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California parents beware: Those little tax deductions running around the house are now worth less (in a strictly financial sense, of course).
To help balance its budget, California has reduced the state tax credit for dependents.
The change will increase a family's California taxes for 2009 by about $210 per dependent compared with 2008.
A family with one dependent that normally gets a state-tax refund will get back $210 less when they file their 2009 return next year. A family that normally owes money will have to pay $210 more. Multiply that by two or more dependents, and it really adds up.
This may come as a shock to parents who have been too busy shuttling between soccer games and viola lessons to keep up with the state's budget fiasco. The Franchise Tax Board is trying to get the word out, so families can prepare.
At issue is the exemption you get for each person listed on your tax return. The credit reduces your tax bill dollar for dollar. (The exemption credit phases out for couples with more than roughly $326,400 in adjusted gross income and singles with more than $163,200. This column applies to those under the limit.)
The change essentially takes us back to where we were before 1998.
Before then, the credit was the same for adults and dependents. But in 1998, when the state was awash in cash, it roughly tripled the amount for dependents.
In 2008, the exemption was $99 for each adult and $309 per dependent.
Now that the state is swimming in red ink, it decided to take away that gift to families and set the dependent credit equal to the adult amount for 2009 and 2010. So the dependent credit will shrink from $309 to roughly $99. (The credit is indexed for inflation; the final amount for 2009 will be announced later this summer.)
If you are in this boat and would rather not face a big tax bill early next year, you could pay more state tax this year, either by increasing the amount withheld from your paycheck or - if you are self-employed - by making bigger estimated quarterly tax payments.
To increase your withholding, file a new Form DE 4 with your employer. (This is the state version of the federal Form W-4.) You can get one at work or download it at links.sfgate.com/ZHLJ.
You don't have to do this now. The Franchise Tax Board will not slap you with an underpayment penalty that results from this change on your 2009 taxes. But it could for 2010.
If you don't increase your withholding, make sure you're saving enough to pay the tax next year, says Gina Rodriquez, Sacramento bureau chief with Spidell Publishing, which provides education and research to tax professionals.