In California, Teachers Lose a Break; Others Gain

California teachers lost and domestic partners gained in state tax changes made for the 2002 tax year. New rules also will affect the state returns of taxpayers in a handful of other groups, including country club members, wealthy taxpayers who donate land to the state, Holocaust victims and unmarried parents.

“It wasn’t a big year for changes, but the people who fall into the niches where there were changes are going to see a big impact,” said enrolled agent Jennifer MacMillan of Santa Barbara. “That teachers tax credit was huge and a very big loss.”

State lawmakers, grappling with a massive budget gap, suspended the teacher retention tax credit for 2002. This credit, which was claimed by 214,166 teachers in 2001, could reduce a veteran teacher’s state tax bill by as much as $1,500 annually. (Credits reduce taxes owed dollar for dollar; deductions reduce the amount of income that’s subject to taxation.) Teachers claimed an average credit of $772 in 2001 -- for a total tax break of $165.4 million statewide.

Although teachers get no retention credit on their state returns this year, the federal government has introduced a small -- $250 -- deduction for teachers who buy school supplies. But even that deduction isn’t available on state returns. Teachers claiming it on their federal returns must add the $250 they deducted to their income when calculating their state tax.

Another lucrative credit that was suspended during the current budget woes: the natural heritage tax credit, which provided a dollar-for-dollar write-off of as much as 55% of the value of land donated to the state or certain conservation organizations.

The credit was suspended as of mid-2002, said Lynn Freer, editor of Spidell’s California Tax Letter. So donations made before July qualify for the credit on tax year 2002 returns; those made after that point must wait to see whether the credit is revived in the future.

Unlike the teacher’s credit, the natural heritage tax credit was used by only a handful of wealthy Californians. In 2001, just 51 people were able to claim it, said Denise Azimi, a spokeswoman for the Franchise Tax Board, California’s equivalent of the Internal Revenue Service. But the average credit was substantial -- more than $161,000 -- and the total was $8.25 million, she said.

State tax authorities will waive underpayment penalties that resulted solely from a tax law change made in 2002. In other words, those who underpaid because they banked on the teacher’s credit won’t have to pay interest penalties in addition to more tax.

California lawmakers also changed rules related to the child- and dependent-care credit and to tax-free employee benefits for domestic partners.

In the past, unmarried couples with children were barred from claiming the dependent-care credit, which provides as much as $907 in state tax savings for parents who pay child-care expenses so they both can work or attend school.

Starting in 2002, unmarried parents were treated the same as divorced or separated parents. That allows the custodial parent, whoever has physical responsibility for the child more than 50% of the time, to claim the credit.

This is particularly important for low-income families, said Freer, because the child- and dependent-care credit is refundable in California, working much like the earned income tax credit on federal returns. In other words, a resident who owed $100 in state tax but who qualified for a $500 dependent-care credit would wipe out the entire state tax bill and get a $400 refund.

Employer-provided health benefits also became nontaxable for domestic partners in 2002. Self-employed individuals can deduct health insurance premiums for themselves and their domestic partners for the first time, as well.

A handful of state law changes were made to conform with new and existing federal laws. Those changes:

* Holocaust restitution payments are nontaxable for eligible individuals and their heirs.

* Military service personnel called into active service are given additional time to file state returns.

* Country club dues can no longer be deducted, nor can lobbying and political expenses.

* Maximum contribution amounts to all types of retirement plans have risen, and additional “catch-up” contributions are allowed for those age 50 and over.