Note: the process for entering manual entries to adjust income is described on page 108.

Income Not Taxed 

California does not tax certain income items which are taxable on the federal return; these subtractions are listed below by section and line number of CA Schedule CA Part I, where they should appear. As noted above, in TaxSlayer they will appear only on line 8z of Section B.

    • Note: There is a question in TaxSlayer’s California section, on the Other Subtraction 1 [or 2 or 3] page: “Is this entry exempt Native American Income, which may be reported on FTB 3504?”. This question refers to FTB Form 3504, Enrolled Tribal Member Certification. Tribal members are supposed to file this form (separately from their tax return) to document any income that is not taxable by CA. (See FTB Form 3504 Instructions.) Except where noted below, the answer to the question is “No.”
  • [Section A, line 1a] Military income: Active-duty military pay is not included as part of California taxable income unless the military member is domiciled and stationed in California and the pay is earned in California.
    • Tax preparers must have the Military certification to prepare returns involving active duty pay.
    • The CA adjustment must be manually entered; it will post to Section B, line 8z.
    • See FTB Pub 1032, Tax Information for Military Personnel, for other differences between federal and CA tax rules.
  • [A,1a] Clergy housing income –tax provisions peculiar to clergy make the return out-of-scope).
  • [A,1a] Indian tribal members’ income, if the member lives and works on tribal land – see the section W-2 Form - Indian Tribal Income, page 28.
    • The CA adjustment must be manually entered; also answer “Yes” to the question about FTB Form 3504. The adjustment will post to Section B, line 8z.
  • [A,2] Interest paid on municipal bonds issued by the state of California, including counties, cities, and agencies - see the section Interest Income on Form 1099-INT, page 33.
    • TaxSlayer’s page allows an amount of tax-exempt interest to be specified as taxable on the state return; if not so specified, then it is automatically treated as not taxable at the state level. 
  • [A,2] Interest earned from U.S. Government Savings Bonds, U.S. Treasury Bills, and any other bonds of the U.S. or U.S. territories – see page 33.
    • TaxSlayer’s page allows such interest to be specified as not taxable by California; this should be done.
  • [A,3] Dividends from CA municipal bond funds - see the Line 3 - Dividends, page 35.
    • The amount to be taxable, if any, by CA can be specified on the TaxSlayer page for 1099-DIV information. 
  • [A,3] Dividends from U.S. government bond funds (Form 1040, Line 3) – see page 35.
    • TaxSlayer provides a line to enter the adjustment on the TaxSlayer page for 1099-DIV information.
  • [A,5] Tier II Railroad Retirement benefits (1040 Line 5) - see page 45.
    • TaxSlayer automatically makes the adjustment.
  • [A,6] Social Security benefits (U.S. only) (1040 Line 6) - see page 46.
    • TaxSlayer automatically makes the adjustment. If Canadian or German social security is entered, a manual adjustment is required, because these payments are taxable by California – see page 49.
  • [A,6] Tier 1 Railroad Retirement benefits (1040 Line 6) - see page 48.
    • TaxSlayer automatically makes the adjustment (this is Social Security equivalent).
  • [10] Any state tax refunds (1040 Schedule 1 Line 1) - see page 36.
    • TaxSlayer automatically makes the adjustment.
  • [19] Unemployment compensation paid by CA or another state (Schedule 1 Line 7) - see page 65.
    • TaxSlayer automatically makes the adjustment.
  • [21] Indian tribal members’ benefits, if the member lives on his or her tribal land – see Indian Tribal Income on  page 56.
    • The CA adjustment must be manually entered; also answer “Yes” to the question about FTB Form 3504.
  • [21] Lottery winnings in California (Schedule 1 Line 8b) – see the section Gambling Winnings (Form W-2G), which begins on page 66 [other states’ lottery winnings are taxable by CA].
    • The CA adjustment must be manually entered. 
  • [21] Government-agency authorized reward from a crime hotline (1040 Schedule 1 Line 8z) - see FTB Pub 1001 for details.
    • The CA adjustment must be manually entered. 
  • [21] HSA distribution in excess of qualified medical expenses (1040 Schedule 1 Line 8f) – see Health Savings Accounts in CA, page 113.
    • The CA adjustment must be manually entered. 

Additional Business Expenses

California allows certain business-related expenses not allowed on the federal Schedule A to be added to the calculation of net profit from self-employment. These expenses reduce California taxable income, and are entered on CA Schedule CA Part I line 12.

  • Work-related educational expenses for which the Lifetime Learning Credit was claimed
    • If the taxpayer has a Schedule C on the return, and the educational expenses are related to that business, and the business has a net profit, then those work-related educational expenses can be used to reduce income on the CA return [the reduction is the lesser of the educational expenses or the net profit].
      • The adjustment must be manually entered.
  • Entertainment expenses which are business-related
    • California does not conform to the elimination of entertainment expenses as an allowable business expense. As of the publication date of this manual, TaxSlayer does not separate meal expenses from entertainment expenses, on the Schedule C – Expenses page, so it is necessary to handle entertainment expenses as a manual adjustment.

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