Just What You Needed: More Trouble at Tax Time

Most Americans are likely to benefit in some measure from the changes Congress made this year in the federal tax law. And at least in California, some of the biggest gainers could turn out to be professional tax preparers. That’s because federal and state tax laws, which once were virtually parallel, have been growing apart over the last decade, and the changes made by Congress this year considerably expand the gap. That complicates the challenge of preparing state tax returns and is expected to send a rising number of confused taxpayers in search of professional help.

A bill that would help bring California’s tax code into greater conformity with federal law has been introduced in Sacramento, but it addresses only federal changes made in past years, and in any case its chances of passage seem uncertain. No steps have yet been taken to bring state law into conformity with this year’s federal changes. So a lot of Californians could find some unpleasant surprises next April when their state bill falls due.

The biggest hit could involve a taxpayer who sells a principal residence. The new federal law lets the taxpayer exclude $250,000 in profit ($500,000 for a couple) from the sale. State law allows deferral of taxes on such a capital gain only if the profit is invested within two years in a home of equal or greater value. With home prices and home sales rising, a lot of Californians may be expecting to pocket big gains, only to discover that they owe the state thousands in ordinary income taxes on real estate profits that the federal government no longer taxes.

The growing disparities in California and federal tax laws primarily work to the state’s revenue advantage. For some in Sacramento, that may be an incentive to be dilatory in rewriting state rules to achieve greater compliance with federal requirements. Any temptation to dally should be vigorously resisted.

Preparing a state tax return used to be relatively simple, once the federal form was filled out. It has been growing steadily more difficult, and by filing time next year it promises to be trickier still. The remedy is for the Legislature and the governor to move with dispatch to once again bring state tax law into close conformity with the language of the federal code.