Apr 24 2012

California Backs Off on Property Tax Deduction Limits

Does State Tax Change Mean Refunds for Piedmonters?

On Friday, April 13, 2012,  the State Franchise Tax Board retracted its position that advised California taxpayers to limit their property tax deductions to “ad-valorem” property taxes, with only limited exceptions.  For Piedmonters who followed this State guidance, this meant not deducting school parcel taxes, which average over $3,000 per parcel in Piedmont. 

Taxpayers who did not deduct school or other parcel taxes on their 2011 California state income tax forms are now being advised by tax professionals to consider amending their returns to claim the deduction.

The Franchise Tax Board (FTB) took down the property tax deduction guidance from its Web site, and posted new information only 4 days before this year’s April 17th filing deadline.

The FTB’s attributes its unexpected change to a February 6 Opinion Letter from the IRS.  The IRS letter has confirmed that non-ad valorem real property taxes can be deductible in some cases under federal law.  (California law follows Federal law on this deduction.)  The IRS stated:

“Assessments on real property owners, based other than on the assessed value of the property, may be deductible if they are levied for the general public welfare by a proper taxing authority at a like rate on owners of all properties in the taxing authority’s jurisdiction, and if the assessments are not for local benefits (unless for maintenance or interest charges).”

What About Piedmont?

The IRS definition would confirm the deductibility of Piedmont school parcel taxes, which levy more for larger parcels, if they are considered “at a like rate” for all property owners.  “Like rate” was not defined in the IRS letter.  The issue of whether Piedmont’s school parcel tax would qualify as “at a like rate” was raised at the April 17 meeting of Piedmont’s new Budget and Finance Advisory Committee.

(Many school parcel taxes in other cities are imposed at a flat rate per parcel, rather than varying by parcel size.  These levies would clearly be deductible pursuant to the IRS information letter.)

Piedmont’s private undergrounding district assessments continue to be non-deductible (as a local benefit which tends to improve property).

Piedmont’s sewer and city general parcel tax are levied based on parcel size.  They continue to be “arguably” deductible under the exception for repairs and maintenance (see PCA article), but now they may satisfy the general rule for deductibility, as well, if considered “at a like rate”.

What Tax Professionals Are Saying

The California Taxpayers Association noted in a report, “Since the personal income tax filing deadline is Tuesday, taxpayers [did] not have much time to correct their returns if they followed the FTB’s advice and did not deduct school parcel taxes and eligible Mello-Roos assessments. Amended returns should be filed if the originals already have been filed . . . ”

See also an article in the San Francisco Chronicle which quotes Kip Dellinger, a senior tax partner at Cooper Moss Resnick Klein, as saying taxpayer “should make a ‘good faith’ effort to determine if the taxes are deductible and if it seems they are, deduct them. If they have already filed their 2011 taxes and did not deduct taxes which they now believe are deductible, they should file an amended return and claim them.”

The IRS will be recommending “appropriate revisions to the IRS forms and publications on the subject.”   After federal revisions are completed, the FTB will provide revised State forms and instructions consistent with the IRS revisions.  (Under current law, the deductibility of real property taxes is generally a matter of federal law to which California conforms.)

The FTB explained the late notice to taxpayers by stating the FTB did not receive the February 6 IRS letter, and instead discovered its existence April 5 through a news service for tax professionals.  The FTB website was changed on Friday, April 13.



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