For Those Who Qualify, State Tax Credits Lighten 2000 Filing

By LIZ PULLIAM WESTON

Dec. 29, 2000 12 AM PT

Call them tax breaks for people who care.

Starting with year 2000 returns, California will offer new tax credits to many parents, teachers and caregivers.

A teacher with 20 years’ experience, for example, might shave up to $1,500 from her state taxes. A working parent who pays for day care could qualify for a cut of up to $907. People who provide or pay for long-term care may save $500.

All told, the new credits are expected to reduce the state’s tax bite by $570 million next year. For those who qualify, the new tax breaks should make paying state income taxes a bit more pleasant next April 16. (April 15, the usual deadline, falls on a Sunday in 2001. That gives filers an extra day to send in their year 2000 returns.)

Filing state income taxes has long been a frustrating process for many taxpayers, thanks to differences between California and federal law and a rather stiff tax rate.

California takes at least 1% of all taxable income, with the rate quickly climbing to 9.3% for incomes over $35,826 for singles and $71,652 for married couples filing jointly. In addition, California offers no break for capital gains, which means that stock and real estate profits that qualify for the 20% federal rate typically get hit with the state’s maximum 9.3%.

The Legislature in 2000 did nothing to lower the tax rates and little to make California law conform more closely to the federal code. But flush with budget surpluses, lawmakers did decide to dole out breaks for many middle-income and lower-income taxpayers.

Tax credits reduce a tax bill dollar-for-dollar. Credits tend to be more valuable than deductions, which reduce the income used to compute your tax. The value of deductions is thus limited by which tax bracket you’re in. A $500 credit can cut a $1,000 tax bill in half, while a $500 deduction will reduce a tax bill by only $169 for someone in the 28% federal and 8% state brackets.

Credentialed teachers with at least four years of experience can qualify for the “teacher retention credit” of $250 to $1,500, depending on years of service. The taxpayer must be a classroom teacher in a public or private school instructing grades kindergarten through 12. There is no income limit to claim the credit, although the credit itself is limited to 50% of the state income tax attributable to wages earned from teaching.

Details about the teacher credit are available on the agency’s Web site at https://www.ftb.ca.gov.

Parents who pay for day care or nannies in order to work may qualify for a refundable credit if their adjusted gross incomes are under $100,000, married or single. (A refundable credit is one that allows taxpayers to claim a refund if the credit is worth more than the tax owed.)

The state’s “child and dependent care expenses credit” is based on the relatively complicated federal credit with the same name.

The federal credit gives many parents a break equal to a portion of their dependent care costs; it’s claimed by using IRS Form 2441.

The state credit is a percentage of the federal credit and is calculated based on income. For example, taxpayers with adjusted gross incomes up to $40,000 can qualify for a state tax credit equal to 63% of the federal credit on their state returns.

Not all taxpayers with dependent care expenses can use the federal credit, even if they meet the income limitations. Using a workplace tax-saver or flexible spending plan--programs that are designed to allow employees to use pretax money to pay for child care--can reduce or eliminate the taxpayer’s ability to take the credit. The tax-saver plans are often the better bet for working parents, but taxpayers should crunch the numbers--or ask a tax preparer to do so--to see whether the credit or the program offers more savings.

The third credit, for long-term care, provides a $500 tax cut for qualifying taxpayers with adjusted gross incomes under $100,000 (once again, the limit is for all taxpayers, whether single, head of household, married filing separately or married filing jointly).

One $500 credit is allowed for each person who needs care. The long-term care must be expected to last at least six months and the need for the care must be certified by a physician by April 16, 2001. The person must meet certain criteria, such as being unable to perform certain basic tasks including bathing, eating or dressing. The person needing care also must have a specific relationship to the taxpayer taking the credit--either a dependent, a spouse or the taxpayer himself.

There’s no requirement that the taxpayer actually pay money for long-term care services; unpaid help can qualify the taxpayer for the credit as well.

“If you’re sick and your niece is taking care of you [for free], you may be able to take the credit if you meet the criteria,” said Denise Azimi, spokeswoman for the state Franchise Tax Board. “It’s kind of a weird credit.”

As with the dependent care credit, the rules can be complicated. Brochures explaining the long-term care credit, and the dependent care credit, will be available next week from the Franchise Tax Board by phone at (800) 852-5711 or on its Web site.

Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at https://www.latimes.com/moneytalk.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

New State Tax Credits

The California Legislature created three new tax credits to benefit teachers, parents and those paying long-term care expenses.

Teacher Retention Credit

This credit is available to public and private school teachers and is based on years of service.

Those who have taught for: Qualify for a credit* of:

4-6 years: $250

6-11 years: $500

11-20 years: $1,000

20 years or more: $1,500

*The credit may not exceed 50% of the state income tax on teaching income.

Refundable Child and Dependent Care Expenses Credit