California Conforms to Federal Military Relief Acts

New legislation signed by California Governor Arnold Schwarzenegger conforms California personal income and corporation franchise (income) tax law to changes made by the federal Military Family Tax Relief Act of 2003 (P.L. 108-121) and the Servicemembers' Civil Relief Act (P.L. 108-189). The changes are effective retroactively for California purposes for the same periods as under federal law, as noted below.

Military personnel stationed in California who are not California residents will benefit from the signing of SB 615.

For personal income tax purposes, the legislation does the following:

1. Increases the excludable amount of military death gratuity benefits from $6,000 to $12,000 (effective with respect to deaths occurring after September 10, 2001).

2. Allows an exclusion for certain income and death benefits of astronauts who have lost their lives on a space mission (effective for qualified individuals whose lives are lost after December 31, 2002).

3. Allows an exclusion for amounts received by certain employees and members of the armed forces under the federal Department of Defense Homeowners Assistance Program, which is designed to offset the adverse effects on housing values that result from a military base realignment or foreclosure (effective for payments made after November 11, 2003).

4. Clarifies that dependent care assistance provided under a dependent care assistance program for a member of the uniformed services by reason of the member's status or service as a member of the uniformed services is excludable from gross income (effective for taxable years beginning after 2002).

5. Allows an above-the-line deduction for overnight transportation, meals, and lodging expenses of National Guard and Reserve members who must travel away from home more than 100 miles and who must stay overnight to attend National Guard and Reserve meetings (effective with respect to amounts paid or incurred in taxable years beginning after 2002).

6. Allows the five-year test period for ownership and use of a residence to be suspended for up to 10 years in excluding gain from the sale or exchange of a principal residence, if during the period of the suspension the individual or the individual's spouse is serving on qualified official extended duty in the uniformed services or the Foreign Service of the United States (effective for sales or exchanges made after May 6, 1997).

7. Expands the use of Coverdell education savings accounts and qualified tuition programs by allowing withdrawals, without an additional 2.5% California tax (10% for federal purposes) on the earnings portion of the withdrawals, for beneficiaries attending specified military academies (effective for taxable years beginning after 2002).

8. Makes provisions suspending periods of time for persons in combat zones to file returns, pay tax, and perform certain other acts, applicable to persons deployed outside the United States away from their permanent duty station while participating in a contingency operation (applicable to any period for performing an act that has not expired before November 11, 2003).

SB 615 conforms the California Revenue and Taxation Code to the tax changes in federal H.R. 100, the Servicemembers' Civil Relief Act. The act, signed into federal law last December, prohibits any state from using the "California method," which includes military income in computing total income for state tax computations. Although California does not tax the military pay of servicemembers living outside of California, the total income calculation determines the state tax bracket to apply to non-military California income.

A military taxpayer living in a state other than California, who earns California-source non-military income from a part-time job for example, will most likely pay a lower state tax under this new law. It may also reduce the complexity of computing state income taxes by eliminating the total income-from-all-sources calculation. This change affects the tax rate, credit percentage, and deduction percentage.

Servicemembers not domiciled in California who have not yet filed their 2003 California tax returns should compute their state tax amount by eliminating their military income from the California tax return (excluded from total income on Schedule CA, Column D). The FTB requires refund claims for older years and for those who already filed for 2003 using prior law to be submitted on the California Form 540X, Amended Individual Income Tax Return. The FTB advises taxpayers to write, "H.R. 100" in red at the top of the amended return, and to include a daytime phone number.

Because the State's Constitution bars California from automatically adopting federal laws, California had to enact a state law to conform to the federal changes. The Federal Act is largely a restatement and modernization of the Soldiers' and Sailors' Civil Relief Act of 1940.

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