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Tax Newsletter
July 2002

Zip Code Change - Our Zip Code has changed to 94597. Please update your records to reflect this change.

California Conformity

On April 26th and May 9th, Governor Davis signed three pieces of legislation that bring California into conformity with many of the provisions of Internal Revenue Code as it read on January 1, 2001. Thus, California has adopted many of the changes introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The provisions of the bills apply to taxable years beginning in 2002.

As of this date, however, California has not conformed to the provisions of the Job Creation and Worker Assistance Act of 2002 which was enacted in 2002 to provide certain incentives to businesses.

1. Increased Limits on Retirement Contributions

As a result of the conforming legislation, California has now adopted the increased limits on retirement plan contributions reflected in EGTTRA. For example, the annual limit on employee contributions to 401(k) plans is $11,000 in 2002 for both federal and California purposes. The annual contribution limit for IRAs and Roth IRAs increases to $3,000 for years 2002 through 2004.

2. Alternative minimum tax treatment of charitable contributions of appreciated property

For federal tax purposes, contributions of appreciated property to public charities are generally deductible at full fair market value for both regular and alternative minimum tax purposes. Prior to conforming legislation, California treated the appreciation element as a tax preference for alternative minimum tax purposes. Thus, there was the possibility that individuals subject to California AMT would not receive the full benefit of their charitable contributions.

As a result of conformity legislation, for contributions of appreciated property after January 1, 2002, the appreciation element is not a tax preference item for either federal or state purposes.

3. Contributions of appreciated stock to private foundations

Federal law permits taxpayers to deduct the fair market value of appreciated publicly traded stock that is contributed to a private foundation. For California purposes, the contribution has been limited to cost basis.

As a result of the conformity legislation, California now allows for a full fair market value deduction on the contribution of publicly traded stock to a private foundation. For both federal and California purposes, however, contributions of non-publicly traded stock are limited to cost basis.

4. Estimated tax payments of individuals

As a result of the conforming legislation, California has now adopted increased thresholds for estimated taxes. The new provisions increase the required estimated tax payments from 80 percent to 90 percent of the current year tax, and requires AMT to be included in the computation of the estimated tax payments. In addition, for both federal and California purposes, estimated tax payments must equal 112% of the prior year tax liability to constitute a “protected” estimate.

5. Qualified Tuition Plans

Federal law permits taxpayers to treat qualified distributions from qualified tuition plans as tax-free. Qualified distributions are distributions made during the years 2002 through 2010 that are used for an individual’s qualified education expenses (postsecondary education expenses).

Previously, California treated qualified distributions to the student as taxable. As a result of the conformity legislation, California now treats qualified distributions from qualified tuition plans as tax-free.

6. Partial Pension Conformity for Public-Sector Employees

The conformity legislation includes a number of provisions to bring California pension provisions for governmental employees in line with federal provisions. For example, California now conforms to federal provisions that allow public employees to roll over IRC §§403(b) and 457 accounts into another eligible retirement account.

The bills also contain provisions intended to prevent the potential disqualification of plans for state tax purposes in the event of changes in federal law in the future.

7. Bonus Depreciation – California Does NOT Conform

As stated above, California has not conformed to the provisions of the Job Creation and Worker Assistance Act of 2002, which was enacted in 2002 to provide certain incentives to businesses. The most notable Federal provision to which California has not conformed is that which allows a special 30% depreciation allowance for property acquired after September 10, 2001 and before September 11, 2004.

Please feel free to contact us should you have any questions regarding the foregoing.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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