California Tax Service Center

Special Circumstances

We know there are special, sometimes difficult, circumstances that you may be dealing with. We have gathered information and resources that may be helpful for you and your business. If you don't find the information you need, check our Contact Us page for a telephone number or the location of a local tax agency office.

Bankruptcy

Bankruptcy proceedings begin with the filing of a petition with the bankruptcy court. The filing of the petition creates a bankruptcy estate, which generally consists of all the assets of the person filing the bankruptcy petition.

A separate taxable entity is created if the bankruptcy petition is filed by an individual under chapter 7 or chapter 11 of the Bankruptcy Code.

The tax obligations of the person filing a bankruptcy petition (the debtor) vary depending on the bankruptcy chapter under which the petition was filed.

Generally, when a debt owed to another is canceled, the amount canceled or forgiven is considered income that is taxed to the person owing the debt. If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income. However, the canceled debt reduces the amount of other tax benefits the debtor would otherwise be entitled to.

For more information, see IRS Publication 908, Bankruptcy Tax Guide.

Casualties, Disasters and Thefts

A casualty occurs when property is damaged as a result of a disaster such as a hurricane, fire, car accident or similar event. Generally, you may deduct a casualty loss only in the tax year in which the loss occurred. However, if you have a casualty loss from a disaster that occurred in an area declared by the President or the Governor as a disaster area, the loss may be claimed for the year in which the disaster occurred, or the year immediately before the loss.

California

The following forms may be used to report a disaster loss in California:

  • Form 540/540A, California Resident Income Tax Return
  • Form 540X, Amended Individual Income Tax Return
  • Schedule D, Sales of Business Property
  • Form FTB 3805V, Net Operating Loss (NOL) computation and NOL and Disaster Loss Limitations - Individual, Estates and Trusts

Locate forms for the appropriate tax year

To report a casualty, including a disaster or theft, use the federal Form 4684, Casualties and Thefts. Then transfer the non-business casualty and theft losses to federal Schedule A (1040), Itemized Deductions. If there is a basis difference for California purposes use Schedule CA (540).

Federal

Use Federal Form 4684, Casualties and Thefts, to claim the loss. You will also have to file one or more of the following forms:

IRS Publication 547, Casualties, Disasters, and Thefts covers the following topics:

  • Definitions of a casualty, theft, and loss on deposits
  • How to figure the amount of your gain or loss
  • How to treat insurance and other reimbursements you receive
  • The deduction limits
  • When and how to report a casualty or theft
  • The special rules for disaster area losses

Workbook for Casualties and Thefts

IRS Publication 584, Casualty, Disaster, and Theft Loss Workbook is available to help you make a list of your stolen or damaged personal-use property and figure your loss. It includes schedules to help you figure the loss on your home and its contents, and your motor vehicles.

Death

If a taxpayer dies before filing a tax return, the taxpayer's spouse or personal representative may have to file and sign a return for that taxpayer. A personal representative can be an executor, administrator, or anyone who is in charge of the deceased taxpayer's property. If the deceased taxpayer did not have to file a return but had tax withheld, a return must be filed to get a refund. The person who files the return should write "Deceased, the deceased taxpayer's name and the date of death across the top of the return. Write Filing as surviving spouse in the area where you sign the return. If someone else is the personal representative, he or she must also sign.

The surviving spouse or personal representative should promptly notify all payers of income, including financial institutions, of the taxpayer's death. This will ensure the proper reporting of income earned by the taxpayer's estate or heirs. A deceased taxpayer's social security number should not be used for the tax years after the year of death, except for estate tax return purposes.

See IRS Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return and the California State Controller's website for estate tax information.

In California, wages paid to the beneficiary or estate after the date of the employee's death are subject to all state payroll taxes unless they are paid after the calendar year in which the employee died.

Disability

State Disability Insurance (SDI)

SDI provides temporary payments to workers who are unable to perform their usual work because of a pregnancy or a nonoccupational illness or injury. Beginning January 1, 2004, SDI also includes Paid Family Leave, which provides benefits to workers who need to care for a seriously ill family member or to bond with a new child. SDI benefits are taxable only if paid as a substitute for unemployment insurance (UI) benefits. This could occur if a person was receiving UI benefits and then became disabled. When SDI benefits are received as a substitute for UI benefits, the SDI is taxable by the federal government but is not taxable by the State of California.

You will only get a Form 1099-G if all or part of your SDI benefits are taxable. If your SDI benefits are taxable and you don't receive your Form 1099-G by mid-February, you may call EDD at (800) 795-0193 to get another copy. For more information, see IRS Publication 525, Taxable and Nontaxable Income.

Disability Pensions

Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan paid for by your employer. If both you and your employer pay for the plan, only the amount you receive for your disability that is due to your employer's payments is reported as income. However, certain payments may not be taxable to you. Your employer should be able to give you specific details about your pension plan and tell you the amount you paid for your disability pension.

Generally, if you retire on disability, you must report your pension or annuity as income. There is a federal tax credit for people who are permanently and totally disabled. For more information, see IRS publication 524, Credit for the Elderly or the Disabled.

For more information, see IRS Publication 525, Taxable and Nontaxable Income, and IRS Publication 17, Wages, Salaries, and Other Earnings (Chapter 2).

California law is generally the same as federal law. The following are exceptions:

  • Social security benefits are not taxable by the State of California. Social security benefits may be taxable by the federal government.
  • Railroad sick pay is also not taxable by the State of California. It is taxable by the federal government unless it is a payment for an on the-job-injury.
  • A disabled taxpayer who receives SDI as a substitute for unemployment benefits is considered to be receiving unemployment insurance (UI) compensation. This could occur if a taxpayer was receiving UI benefits and then became disabled. Unemployment insurance compensation is taxable by the federal government but is not taxable by the State of California

Divorce

If you have been divorced or separated recently, it is important to determine whether you are married or unmarried because that affects your filing status.

Married or Unmarried Filing Status for California

You are considered unmarried if you separated under one of the following:

  • Final Decree of Divorce,
  • Decree of Separate Maintenance,
  • Judgment of Legal Separation, or
  • Decree of Separation.

If you were unmarried on the last day of the tax year, your filing status will be one of the following:

  • Single.
  • Head of Household.
  • Widow.

FTB Pub. 1031 (Guidelines for Determining Resident Status) will give you more information about community property. Go to ftb.ca.gov and search for 1031.

IRS Publication 504, Divorced or Separated Individuals, explains tax rules that apply if you are divorced or separated from your spouse. The first part covers general filing information. It can help you choose your filing status whether you are separated or divorced. It also can help you decide which exemptions you are entitled to claim, including dependent exemptions.

The next part of the publication discusses payments and transfers of property that often occur as a result of divorce and how you must treat them on your tax return. Examples include alimony, child support, other court-ordered payments, property settlements, and transfers of individual retirement arrangements. This part also explains deductions allowed for some of the costs of obtaining a divorce.

The last part of the publication explains special rules that may apply to persons who live in community property states.

Spousal Tax Relief Eligibility Explorer

Many married taxpayers file a joint tax return because of certain benefits this filing status allows. If you did so, you may be held responsible for monies due, even if your spouse earned all of the income - And this is true even if a divorce decree states that your spouse will be responsible for any amounts due on previously filed joint returns.

To qualify for Spousal Relief, you must meet certain conditions.

Alimony

Alimony is payment to or for a spouse or former spouse under a divorce or separation instrument. It does not include voluntary payments that are not made under a divorce separation instrument.

Alimony is deductible by the payer and must be included in the spouse's or former spouse's income.

To be considered alimony, a payment must meet certain requirements. Different requirements apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985.

Financial Hardship

If you cannot pay the full amount due with your income tax return, you can ask to make monthly installment payments. However, you will be charged interest and may be charged a late payment penalty on the tax not paid by the due date, even if your request to pay in installments is granted. If your request is granted, you must also pay a fee. To limit interest and penalty charges, pay as much of the tax as possible with your return. But before requesting an installment agreement, you should consider other less costly alternatives, such as a bank loan.

See the IRS website for more information on Interactive Installment Payment Process or call (800) 829-1040.

Also, see the FTB website for Installment Agreement information or call (800) 338-0505.

Fraud

Do you know someone who:

  • Isn't paying their share of taxes?
  • Doesn't take taxes out of employee's pay checks?
  • Is collecting unemployment insurance, disability insurance, or workers' compensation benefits but still working?

When people and businesses don't pay their fair share of taxes, they enjoy an unfair advantage over those who comply with the tax laws. According to Johan Klehs, former member, Board of Equalization "Tax evasion cheats hard-working, honest California citizens of millions of dollars of revenue for education and other important government services every year."

If you think a person or business may be involved in tax evasion or fraud, call the appropriate tax agency:

  • BOE - (888) 334-3300 (for fraud only)
  • EDD - (800) 229-6297 (for fraudulent unemployment and disability benefits only)
    (800) 528-1783 (for fraud allegations against employers)
  • FTB - (800) 852-5711 (general assistance)
  • IRS - (800) 829-1040 (general assistance)
  • Department of Insurance - (916) 854-5760

Gifts

If you give someone money or property during your lifetime, you may be subject to federal gift tax. IRS Publication 950, Introduction to Estate and Gift Taxes, gives you a general understanding of when these taxes apply and when they do not. It explains how much money or property you can give away during your lifetime or leave to your heirs at your death before any tax will be owed.

No tax owed. Most gifts are not subject to the gift tax, and most estates are not subject to the estate tax. For example, there is usually no tax if you make a gift to your spouse at your death. If you make a gift to someone else, the gift tax does not apply to the first $11,000 that you give that person each year.

No return needed. Generally, you do not need to file a gift tax return unless you give someone other than your spouse money or property worth more than $11,000 during a year.

No tax on the person receiving your gift. The person who receives your gift or estate will not have to pay any gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received.

No income tax deduction. Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).

What IRS Publication 950 contains. If you are not sure whether the gift tax or the estate tax applies to your situation, see Publication 950. It explains in general terms:

  • When tax is not owed because of the unified credit,
  • When the gift tax does and does not apply,
  • When the estate tax does and does not apply, and
  • When to file a return for the gift tax or the estate tax.

California does not have a gift tax or an inheritance tax. However, California does still impose a death tax equal to the federal credit for state death taxes. This is commonly called the "pick-up tax".

In addition, the California Inheritance Tax Law provides for a generation-skipping transfer tax equal to the allowable credit amount under the federal Generation-Skipping Transfer Tax provisions. For more information, see Tax Information on the California State Controller's website.

Offers in Compromise

Board of Equalization

The Board of Equalization considers offers in compromise for taxpayers or feepayers that do not have, and will not have in the foreseeable future, the income, assets, or means to pay their tax liability in full.

Employment Development Department

Under certain circumstances, the Employment Development Department is authorized to receive applications for Offers in Compromise that may enable a qualified tax debtor to eliminate a payroll tax liability at less than full value. For details, see Information Sheet: Offers in Compromise (DE 631C).

Franchise Tax Board

The Franchise Tax Board will also consider an Offer in Compromise when the taxpayer is not able to pay his or her taxes now, and will not be able to pay them in the future. See FTB's website for more information on Offer in Compromise.

Internal Revenue Service

In some cases, the IRS may accept an offer in compromise to settle an unpaid tax account, including any interest and penalties. With this type of arrangement, the amount accepted may be less than the amount you owe when it is doubtful that the amount you owe will be collectable in the near future. To file for an Offer in Compromise, see IRS Form 656, Offer in Compromise. The IRS also has an online Offer in Compromise program.

Social Security

California does not tax social security income from the United States, including survivor's benefits and disability benefits. Social security income may be partially taxable under federal law.

To determine whether or not your social security benefits are taxable for the federal return, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, or IRS Publication 17, Your Federal Income Tax, Chapter 12, Social Security and Equivalent Railroad Retirement Benefits.

Unemployment Insurance

Unemployment insurance (UI) provides temporary payments to individuals who are unemployed through no fault of their own. It is an employer-paid tax.

Unemployment insurance benefits are taxable income for federal purposes but are not taxable by the State of California.

In order to determine taxable income each January, the EDD sends a Form 1099-G to each individual for the total unemployment insurance benefits paid during the prior year. If you don't receive your Form 1099-G by mid-February, you may call EDD at (800) 795-0193 to get another copy. For more information, see IRS Publication 525, Taxable and Nontaxable Income.