Every winter, we sit up nights adding up receipts and organizing slips of paper to prepare to file our taxes, an annual ordeal the IRS once estimated took the average taxpayer 20 hours.
Along came President Trump and Republicans in Congress. They passed tax reform that promised to make the job so easy you could file your taxes on a postcard.
But a funny thing happened on the way to tax simplification: California didn’t go along.
Yes, the new IRS Form 1040 has been redesigned to be a half-page document with just 23 lines. That's down from two pages and 79 lines.
And yes, the new tax law raises the standard deduction to $24,000 for couples and $12,000 for singles, sparing what TurboTax estimates to be 90% of federal taxpayers the hassle of adding up columns of deductions.
But “California has not adopted the changes,” notes Conrad Seales, a certified public accountant in Santa Cruz. “So you may be claiming the enhanced standard deduction for federal purposes and itemizing for California tax.”
That means the task of sifting through those slips of paper has not gone away for many of us in the Golden State.
But much has changed under the new law. Federal tax brackets were cut. For example, the marginal bracket for a single taxpayer earning $50,000 a year will drop from 25% to 22%, and for a married couple earning $200,000 a year from 28% to 24%. The top bracket drops from 39.6% to 37%.
In California, the top marginal bracket for state income taxes remains 13.3%, the highest in the nation.
In a move by Republicans in Washington, D.C., to soak high earners in high-tax states like California and New York (which tend to vote overwhelmingly Democrat), the new law lowers the deduction for state and local taxes from unlimited to $10,000.
That means top earners in California will end up paying a lot more in taxes, even with their lower marginal bracket, because of the lower deductions for state income taxes and property taxes.
But Seales said, “Our general conclusion is that most of our clients will experience little change to their tax liability.”
Many workers have already seen a tax cut in their paychecks, and might end up with a smaller refund or bigger tax bill than they were expecting.
Early last year, the IRS changed the tables on how much federal income tax is withheld from worker paychecks based on how many allowances they claim on the W-4 form they file with employers. The change incorporated the cut in rates, but not the many other changes in tax law.
“As a result, some taxpayers could have paid too little tax during the year,” the IRS said last month.
Among the other changes noted by Seales, mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out in 2018. And there is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
The dream of tax simplification remains elusive for Californians. More than ever, you need to get started on your return early. If you plan to use a tax preparer, get your paperwork to them as early as possible, as they brace for a hectic few weeks.