Can’t Take Tax Deduction if You Have Company Pension Plan : State’s IRA Law Traps Thousands
When Gov. George Deukmejian got trapped in the web of California’s confusing income tax laws the other day, he was not alone.
By erroneously claiming a deduction on his 1984 return for an individual retirement account, he was making the same mistake that the state Franchise Tax Board says thousands of Californians made on their 1982 returns--the first year of a liberalized federal law on IRA deductions.
Although state officials said earlier this month that 300,000 taxpayers were getting notices of their three-year-old errors--and being billed for back taxes plus interest--that ugly reality only began to set in this week as a trickle of notices turned into a blizzard, prompting squawks heard around the state.
“Obviously, no one is happy to pay,” said Franchise Tax Board spokesman Will Bush, who has a penchant for understatement.
Reap Bonanza
By the end of June, when the last of the notices has been mailed, the state estimates that it might reap a $30-million bonanza, an average of about $100 from each violator.
Tax officials said they have not gotten around yet to checking 1983 and 1984 returns. Deukmejian’s accountant caught his own mistake on the governor’s return.
The root of the confusion is the federal law that was liberalized in 1982 to allow taxpayers to take up to a $2,000 deduction on their federal tax returns for contributions to IRAs, regardless of whether they were members of other active pension systems.
California did not follow suit with a matching liberalization.
Thus, state law continued to permit an IRA deduction of only $1,500 and to limit it to those who are not members of active pension systems.
“It’s a big mess,” said Joel McThomas, a Santa Monica tax accountant. “I had two people who had no idea they are in a pension plan receive the notice. If a person doesn’t know they are in a plan, they can’t answer correctly.”
Pension Plan
Other tax preparers said many people assumed that they were not in a pension plan if they had not been contributing to one.
Still others said not all the 300,000 who are receiving notices owe the money.
In many cases, said accountant Betsy LaNoue of Davis, the IRA deduction may have been taken for a working spouse who was not in a pension plan, but the Franchise Tax Board computer did not make that distinction.
“The state is not always right,” LaNoue said.
Therefore, it is a good idea for those who get notices to double-check their state return or talk to their accountant before automatically mailing the state a check.
“Displeased would be a very nice word for it,” Barbara Foster of Claremont said about the notice she and her husband received.
She said their accountant wrongly assumed that they were not in a pension plan and took the IRA deduction without asking them first.
They paid.
Tax spokesman Bush said that since 1982 was the first year of the liberalized federal law, “many financial institutions went out and did a lot of marketing on the new deduction, and more people took them than even the Internal Revenue Service was prepared for.”
Federal Return
“They filled out their federal return based on the more liberalized law and then went ahead on their state form without realizing that the state had not conformed to the federal law,” he said.
That, at least, is the official explanation for the large number of violators.
Tax officials traced the culprits by cross-referencing Social Security numbers with taxpayers claiming an IRA and then cross-referencing those taxpayers with the employer identification numbers reported on their W-2 forms. The employer identification numbers were used in turn to determine whether the taxpayers’ employers offered qualified pension plans.
Provide Statement
“If you did receive the notice of proposed assessment and don’t believe you should have,” Bush said, “you return it to us in 60 days, along with a statement from your employer that you are not a participant in his pension plan.”
He also said those who paid, but determined later that they did not owe, can write a letter to the Franchise Tax Board explaining the mix-up and requesting a refund, or they can file an amended 1982 return.
Deukmejian was not eligible for the deduction because he is a member of the state retirement system. His accountant attributed the mistake to a computer error. The governor’s 1982 and 1983 returns did not reflect any IRA deduction.
Despite his own temporary embarrassment, however, Deukmejian indicated at a Los Angeles press conference Thursday that he still was not enthusiastic about changing the state law to conform to federal law.
“If Californians were allowed to take the full deduction,” he said, “it would cost . . . around $400 million, which would be a very significant amount of money.
No Position
“And while there is a proposal pending in the Legislature to that effect, I wouldn’t predict what the outcome of it might be . . . nor are we taking any position in support of it at this point.”
In fact, there are several proposals in the Legislature to achieve state-federal conformity.
One of them, a bill by Sen. William Campbell (R-Hacienda Heights), cleared the Senate Revenue and Taxation Committee on Wednesday and will go to the Senate Appropriations Committee.
Campbell said his bill would conform state to federal law both in terms of the amount of IRA deductions allowed and who may claim them.
