In 2017, the Tax Cuts and Jobs Act (TCJA) simplified tax filing by almost twofold, as almost 3 million Americans gained access to the standard deduction. To most, an itemization of their federal filing ceased to have any sense. However, in California, the story has not ended yet.
California is not complying with all the federal TCJA rules. This forms a special, and in many cases, wonderful situation in which you could assert large itemized deductions on your state filing that you could no longer assert on your federal filing.
This is one of the reasons why an understanding of this divergence can save you the maximum amount of your California tax bill. When you have a professional tax person (like an EDD tax lawyer), it will be easy for you to navigate.
Check the Golden Deductions of Golden State
As the federal government tightened its belt, California continued to have several of its pre-TCJA deduction rules in place. These are the most influential places where California is more liberal.
SALT Cap
Federal: Federal deduction of state and local taxes (SALT) of income, sales, and property taxes is limited to $10,000.
California: No cap on SALT. You are allowed to subtract the total amount of your state income tax and the total amount of your property tax bill on your California filing. This is an enormous advantage to homeowners and the high-earners of a high-tax state.
- What about Mortgage Interest?
Federal: The interest that you deduct on acquisition debt (the loan you took to purchase, build, or substantially improve your home) is limited to one point seven hundred and fifty thousand dollars. Interest on the home equity loans can only be deductible provided the money was used for home improvement.
1. Learn about Medical Expenses
Federal: You are only allowed to deduct medical expenses that are more than 7.5 percent of your Adjusted Gross Income (AGI).
California: The threshold is even less. You are able to claim expenses in an amount greater than 7.5 percent of your federal AGI. This simplifies the process of qualification of Californians who have large medical bills to receive this deduction.
2. Casualty Losses
Federal: Loss deductions on personal casualty and theft were mostly abolished, with the exception of those that occurred in a disaster area proclaimed by the Federal Government.
California: The losses that cannot be insured against and that arise due to a sudden, unexpected, or unusual happening, which includes a wildfire, flood, or theft, are deductible. It is a crucial inference for most people handling the natural disasters in California.
Professional Tips for Californian Tax Filers
1. Prepare all the Calculation Methods
Be Ready to make Two Calculations. You will undoubtedly fill out your federal filing before you fill out the state filing. Your federal AGI is where your California return will begin, but this is where things quite differ. When you are dealing with digital income better to hire an expert (like a crypto tax lawyer).
2. Don’t Assume
Don't Sell. Itemizing is Dead. You will have to run the numbers on California, even though you claim the standard deduction on your federal return. The unlimited SALT deduction by itself usually causes itemizing your state return to be the decisive choice.
3. Meticulous Recording
Because you are following the deductions the federal government disregards, you must have good records of property tax, mortgage interest statements (Form 1098), and medical expenses.
It takes attention to detail, but the reward would be well deserved for navigating the two-tiered system. By knowing about the special deductions of California, you will be able to leave nothing on the table.
