State Law on IRAs May Be Changed

QUESTION: I am one of the many California taxpayers whose IRA deduction was disallowed by the state because I didn't realize that the state law was different than the federal law on IRAs. Is anything being done to correct this terrible inequity?--A. L.

ANSWER: Making the state IRA rules conform to the federal standards requires legislative action, and several bills are making their way through the state Senate and Assembly.

Since 1981, when Congress liberalized the federal rules on these tax-deferred individual retirement plans, most states have conformed to the federal standards. California lawmakers have made stabs at conformity, but so far without success.

Money is the hang-up. The state estimates that it would lose tax revenue of $400 million in the first year alone if state law adheres strictly to the federal rules.

But if California's law on IRA contributions is to be liberalized, some politicians and consumer groups think this is the year. The reason: About 300,000 California taxpayers are up in arms over notices that they recently received disallowing their write-offs and demanding the unpaid state taxes for 1982 or 1983.

More upset taxpayers are likely to come out of the woodwork once deficiency claims are prepared on 1984 tax returns.

These taxpayers are in good company. Gov. George Deukmejian has acknowledged that he took an IRA deduction on his 1984 state return, not knowing that he didn't qualify under state law even if he did under the federal rules. He is filing an amended return.

There are two chief differences between the two sets of laws. Under federal law, every working taxpayer may set aside up to $2,000 a year in a tax deferred retirement plan, even if he or she is covered by a separate retirement plan at work. California taxpayers are covered by that law, of course. But when it comes time to file their state return, they are allowed a maximum deduction of $1,500 and nothing at all if they are covered by an employer retirement plan.

Until 1981, the federal law was equally discriminatory. But to encourage Americans to save on their own for retirement--instead of entrusting their retirement years to Social Security--Congress in 1981 changed the law to extend the retirement plan tax deduction to all workers.

Many taxpayers have assumed all along that the states immediately changed their rules accordingly. Only now, with the surprise receipt of notices from the Franchise Tax Board, are California taxpayers learning otherwise.

To appease the taxpayers and the state tax collectors, some of the bills seeking conformity include provisions to make up the loss. A proposal by Assemblyman Byron D. Sher (D-Palo Alto), for example, would, among other things, curb deductions for investors in certain tax shelters to offset part of this revenue loss. Others would extend IRA deductions to workers already covered by an employer retirement plan but hold the maximum deduction at the current $1,500 level.

Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business Section, The Times, Times Mirror Square, Los Angeles 90053.

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