California Tax News Alert - Conformity Act of 2010

On April 12, 2010, the Governor signed SB 401, the Conformity Act of 2010. The Act changes California's conformity date to the Internal Revenue Code from January 1, 2005, to January 1, 2009. California's conformity results in numerous substantive changes to both the Personal Income Tax Law and the Corporation Tax Law with respect to those areas of preexisting conformity that are subject to changes under federal laws enacted after January 1, 2005.The act is operative for taxable years beginning on or after January 1, 2010, except as noted below.
 
The following are provisions of the new law affecting taxable years beginning prior to January 1, 2010.  We will provide additional updates about changes to the law for taxable years beginning on or after January 1, 2010.
 

Mortgage Forgiveness Debt Relief Extended

The Act allows taxpayers that had all or part of the loan balance on their principal residence forgiven by their lender to exclude the forgiven debt from gross income. The new law applies to discharges of qualified principal residence indebtedness on or after January 1, 2009, and before  January 1, 2013.
 
California law is similar to federal law, however there are notable differences.
 
The California maximum amount of qualified principal residence indebtedness is:
- $800,000 for married or registered domestic partner (RDP), single, head of household, widow/widower.
- $400,000 for married/RDP filing separately.
 
California law limits the maximum debt relief to:
- $500,000 for married or registered domestic partner (RDP), single, head of household, widow/widower)
- $250,000 for married/registered domestic partner (RDP) individual filing separately.
 
The federal provision applies to discharges occurring in 2007 through 2012, and:
- Limits the amount of qualified principal residence indebtedness to $2,000,000 for taxpayers who file as married filing jointly, single, head of household, or widow/widower, and to $1,000,000 for taxpayers who file as married filing separately.
- Does not limit the debt relief amount; it only limits the indebtedness amount used to calculate the debt relief amount.
 
For more information regarding federal mortgage debt relief provisions, please visit the IRS website, www.irs.gov.
 

Taxable years 2007 and 2008

For taxable years 2007 and 2008, the amount of qualified principal residence indebtedness is $800,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $400,000 for taxpayers who file as married/RDP filing separately.
 
Additionally, the debt relief amount is limited to $250,000 for taxpayers who file as married/RDP filing jointly, single, head of household, or widow/widower, and to $125,000 for taxpayers who file as married/RDP filing separately.
 

Income Exclusion of Federal Energy Grants

The Act provides that federal energy grants provided in lieu of federal energy credits are excluded from California gross income and alternative minimum taxable income of individuals and business. The income exclusion is applicable for any taxable year and is thus retroactive in its application.
 

Hokie Spirit Memorial Fund Exclusion

The Act allows a California taxpayer to exclude from gross income any amount received from the Virginia Polytechnic Institute and State University, out of amounts transferred from the Hokie Spirit Memorial Fund established by the Virginia Tech Foundation. The income is excluded from gross income for any taxable year and is thus retroactive in its application.
 

Amended Returns

Taxpayers who have already filed their 2009 Tax Return should file an amended return to exclude from gross income:
- Mortgage debt forgiven (Write Mortgage Debt Relief in red across the top of your amended tax return).
- Federal energy grants (any taxable year)
- Amounts received from Hokie Sprit Memorial Fund (any taxable year)