Key Differences in Federal, State Returns

For most taxpayers, filing a California income tax return is fairly easy once the federal return is filled out. But it isn’t a simple matter of copying numbers. California has not adopted several key changes in the federal tax code that were effective in the 1994 tax year.

Although last year Gov. Pete Wilson and the Legislature announced that the top state tax brackets would expire, the expiration was effective this year, not for 1995. The 10% and 11% rates are still in effect for 1995 returns, said Denise Quade, spokeswoman for the Franchise Tax Board. Those rates are not in effect for 1996, leaving 9.3% as the top rate.

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Among the key differences between federal and state returns:

* Eighty-five percent of Social Security benefits are now subject to federal income tax, but none 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.

* Deductions for lobbying--except for up to $2,000 in in-house expenses--have been eliminated from the federal 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.

* Nonresident immigrants: The IRS requires that only U.S. income sources be reported, but California requires adjusted gross income from all sources.

* Living benefits: Funds that a terminally ill person gets under contract from his or her life insurance policy before dying are taxable under federal law but not under state law.

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There are eight state tax brackets, ranging from 1% to 11%. Here are the three highest bracket levels for 1995:

9.3% rate kicks in at taxable income of

$31,700 for singles and married people, filing separately.

$43,149 for heads of household

$63,400 for married, filing jointly

10% rate kicks in at

$109,936 for singles and married, filing separately

$148,638 for heads of household

$219,872 for married filing jointly

11% rate kicks in at

$219,872 for singles and married, filing separately.

$299,279 for heads of households

$439,744 for married filing jointly

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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.