Author Topic: Does California tax dependent care fsa contributions?  (Read 5661 times)

CanuckExpat

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Does California tax dependent care fsa contributions?
« on: September 15, 2016, 02:34:54 PM »
HSA contributions are exempt from federal tax, but taxed by California (also Alabama and New Jersey): https://www.bogleheads.org/wiki/Health_savings_account#State_taxation_of_HSAs

What about contributions to a Dependent Care FSA, are they exempt from both Federal and California taxes, or treated the same as HSAs by California?

I'm leaning towards thinking that the Dependent Care FSA is tax exempt for California taxes, because I can't find information either way, but if anyone has a clear answer, that would be great.

Cathy

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Re: Does California tax dependent care fsa contributions?
« Reply #1 on: September 17, 2016, 04:37:33 PM »
Plans commonly referred to as "dependent care FSAs" receive preferential tax treatment federally as a result of the combined effect of sections 125 and 129 of the Internal Revenue Code ("IRC"), both of which sections are located within Part III of Subchapter B of Chapter 1 of Subtitle A of the IRC.

Meanwhile, section 17131 of the Califorina Revenue and Taxation Code ("CRTC") (located within an article titled "Items Specifically Excluded from Gross Income") provides that "Part III of Subchapter B of Chapter 1 of Subtitle A of the Internal Revenue Code, relating to items that are specifically excluded from gross income, shall apply, except as otherwise provided". I was not able to locate any provision that would provide otherwise for dependent care FSAs. Other such special provisions are located within the same article as CRTC § 17131, and none of them references IRC § 129. There is one special provision that references IRC § 125 but that provision, CRTC § 17131.5, is not relevant here.

Under California law, for the purpose of tax years beginning on or after January 1, 2015, the term "Internal Revenue Code" means the IRC as it read on January 1, 2015, not necessarily the IRC as it reads today. CRTC § 17024.5(a)(1)(F). So we need to verify that on January 1, 2015, sections 125 and 129 of the IRC were still the same or substantially the same and still located within the same part of the IRC. Fortunately, based on the "Notes" in the United States Code, IRC § 129 was last amended in 2004 and IRC § 125 was last amended in 2014.

Based on this analysis, it looks like dependent care FSAs should receive the same preferential tax treatment under California law as under federal law.
« Last Edit: September 17, 2016, 07:45:14 PM by Cathy »

CanuckExpat

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Re: Does California tax dependent care fsa contributions?
« Reply #2 on: October 16, 2016, 08:23:13 PM »
Thank you for the detailed response Cathy.

For future reference, how did you find the relevant sections to quote. Did you know from previous knowledge, or by searching within the tax code documents?

ender

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Re: Does California tax dependent care fsa contributions?
« Reply #3 on: October 16, 2016, 08:30:06 PM »
Thank you for the detailed response Cathy.

For future reference, how did you find the relevant sections to quote. Did you know from previous knowledge, or by searching within the tax code documents?

Posting to follow.

I love reading Cathy's posts here and am curious how they are inspired :-)

Cathy

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Re: Does California tax dependent care fsa contributions?
« Reply #4 on: October 16, 2016, 10:35:46 PM »
I suppose from the outside some of my posts might seem a bit like a pure math proof, insofar as when you look at a proof in a math textbook, you can readily follow along and see how each step follows from the previous one, but unless you have a background in the area of math, you don't know how the steps were chosen in the first place.

I do some research for almost all of my posts on this forum (even if I think I already know the answer, I still make sure I'm right), but it's a nuanced form of research, guided and informed by a significant amount of background knowledge.

I can give an analogy that I think both of the earlier posters in this thread will appreciate. If I asked either of you, "On Linux, how does the /dev/random special file generate random numbers?", you might not know the answer, but you would know how to find the answer. You would open up the Linux source code and use standard text search tools (such as grep) to find anything relevant to /dev/random, and then, once you found something that looks relevant, you would know how to read the C code and how to follow the chain of function calls and data structures and reduce it all down to an English answer to the original question. Being able to figure out the properties of a complex computer program without advance familiarity with it is probably one of the most important skills in software engineering, and somebody who isn't familiar with that field wouldn't know what steps to follow to do that research, and even after reading those steps earlier in this paragraph, they wouldn't have any idea how to actually implement those steps, without the relevant background knowledge.

So, my point is that if you want to replicate the research I do to write these posts, you are going to need some background knowledge. Unfortunately, the amount of background knowledge required to be proficient at legal research is pretty substantial. I say "unfortunately" because it would be ideal for everybody to be able to determine with relative ease, on their own, what their rights and obligations are in our society. However, the way the law actually works is that you need a broad base of fundamentals before you can really do legal research effectively. Those fundamentals are basically what are taught in a typical US/Canada law school program, such as property law, contract law, torts, constitutional law, administrative law, agency law, principles of statutory interpretation, and a variety of other things.

The way most people today acquire this background knowledge is to attend law school, but if you want to learn through self-study, you'd probably want to cover the same material as a law school curriculum. You'd want to read a large number of court opinions, which helps you become familiar with how it all comes together in practice. Each opinion references other ones, so you can go down the rabbit hole by following the cites "all the way down" and learn a lot along the way. That said, this post is not an attempt to outline a self-study program for legal research. I'm just saying there's a lot to learn.

I know this doesn't exactly answer the question of how I choose what to cite, but I guess the point I'm making is that there isn't a simply stated answer to that, because my methodology is based on having relevant background knowledge. I hope this explanation helps.
« Last Edit: October 16, 2016, 11:45:57 PM by Cathy »

CanuckExpat

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Re: Does California tax dependent care fsa contributions?
« Reply #5 on: October 18, 2016, 09:19:30 PM »
That does seem like a well chosen analogy, thank you for taking the time to write the original answer and follow up to my query.

I asked because I did also want to double check in the original source (mental note TODO that at some point), and was curious as to the process of finding the relevant sections in the tax code. I assumed some level of background knowledge and not simply searching, which you seem to have clarified.

Outside the scope of this thread, but if you do ever expand on the idea of an "attempt to outline a self-study program for legal research", I would be interested to read, and please do link from here as well if you remember.

 

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