California Tax Payment Due Dates – CA Is Acting Like An Abusive Credit Card Company

By Ron Cohen, CPA, MST
Partner
Greenstein, Rogoff, Olsen & Co., LLP

The California Legislature and Governor Schwarzenegger enacted a new rule, for 2009 and thereafter, for taxpayers with Adjusted Gross Income (“AGI”) over $1 million per year.

In the past, for at least three decades I can remember, a taxpayer avoided any penalty for underpaying tax during the year by paying in at least 90% of the current year tax or 100% of the prior year tax. The rule was later changed for taxpayers with over $150,000 of AGI to pay in at least 110% of the prior year tax. All this is reasonable because it is so difficult to determine what your full-year tax will be during current the year. Therefore, you could always rely on paying in an amount based on the prior year to avoid penalties.

However, an endless budget crisis has hit California. The number-crunchers in Sacramento got a half-baked idea (I snidely paraphrase):

Let’s have people with over $1M of AGI always have to pay-in 90% of the current year tax. They can’t use the prior year rule at all. That will accelerate tax payments to the state in situations where a taxpayer is more successful than the prior year and anticipates AGI over $1M. These people would have paid-in all their tax by April 15^th of the following year anyway (or face long-standing penalty rules), but now we accelerate the cash-flow to CA for amounts due 4/15, 6/15, 9/15 during the current year, and 1/15 of the following year, for estimated tax payments and/or additional withholding taxes! If they don’t pay-in on time based on the new rules, we collect more penalties in addition to the tax. Brilliant!

Sound familiar? That’s just what the credit card companies do. Accelerate due dates and charge penalties. That’s right, our CA government is acting like an abusive credit card company.

The similar federal rule did not change, so these taxpayers have to make a separate computation for CA tax purposes versus the I.R.S. This is more dreaded “non-conformity” that drives my clients (and their humble CPA) nuts…although I appreciate the extra work for our practice!

The 100% or 110% rule has been in place for many decades. Is CA in so much trouble that they have to enact an inconsistent accounting gimmick?

Of course they argue that the rule will only apply to folks with taxable incomes over $1M. Those people have the accountants or software to figure this all out 4 times a year to avoid penalties. There aren’t enough folks with over $1M of AGI to make any difference at election time, so “no worries” about being re-elected.

These same legislators, I’m sure, have never done a tax return projection during the year, so they have no idea of the computational complexity involved for people at the $1M income level. Trust me on this point, as we do this type of work all year-round.

This smirks of “class warfare”, but putting politics aside, it is an uneven administrative burden on our most successful group of taxpayers. Perhaps we are trying to encourage them to move and take their businesses to Nevada.

I often wish Legislators were required to calculate taxes – trapped in a room until they get the right answer -- using a 10-Key calculator, a pencil and paper, before they are allowed to impose rules and regulations on the rest of us. That would sensitize them to the compliance burden their rules create.

Let us not forget, the rich have rights, also. They are entitled to a fair and CONSISTENT system with a reasonable level of administrative burden.

Further, starting in 2010, the rich (as defined in the link immediately below) are not even allowed to mail-in a check to pay their CA taxes. If they do send in a check, paying all their taxes, on time, with a properly filled-out form, they STILL face a penalty. The new rule requires them to electronically pay using the FTBs electronic system. See: http://www.ftb.ca.gov/individuals/Mandatory_e-pay.shtml Here again, this accelerates cash-flow to our desperate state by a few days, as the electronic payments avoid mailing time and clear the banking system almost immediately.

Further, in addition, you don’t even get to pay your taxes in evenly during year. Another change effective for 2009 for EVERYONE making estimated tax payments is the following:

“Installment Payments – Installments due for each taxable year beginning on or after January 1, 2009 shall be 30% percent of the required annual payment for the 1st and 2nd required installments and 20% percent of the required annual payment for the 3rd and 4th required installments.”

It still equals 100% in total, so it’s just a numbers game to “front-end” the payments… just because you didn’t have enough on your mind to think about.

Our federal and state tax system are based on a "pay-as-you-go" system. Therefore, it is logical to pay-in taxes evenly over four calendar quarters in equal amounts. Isn't it unconstitutional to ask taxpayers to pay-in 30% a calendar quarter when they have only earned 25% of their annual income in that quarter?? Isn't the extra 5% a "confiscation" of tax on yet-unearned income? Isn't that un-American and something a dictator or uncaring King would do? Isn't it?

I understand the "loan" is paid back when the 3rd and 4th quarter payments are only 20% each (Less than the normal 25%)...but why is our CA government allowed to front-end the tax in the first place? Is this another example of our government doing things, not because they are right, but because they can get away with it?

Another “Boston Tea Party”, anyone?... this time in the Sacramento River?

Here’s the rules on the estimated tax payments:

http://www.ftb.ca.gov/forms/2009/09_540esins.pdf

You will find at this link:

“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.”

For as long as I can remember, taxpayers making estimated tax payments paid in their taxes evenly over 4 quarters on 4/15, 6/15, 9/15, and 1/15 of the following year, at the rate of 25% for each payment of the required “safe” full-year estimated tax amount. There are exceptions, but the vast majority of people follow this rule.

For 2009, the clever people in Sacramento accelerated their cash flow by accelerating the % of the full-year tax due in 4 payments in chronological order as: 30%, 30%, 20%, 20% = 100% for 2009.

Now, they accelerated it again for 2010 in the recent budget bill. It will be 30%, 40%, 0%, 30% = 100%

“Revenue receipts accelerated. The first tax bill (A17, 4th S.S.) will increase tax withholding schedules on wages and salaries by 10% starting with wages paid after October 31, 2009; and will require individual and corporate taxpayers to accelerate estimated payments by remitting 30% of their estimated annual income or corporate tax liabilities in April, 40 % in June, no payment in September, and 30% in December (compared to existing law requirements of 30% each in April and June)— starting with the 2010 taxable year.”

Comments:

If you earn your income evenly throughout the year, I’m flabbergasted how it is legal to require the accelerated payment of tax prior to when a taxpayer has earned the income! At least they made the 3rd payment in September = to zero as some form of “rough justice” to even it out. Note, this rule impacts many small businesses and the self-employed as well as investors with large interest and dividend income.

More complexity and confusion in the tax law. The I.R.S. federal law did not adopt this (thanks for small favors!), so this is more I.R.S/California Franchise Tax Board NON-conformity to worry about.

No surprise, this law change is called an “accounting gimmick” by the press to balance the budget from the accelerated cash flow.

AB17, Sec. 19025 for the actual bill. http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx4_17_bill_20090723_amended_sen_v98.pdf

I can always be reached for questions or comments at (510) 797-8661 x237.