California Differences - Miscellaneous Deductions
California generally conforms to the federal rules for the types of expenses classified as miscellaneous deductions. However, significantly, California has not conformed to the TCJA suspension of Tier 2 deductions for years 2018-2025. Therefore, some taxpayers may be able to deduct their employee business expenses or other Tier 2 expenses for state purposes but not for federal. The FTB has modified Schedule CA to accommodate the expanded list of items that differ from the federal Schedule A. Other miscellaneous deduction differences include:
-
The federal estate tax in respect of a decedent is not deductible for California.
-
The amount of investment expenses could be different for California if the amount of non-taxable income against which the expenses are incurred is different for federal and California. This is illustrated in the following example.
Example – Allocating expenses – Joe Lewis has ABC Financial manage his investment portfolio and ABC charges Joe an annual management fee of one half of one percent of his portfolio value. For 2021 that management fee was $3,700. Joe’s portfolio produced a total of $35,000 of taxable and non-taxable income for the year. Of that $35,000, $15,000 was from tax free municipal bonds and the balance, $20,000, was from taxable interest and dividends. Therefore, for federal purposes, if the TCJA suspension of the Tier 2 deductions didn’t apply, only $2,114 ($3,700 x ($20,000/35,000)) of the management fee would be deductible. But since it does apply, none of the management fee is deductible. Of the $15,000 muni bond interest, $10,000 was derived from state of California obligations and $5,000 from other states’ obligations. California taxes the $5,000 of interest from out-of-state obligations, so the associated investment expense is deductible, and $2,643 ($3,700 x ($25,000/35,000)) of the management fee is deductible for California and will be an adjustment on Sch CA.
-