This spring, the state government says tax relief is coming to Californians.
Governor Schwarzenegger signed Senator Lois Wolk’s (D-Davis) measure SB 401 on April 12. The law offers tax relief to California homeowners engaged in short sales or loan modifications and exempts federal renewable energy grants from taxation.
Without the law, debt forgiven on many home loans would be considered income and subject to state income tax. Under the new law, taxpayers can exclude up to $500,000 in income from mortgage debt forgiveness resulting from a short sale or loan modification on a recourse loan.
SB 401 also accelerates solar and wind energy projects by preventing state taxation of federal renewable energy production tax credits. Congress converted the tax credits to cash grants in 2009 as part of the American Recovery and Reinvestment Act – simultaneously exempting the grants from federal taxation.
The new law also makes numerous updates, conforming state law to federal changes since 2005, making state and federal law simpler and more consistent.
The debt relief provisions take effect immediately and retroactively for the 2009 tax year and through 2012.
” [I] applaud Senator Lois Wolk, Senator Ron Calderon, Assemblymember V. Manuel Pérez and Assemblymember Anthony Portantino for their work,” Schwarzenegger said in a press release. “It is important that we continue to provide all possible assistance to homeowners who were negatively impacted by the mortgage crisis, and this bill will provide them with necessary mortgage debt relief and protect them from thousands of dollars in unfair taxes.”
The California Taxpayers’ Association supported the bill.
Vice President of Communications and Research David Kline said in addition to the assistance for struggling homeowners who now will not have to pay income tax on income they never received, SB 401 will reduce tax paperwork and reduce government waste by conforming state law to federal tax laws previously enacted by Congress.
Lack of conformity created a huge weight for taxpayers in California, including many small and large businesses, who are overburdened by regulation and taxation. A lack of conformity merely perpetuates the perception that California is hostile to business, Kline said.
Additionally, with California in the midst of a budget crisis, Kline said conformity is one tax policy that will not drain the state’s financial reserves. Rather, it will save money for both California and its taxpayers.
Kline said the bill’s one major problem is it does not include provisions to conform California law with the federal law relating to the deductibility (from personal income tax) of contributions made to health savings accounts. There are separate bills that seek to make this change, but they have not been successful.
Experts also believe the bill should benefit college students looking to live and work in California after graduation.
“The bill improves California’s business climate and thus improves the availability of jobs for college graduates,” Kline said. “The lack of tax conformity had been a major complaint of many large California employers and this was a factor when businesses were deciding whether to locate or expand in California or in other states.”
Although Senator Wolk said there is nothing that specifically affects college students, the increase in the “kiddie-age” tax from age 14 to 24 will allow children to not have to use their parents’ tax rate until age 24 if their child earns a certain amount of money.
Denise Azimi, communications director of the Franchise Tax Board, said she agreed the law will help college students, as the mortgage relief will allow students’ parents not to have to pay a state tax bill on top of college tuition.
For more information on the law visit ftb.ca.gov/aboutFTB/newsroom/Mortgage_Debt_Relief_Law.shtml.
ANGELA SWARTZ can be reached firstname.lastname@example.org.