Saturday, 25 May 2024

Taxes and money: Changes in state and federal law

Before I return to my discussion of the Alternative Minimum Tax (AMT), a brief comment on the state. I mentioned in the last article that new laws are making their ways through congress; the same happened in Sacramento. The state has announced some of their tax changes. Like the federal government, these announcements are short on details.

The state has the choice of following the federal law, ignoring the federal law for state purposes or making their own law. Even if the state follows the federal law, they may not be exactly the same.

A perfect example is the AMT. California has the AMT, but it has never been a problem since they have always indexed the exemptions, while the federal government has not done this.

Another example is retirement plans. California has retirement plans like the federal but in many years has had different rates. The capital gains tax is an example of California going its own way, as they simply do not recognize capital gains tax.

The state has announced that refunds will be delayed if there is not enough cash in the bank. One solution to waiting is, if you get a refund on your 2008 state taxes, is not to take them in cash but to apply it to your 2009 taxes. Of course, this depends on how much you need the cash. This is also a great idea, if you are subject to the above mentioned AMT. It seems the AMT is never far from the discussion on taxes.

As the governments announce their proposals, we need to remember several points. These are proposals, when finally passed they may not exactly look like they do today. If they do make it though the legislative maze and do look exactly as they are proposed, then we have the detail to review. As a common saying goes, “The devil is in the details.”

Lastly, how will these be implemented?

It is clear that the financial rules we’ve lived for so many years are changing. During these times of a slow economy, it’s easy to take the easy road and say, “It’s too hard, it doesn’t matter what I do,” and “I’ll just wait and see what happens.”

These are not good enough attitudes for this year and beyond. It’s never been more important to commit to taking time to start planning and being aware of what rules and regulations are “coming down the pike.” The repercussions of not knowing and just see what happens have never been so severe. Now is not the time for not knowing, but for action.

Some of the major state changes are:

– Sales and use tax rates increase by 1 percent on April 1. While this tax increase will hurt, it must be noted that the state did not make matters worse by changing the law to make labor and service charges subject to sales tax. Not only would this would have been a huge cost to businesses and individuals but would of added much complexity to business transactions. (I won’t make any comments on the date they choose to start the increase despite pressure to make a pun or joke about it.)

– New homebuyer credit will be established. Not sure of the details nor if it will conform to the federal credit. The federal credit has been extended to the end of 2009 and is available for those who have not owned a primary residence for 36 months.

– Vehicle fees will be increased by 1 percent and vehicle registration fee increased by 0.15 percent starting on May 19.

– The exemption credit will decrease to the same amount as the personal credit for tax years 2009 and 2010. This will really hit families very hard. The exemption credit for 2008 is $309 for dependents and $99 for the taxpayers. This is a difference of $210 per dependent and as a credit this is a direct increase of tax.

– There will be an increase in the personal income tax rate by 0.25 percent or 0.125 percent depending on the federal stimulus revenue.

– A tax credit for small businesses, with fewer than 20 employees, hiring new employees.

While some of these are very harsh, there were some increases that were not approved. These measures below seem much harsher than the above.

The major proposals that did not pass were:

  • Gas tax increase;

  • 5 percent surtax on income tax rates;

  • Sales tax on services;

  • Withholding in independent contractors.

It is clear from the above that government is intent on raising tax revenue and that increase is coming from us. This is the time to take action to protect your personal and retirement assets, not the time to just let what happens happen. We need to watch what the new laws mean, continue to save and even to invest in your retirement plan.

I’ll continue more in the next article focusing on the federal changes.

Jon Meyer is a local Tax Accountant and Enrolled Agent with over 25 years experience in tax preparation. The office of Jon the “Tax Man Meyer “also offers retirement planning and insurance options. Questions regarding this article can be directed to 928-5200.



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