State Return Can't Duplicate IRS Form : California: The decision by legislators not to adopt key changes made to the federal Tax Code created the discrepancies. Affected are about 13 million people.

By KAREN KAPLAN

March 7, 1995 12 AM PT

SPECIAL TO THE TIMES

For the millions of average people who earned money in the Golden State last year, filing a California income tax return is no longer a simple matter of copying numbers from the federal return that goes to the Internal Revenue Service.

For the first time in at least a decade, California legislators voted not to adopt key changes made to the federal Tax Code, said Irene Goodman, who heads the California tax group of the Commerce Clearing House. That decision has created a laundry list of discrepancies between federal and state tax laws for 1994.

For the record:

12:00 a.m. March 8, 1995 For the Record
Los Angeles Times Wednesday March 8, 1995 Home Edition Business Part D Page 2 Financial Desk 3 inches; 77 words Type of Material: Correction
State taxes--An article in Tuesday’s editions gave incorrect information about federal and California tax laws. For 1994, up to 85% of Social Security income is subject to federal income tax; California does not tax any portion of Social Security. Also, California has conformed to federal rules reducing the deduction for business meals and entertainment expenses to 50%. In addition, a chart with the article listed Placer County as among the Top 10 counties in terms of average tax paid per return. Placer is 11th; Santa Barbara County is 10th.

Affected are about 13 million people, including some who live in other states but worked in California for part of 1994 and retirees who have left the state but receive pensions from California companies. Among the most significant differences:

* Eighty percent of Social Security benefits are now subject to federal income tax, but only 50% of those benefits are subject to California income tax.

* Dues for business, social and athletic clubs are no longer deductible on federal income tax returns. California still allows deductions for dues if the memberships are used primarily for business purposes.

* Half of business expenditures on meals and entertainment may be deducted on federal tax returns. The state allows 80% of those expenses to be deducted.

* Deductions for lobbying--except for up to $2,000 in in-house expenses--have been eliminated from the federal Tax Code. In California, lobbying expenses are fully deductible for efforts relating to one’s trade or business.

* A spouse’s travel expenses are no longer deductible at the federal level unless the spouse is an employee of a company involved in the trip and has a business reason for going on the trip. In California, a spouse’s travel expenses can be deducted as long as his or her presence is essential to the business trip’s purpose.

* In order to deduct moving expenses on federal income tax returns, a new job must be at least 50 miles farther away from one’s residence than the previous work site. In California, the deduction can be taken if the new job is 35 miles farther away.

* Congress made it easier for real estate professionals to deduct real estate investment costs, but California still treats these as limited passive losses.

Other differences include how to calculate an income exclusion for ride-sharing programs, how business income and deductions are determined and a variety of other specialized issues. Businesses have long had special rules and credit in California.

Detailed guidelines on the differences between federal and California tax law are contained in “Supplemental Guidelines to California Adjustments,” Publication 1001 of the Franchise Tax Board. It can be obtained by calling (800) 338-0505 or from district offices.

Any income earned in the state of California is subject to California income tax, even if the worker is not a California resident. The tax rates range from 1% for the first $5,000 to 11% for more than $212,000 for a single person or a married person filing separately. Retirees must pay income tax on their pension payments derived from years of work in California, even if they retire to another state.

Less obvious California taxpayers are people who work in the state but whose residences and employers are out of state. This situation occurs for consultants and for people in the movie industry.

A more high-profile variation is the professional athlete from an out-of-state team.

For example, an outfielder for the Chicago Cubs must file a California income tax return and pay taxes on the portion of his salary earned playing games at Dodger Stadium, Candlestick Park and Jack Murphy Stadium. In fact, any member of a traveling sports team could be expected to file tax returns in at least 20 states, said Jim Shepherd, a spokesman for the Franchise Tax Board, the Sacramento agency responsible for collecting state taxes.

The state Employment Development Department collects between $7 million and $8 million a year in withholding from professional sports teams, said Suzanne Schroeder, a spokeswoman for the department. Professional athletes in individual sports like golf add another $1 million to the state’s coffers, Shepherd said.

Although income taxes paid in other states are usually deductible in one’s home state, the total effect of this interstate taxation favors California.

“California has more sports teams than most other states, and so there are a greater number of sports days in California than in other states,” Shepherd said.

The scores of out-of-state reporters and television crews who have descended upon Los Angeles to cover the trial of double-murder defendant O.J. Simpson will also have to pay taxes to California on the income they earn while they are here.

Since taxation is based on where you work, there is no advantage to wage earners if they live in a neighboring state with a lower income tax--such as Oregon--or a state without an income tax--such as Nevada.

People who rely on only investment income from dividends and bonds and who have a residence in both California and a non-taxing state are in a more hazy situation.

“If someone has a permanent residence in Nevada but spends more time in California, then there’s a question of whether they are really residing in California or Nevada,” Shepherd said.

Someone who owns property in both states and spends more time in California--even if he is registered to vote in Nevada and has his car registered there--could be ruled a California resident and billed for back taxes plus penalties, he said.

Each year the Franchise Tax Board sorts through more than 200 million tax records to find people who ought to file income tax returns with the state of California but do not. This year, the state expects to identify 500,000 people who did not file tax returns for 1993 and bill them $680 million in unpaid taxes, penalties and interest, Shepherd said.

Well over 90% of California taxpayers file honest and timely income tax returns, said Jim Reber, another Franchise Tax Board spokesman.

In 1993, 1.5 million taxpayers--about 12% of all filers--were subject to serious audits, Shepherd said.

The most difficult tax cheats to catch are people who are self-employed and conduct their business transactions in cash, like sidewalk florists and other street vendors, Reber said. If they are misrepresenting their tax situation, it would be difficult to prove. But even if they are, it’s unlikely they are shielding millions of dollars from the state.

“When you see these people pull up with their rose buckets, they don’t have big diamond rings and Rolex watches,” Reber said. “They are driving 1967 vans and wearing old Converse sneakers.”

A bigger pool of lost tax revenue is in larger underground economies, especially the market for illegal drugs.

“There is a considerable amount of income flowing around in the drug arena,” probably worth billions of dollars, Reber said. The state government’s share of it would total many millions of dollars if there were any way to collect it, he said.

* MORE TAX STORIES: D6-9