision was specifically included to assist women who have been out of the work force for years while rearing children and who are now struggling to accumulate retirement savings.
When doing budget analyses, remember that failure to conform will put millions of wage dollars back into California's taxing system. Failing to conform is actually a tax increase that the Legislature will impose upon millions of California residents – from the poor through the upper middle class.

Partial conformity may sound like a good idea from a budgetary perspective but it will double the compliance burden on employers who must calculate two separate sets of books and employees who must keep track of what was taxed and what wasn't taxed. This will still result in the previously mentioned "hidden tax."

Nonconformity to the federal pension rules will create a whole host of problems for plan administrators, taxpayers, the FTB and the EDD, and eventually the courts if the cases go through audit and appeal. Our recommendation is to enact full pension conformity legislation. Anything short of that will have disastrous results (results, by the way, that a publisher like Spidell can profit from). Thank you for your consideration. We look forward to working with you this legislative session.

Sincerely,

(add your name)

-- posted by Rande