California Comparisons to Federal
Credit Rates
The CA credit rates generally are the same as the federal: 7.65% without a qualifying child, 34% with one qualifying child, 40% with 2 qualifying children and 45% with three or more. However, CA did not conform to the increase to 15.3% for 2021 for childless taxpayers as included in the American Rescue Plan Act.
Earned Income
The maximum earned income amounts to which the credit rates apply for CA are less than the federal amounts, thus resulting in a lower credit amount for CA. The instructions to Form FTB 3514 include the following as earned income:
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Wages, salaries, tips and other employee compensation subject to CA withholding (Form W-2, box 16). Amounts received for work performed while an inmate in a penal institution and pension or annuity from a nonqualified deferred compensation plan or a nongovernmental IRC Section 457 plan don’t qualify;
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IHSS payments even if nontaxable for federal;
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Disability payments from Form 1099-R with a code 3, if taxpayer hasn’t reached minimum retirement age;
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Clergy wages less their SE tax;
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Nontaxable combat pay (by election);
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Net self-employment income.
Phaseout
CA phases out in a manner like the federal, but at substantially lower AGI’s.
Qualifications
To qualify for the California credit:
•Taxpayer cannot have investment income more than $4,674 for 2024 – this is not the same amount as for the federal EITC;
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Cannot file as married filing separate – Exception: a spouse/RDP can claim the Cal EITC if married, not filing a joint return for the taxable year, and had a qualifying child who lived with the spouse/RDP for more than half of the tax year, and either of the following apply:
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The spouse/RDP lived apart from their spouse/RDP for the last 6 months of the year, or
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The spouse/RDP is legally separated according to state law under a written separation agreement or a decree of separate maintenance and did not live in the same household with their spouse/RDP at the end of the year.,
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Cannot be a dependent of another;
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Have a qualifying child, or if no qualifying child, then be age 18 or older at year’s end (for years before 2018, be age 25 or older, but under the age of 65 at the end of the year); and both the eligible individual and qualifying child must have their principal abode in CA for more than half the year.
FTB Form
Form FTB 3514 is to be completed and attached to the California return when claiming the California EITC. The instructions to the form include EITC Tables and worksheets. The form warns taxpayers “If you claim the EITC even though you know you are not eligible, you may not be allowed to take the credit for up to 10 years.”
Preparer Due Diligence
A $500 penalty, in conformity with federal law except not adjusted for inflation, for failure to be diligent in determining eligibility for the earned income tax credit may be assessed by the state against the paid return preparer. (R&TC Sec 19167(f)) Form FTB 3596, Paid Preparer’s Due Diligence Checklist for California Earned Income Tax Credit, which is similar to the federal Form 8867, is required to be completed and attached to the taxpayer’s California return when the California EITC is claimed.
Underpayment of Estimated Tax
A waiver of the underpayment of estimated tax penalty will apply if the underpayment was attributable to the EITC adjustment factor for the year being less than the adjustment factor for the preceding year and applies to penalties imposed on or after January 1, 2016. This has not been an issue since the adjustment factor has not changed since the inception of the California EITC.
SB 106 also authorizes the FTB to prescribe regulations necessary or appropriate to carry out the purposes of this section, including regulations to prevent improper claims from being filed or improper payments from being made with respect to net earnings from self-employment. The FTB is considering several methods to ensure compliance, including requiring self-employed individuals to have business licenses or other documentation to support a claim of self-employment. Another possibility is to require the business to have been in existence in the prior two years and an expanded Form 3514 CA EITC due diligence form. Still another would require the taxpayer to prove they paid federal SE tax on the income.
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Questionable Claims
According to the November 2017 FTB Tax News, if the FTB suspects the self-employment income on a return claiming the EITC could be fraudulent, they may need additional documentation to verify the business and related income or losses before issuing a refund. To obtain the additional information, the FTB will send a request to the taxpayer within 30 days of the tax return being filed and will need this information back before they can allow the credit and issue the refund. The request will come on form FTB 4502, Additional Documentation Required — Refund Pending. Items that the taxpayer may need to provide include:
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A profit and loss statement or schedule used to determine the business income and expenses reported on the tax return.
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Business bank statements and credit card statements supporting the business income (covering at least 2 months).
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Any certification, license, permit, or registration required for the business (taxicab, cosmetology, food service, contractor, vendor, etc.).
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Any federal Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., if partnership income is reported.
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If the taxpayer has claimed qualifying children, the FTB more than likely will also ask for documentation regarding these individuals.