Posted on 02/04/2018 6:29:11 AM PST by Kaslin
If you were worried that the wealthiest California taxpayers were paying too much in Federal taxes, the Democratic dominated California State Senate apparently has been equally concerned and has proposed a "tax" law change that would allow California taxpayers to deduct 85% of their California state taxes as "contributions" in their federal income tax returns.
In short form, the proposal is for California taxpayers to pay an amount equal to their California taxes to a non-profit "charity" that will in turn donate the money to the state. Of course, the California Senate has found a couple of tax professors to bless the plan and apparently the California Senate believes that neither Congress nor the Internal Revenue Service will so much as acknowledge any disagreement with this plan.
Apparently the California Senate has been convinced that Shakespeare is incorrect and that "A Rose By Any Other Name" is no longer a useful expression for analyzing income tax planning ideas. Of course a quick Google search will find literally hundreds of Tax Court cases that have come to other conclusions. With all due respect to the professors who have blessed this legislation, this is the kind of idea that if proposed to me by a prospective client, I would decide that this was a client I could do without. A "cute" idea generally is not viewed favorably in the Tax Court.
The problems with the proposal are legion: (1) The Internal Revenue Service will undoubtedly contest and propose a corrected tax plus penalties on every tax return that includes a deduction for a donation to the California Excellence Fund (2) The Internal Revenue Service will undoubtedly propose penalties on any tax return preparer that signs such a tax return, (3) It is highly likely that the Administration will refuse to work with California on virtually any issue where federal help is needed, (4) There is not one dollar of benefit to the State of California, (5) the legislation does not address the reality that if passed, California 2017 estimated tax payments will disappear as the donations to the California Excellence Fund are all made on December 31th, thereby forcing California to borrow funds to keep California's government open, (6) anyone who has spent a few minutes reviewing historical California tax data knows that virtually the only beneficiaries of this plan will be taxpayers showing federal adjusted gross income exceeding $150,000 and (7) the state would have to administer the plan, which would not be inexpensive. (it is important to note here that many taxpayers with taxable income approaching $150,000 were already losing their tax deductions as the result of the alternative minimum tax.)
The California Senate's hatred of President Trump is so overwhelming that they have determined to undermine the federal income tax system by proposing that wealthy California taxpayers take bogus deductions on their individual tax returns.
There is a claim being made that this legislation will save "middle income taxpayers" money. This would be the case only rarely because the increase in the federal standard deduction from $12,600 to $24,000 is so significant. In 2015, the data prepared by the California Franchise Tax Board shows that until adjusted gross income for federal purposes exceeds $150,000, the average qualified deductions are around $21,000.
Putting the $24,000 standard deduction into a little perspective, a married California taxpayer with $100,000 in California taxable income pays $4115 in California income taxes. 85% of 4115 is $3500. So, before that taxpayer will become a taxpayer who itemizes their deductions, their home interest, real estate taxes, and contributions must equal or exceed $20,500.
But the ultra-wealthy win big.
In 2015, 8051 California taxpayers filed tax returns with individual adjusted gross income of over $5 million. These folks combined to have taxable income of $132 billion. and paid just short of $17 billion of state and local taxes. The California Senate wants to award these folks a deduction of over $14 billion against their federal income taxes.
One needs to think about all the issues facing California at the moment. The California Senate is focused not on poverty, not on the homeless, not on education, and not on water resources. The California Senate is focused like a laser on trying to create a deduction to save 8051 multi-multi-multi millionaires billions of dollars on their federal income taxes.
And who would ultimately end up paying these additional federal taxes? Probably everyone else!
The federal tax bill has already reduced federal taxes on taxable income from most businesses from 39.6% to about 29%. Are we kidding here? The federal taxes on qualified business income have been reduced by more than 25% and the California legislature, with no benefit to other California taxpayers, wants to reduce wealthy folks' taxes even more. If the California Senate was not working almost solely to favor the ultra-wealthy, there would be a limit of say, $10,000 in deductible donation to the California Excellence Fund. That way, all of the benefit would not fall to the ultra wealthy.
And why would the California legislature do this? Bottom line: they hate the President of the United States and if the only thing they can think to do to show that hatred is to benefit the rich, so be it. And maybe those ultra wealthy taxpayers will make significant political donations to anyone favoring this plan who might be planning to run for California elective office in 2018.
Why start a new charity? California could just route all donations through the Clinton Foundation. That way Cali could revenue share with Haiti.........
I think this will fail. If they are getting credit against their taxes it’s not a charitable contribution.
I left California decades ago. Leaving it did wonders for my health. It was hell then just as it appears to be hell now.
And why would the California legislature do this? Bottom line: they hate the President of the United States and if the only thing they can think to do to show that hatred is to benefit the rich, so be it.
When we were in the Beverly hills area last summer for our daughter’s wedding, we saw a beautiful mansion and checked zillo. It was worth something like $45 million and the annual taxes were several hundred thousand. All tax deductible. Not any more.
My daughter and new husband left Burbank for a suburb of Phoenix late last year. The wages are the same, but they bought a new house for $235k that is downright palacial compared to what $650k would have gotten them where they used to live.
My father’s side of the family still mostly live in the Napa area though.
That’s exactly why they’re doing it. Dem chikins, dey comin home ta ROOST!
For decades we’ve heard how increased rates or loss of deductions doesn’t affect economic activity. Such a blatant lie to be laughable. And this is just further proof as high tax blue areas continue to bleed productive taxpayers to red ones.
What goes around . . .
All anyone has to do is just assume (and rightly so) that everything they say is a lie or technically incorrect. Soon, they will have no other option but to finish their mass suicide(s).
It’s up to the IRS to grant Tax exempt status to any fund that California sets up. I suspect that they wouldn’t.
California will be competing with Illinois for the title: First S**t-hole State.
So we are talking about the state taxes and not federal taxes, correct? Or does this indirectly affect federal taxes?
If CA wants to be stupid and give rich liberals a huge tax refund at the expense of the state, then let them bankrupt themselves. We will all be watching with smiles as CA sinks into the sea (figuratively, of course).
Great article and very useful data. I would send this to all of my California friends who still support Jerry Clown, but they would just say that it is GOP propaganda. The socialist sheep in California accept anything the state government dictates to them.
I still have not seen anyone make the most basic point about this proposes scheme.
The definition of charity for the purpose of tax deductions is controlled by the IRS code. To be deductible the charity’s tax deductible status has to be approved by the IRS or perhaps some other federal agency.
For California to claim they’re going to create a “charity” so that donors can deduct the donation from federal income tax is like the ACLU claiming that if you give them a donation you will be put in a state of grace so you can take communion on Sunday. It just ain’t their line of work.
Also there is the small manner of the California Excellence Fund actually transferring the money to the state of California...as they claim they would. Sure, initially most of the money would make it to CA, but as time dragged on the CA Excellence Fund is certainly guaranteed to become a slush fund of corruption.....with 30-50% of the money somehow not making it to Sacramento because of “unexpected other priorities”. This idea is so bad, it’s laughable.
In short, Trump found away to give tax relief to working people while actually increasing the taxes of the rich.....but, generally only the rich in Blue states. Obviously, this isn’t exactly correct, but it’s generally correct. Trump has done a classic Alynski maneuver.....make your opponents live up to their own standards.
The Dems made a huge mistake by not insisting they be part of the tax bill negotiations., They incorrectly calculated that taking part in the negotiations would only lend legitimacy to the President and they would be better off not providing Trump that legitimacy. Fair enough, but ultimately, this meant the Dems concerns and the concerns of their constituents were not represented in the final product. The Dems have only themselves to blame for the problems CA is facing.
Politics is so ugly right now. I really think the Dems started to go off the rails when they selected Clinton back in 1992 and it got even worse when they got gbehind Obama in 2008. There are many good Democrats who we nay disagree with, but are otherwise very honorable people. Clinton and Obama on the other hand, are corrupt to their souls. I’ll never forgive Obama for using the IRS against his opponents...absolutely terible. Now, we find out Obama and the Clinton’s corrupted the FBI and DOJ as well. Awful!!!
Don’t know how to put this to the rank and file Dems but to say.... ‘You chose....poorly.”
CA is proposing to fraudulently make SALT taxes fully deductible at the federal level. This is to defraud the rest of us.
It sure is funny to see an ENTIRE STATE GOVERNMENT sounding like one of those late-night types who tells everyone that he just discovered this ‘flaw’ in the tax code that makes the federal income tax unconstitutional and illegal - and therefore, if you buy his books/DVDs, you too will no longer have to pay federal income tax.
and if taxpayers refuse to donate??? why they will goto jail of course
The definition of charity for the purpose of tax deductions is controlled by the IRS code. To be deductible the charity’s tax deductible status has to be approved by the IRS or perhaps some other federal agency.Apparently you didn't see the part where (tax) professors (whatever that means) approved the plan.< /sarcasm >
Of course, the California Senate has found a couple of tax professors to bless the plan and apparently the California Senate believes that neither Congress nor the Internal Revenue Service will so much as acknowledge any disagreement with this plan.
Do the same with state income tax.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.