New Tax Cuts Under The Obama Plan Are Illusory for Many Californians

Congress passed an $800 billion economic stimulus bill that includes many new tax cuts, mostly for low and middle income individuals. BUT the California Legislature raised state income and sales taxes and vehicle license fees which may offset many of the benefits gained from Obama's tax cuts. Many federal tax breaks, designed to help lower and middle class individuals, will be offset by sales tax increases in California.

For example, if you buy a new car or truck between Feb 17., 2009 and Dec. 31, 2009, Congress is allowing you to deduct - on your federal tax return - the state and local sales tax paid on up to $49,500 of purchase price.

If you take the standard deduction, add the sales tax to your standard deduction.

If you itemize deductions, add it to your deduction for state income taxes.

However, there may be no real benefit to people who already itemize. If you itemize deduction, you can take either deduct the state income tax or state sales tax, not both. If you are one who itemizes and you have chosen to deduct sales taxes rather than state income taxes, the car sales tax is already included in your normal sales tax calculation. So this new legislation gives you nothing more.

Like most tax breaks, this one phases out (shrinks and eventually disappears) if your income is too high.

Despite these new tax breaks designed to increase car sales, in California, because the sales tax is going up by one percentage point on April 1, 2009, any benefit gained is likely to be undercut. Furthermore, sales taxes are not deductible on your California tax return, although you can still deduct this on your federal income tax return, whether you itemize or standardize.

Also, the annual vehicle license fee will be rising from 0.65% to 1.15% of market value starting May 19, 2009. Another factor likely to undercut any benefit gained under the Obama administration.

Who's hurt the most when the state raises fixed taxes such as sales tax? The lower income people. So Obama's Federal tax breaks, which is designed to go to mainly to low-and middle-income taxpayers, will be undercut by California's tax hikes, which will be spread across the board.

The broadest Obama tax break is the new credit. Most workers will get a federal tax credit equal to 6.2% of wages up to $400 per person in 2009 and in 2010. Couples filing jointly will get $800 per year, even if only one spouse works. See www.TaxPolicyCenter.org. This credit phases out for singles with $75,000 to $95,000 in adjusted gross income and for couples with $150,000 to $190,000 in adjusted gross income.

The state income tax rate is going up across the board, either by 0.25% or 0.125%, depending on how much money California gets from the federal stimulus plan.

California families with children will also pay more because the state tax credit for dependents will shrink from $309 per eligible dependent to $99.