Prices Down Taxes Up
California residents have no respite from the poor economy even though prices of goods go down. They have to pay more taxes. No, it was not the action of the state lawmakers. It was due to deflation.
All this is because of a unique law that was passed in 1982 that links the state income tax rate to inflation by way of the consumer price index. Every year, the California Franchise Tax Board adjusts tax brackets and certain tax credits and deductions in accordance with the CPI. Indexing it this way is so that taxpayers do not have to pay more when their wages go up in line with the CPI. That's not a bad idea, but this year the CPI went down.
So the reverse occurred as the California Consumer Price Index dipped 1.5 % for the period between June 2008 to June 2009; the Franchise Tax Board adjusted tax brackets, credits and deductions downwards for the first time since 1983. But the problem was due to the bad economy, most Californians' salaries did not go up. The result – they pay more taxes because they are now eligible for less tax breaks.
The increase will be modest, nevertheless, depending on whether they itemize their expenses, how many deductions they claim and on their income overall. Franchise Tax Board official released figures show that a taxpayer who is single with no dependants and $51,000 adjusted gross income would pay an additional $41 while a married couple with 2 dependants and $90,000 adjusted gross income would pay $71 more assuming standard deductions are taken. This meager increase would not change much whether you are a rich or poor Californian taxpayer. For example, a married couple with 2 dependants and $1 million in income pay only $79 more.
This increase is in addition to 2 other increases in 2009. First there was a 0.25 percentage point increase in tax rates and secondly a steep decrease in tax credits for dependants. These 2 factors will cost taxpayers more than the adjustment for deflation.
But deflation has also affected other taxes and benefits.
Californian property tax assessments are calculated with reference to changes in the state CPI for 12 months ending the previous October. Through June this year, the index is down 0.7 percent. Proposition 13 limits the annual increase to 2 percent but is silent on what would happen in a deflationary economy. The California Board of Equalization is expected to announce next week whether property taxes will go up next year if the CPI continues to be negative.
For Californians, the new tax rate schedules will be posted at www.ftb.ca.gov.
Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for over a decade. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.
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