California safe harbor for 2009 tax year

?C Limit on the Use of Prior Year?s Tax Individuals who are required to make estimated tax payments, and whose 2008 adjusted gross income is more than $150,000 (or $75,000 if married/RDP filing separately), must figure estimated tax based on the lesser of 90% of their tax for 2009 or 110% of their tax for 2008 including AMT. This rule does not apply to farmers or fishermen. Taxpayers with 2009 adjusted gross income equal to or greater than $1,000,000 (or $500,000 if married/RDP filing separately), must figure estimated tax based on their tax for 2009.?

What I don't understand is how people are supposed to base their estimated tax payments on current year income, when many people do not know what that income is until after the end of the year. Many partners cannot know. Many partners (lawyers, for example) don't have their "cut" determined until after the end of the year, and certainly not quarter by quarter.

Ah, but this one is signed, sealed, delivered and chaptered . SB X1 28 was chaptered as Chapter 1, Stats. 2008, on October 1, 2008. It is a done deal.

The bill added Sec. 19136.3 to the Revenue & Taxation Code, which reads as follows:

19136.3. (a) Section 6654(d)(1)(B) of the Internal Revenue Code is modified to additionally provide that clause (ii) shall not apply if the adjusted gross income shown on the return of the individual for the taxable year is equal to or greater than $1 million ($500,000 in the case of a married individual filing a separate return). (b) This section shall apply to taxable years beginning on or after January 1, 2009.

IRC Sec. 6654(d)(1)(B)(ii) is the prior year exception rule. For California purposes, an individual with AGI in excess of $1 million ($500K MFS) must pay in at least 90% of the current year's tax liability in order to avoid a penalty for underpayment of estimated taxes, beginning with tax year 2009.

Katie in San Diego

This is what is making my head spin. If I understand, normally the exception to the safe harbor provision based on 100% of prior year tax liability, is based on the *prior* year AGI. In other words, if your

2008 CA AGI was over $150K, you could have paid 110% of 2008 tax liability to avoid underpayment of estimated tax penalty for 2009.

But the exception to the exception (?) if CA AGI is over $1M, is based on *2009* AGI?? (If your AGI - whichever year -is over $1M, you don't have the safe harbor based on prior year tax liability).

Arrgh.

-Mark Bole

Yes, you're right. If the prior year AGI was over $150K and the current year AGI is less than $1 million, the 110% rule still applies for California. Clause (i) of subsection (b)(1)(C) modifies clause (ii) of subsection (B); but clause (B)(ii) does not apply if current year AGI is $1 million or more. So, no prior year safe harbor for those rich guys .

You understand the purpose of this was to RAISE MONEY, or rather, to accelerate collection. The FTB estimated that elimination of the prior year exception for millionaires would accelerate $900 million into FY 2008-09. If you want to see how the estimates were calculated, you can go here:

link the OP posted). I don't know if anybody ever follows up tosee how accurate these estimates turn out to be in real life. Katie in San Diego

It appears to not be adjusted for inflation, like the 1% surtax (supposedly for "mental health services") on incomes over 1M.

What about this situation. Taxpayer is a resident of another state, say TX. They have a federal AGI of $2.4M. They have some CA source income because they own shares in an S corp of California, or they rent a house in CA, or they sold real estate in CA. Their CA source AGI is 400k. Is the prior year safe harbor exemption available to them? In other words, in the phrase "if the adjusted gross income shown on the return of the individual for the taxable year is equal to or greater than", is AGI the federal or state AGI?

An interesting question. I have looked all over the FTB web site, including the draft 2009 540NR booklet and the draft 2010 form 540ES instructions, and it is not addressed. My guess is that it will be interpreted as AGI from all sources calculated by California's rules (i.e., Schedule CA-540NR, Col. (d)), just as the filing requirements are based on gross income and AGI from all sources. But it certainly doesn't seem to be clear so far.

Katie in San Diego

Here, does AGI refer to one's Federal AGI (Form 540 line 13) or California AGI (Form 540 line 17)? I haven't see this spelled out.

"California AGI" is the logical answer, but sometimes these things are counter-intuitive.