I use TurboTax to do my federal and California state income taxes. When e-file first became available, I remember having to pay a “convenience” fee of $15 each (for a total of $30). It seemed strange to me that I had to pay to save the federal and state government money; they didn’t have to hire someone to input my printed tax forms after all. Thankfully, a few years ago, the IRS finally realized this and made federal e-file free. Unfortunately, the state e-file for TurboTax has always required a fee, which has increased to $19.99 this year.
Initially I blamed California for the state e-file fee; but last year, I found that California did provide several options to e-file for free and that I qualified for CalFile. The $19.99 fee is actually imposed by Intuit as a service fee. CalFile is a web-based application that allows you to fill in and submit an online Schedule CA 540 state income tax form to the California Franchise Tax Board. Because I had the California 540 form completed in TurboTax, all I did was to copy the total amounts from TurboTax into the CalFile web forms (which referred to amounts on the state 540 and federal 1040 forms by line numbers).
CalFile is totally free and easy to use. If your taxes are simple and you make less than $169,000 if single (or higher amounts if head of household or married), you can use CalFile. Check the CalFile qualifications. This year, you are required to create an account to use CalFile; however, both the CalFile Deluxe and Basic account types are free. An account allows you to quit and continue your online 540 form at a later time.
If you are doing state income tax for another state than California, I suggest going to your state’s website to see if there are free e-file options available.
CA SDI vs. VPDI
While we are on the subject of income taxes, when doing an itemized federal income tax return, you are allowed to deduct mandatory state fees in addition to the state income tax. Such a mandatory state fee is the California State Disability Insurance, which appears on the W2 form as “CA SDI”. If you work in California, this state-administered disability insurance premium is automatically deducted from your paycheck and totals to around $1000 a year. On the federal income tax return, this mandatory fee is considered a state tax and thus is deductible.
Until a couple years ago, TurboTax did not deduct the CA SDI in my itemized federal 1040 form, even when I explicitly inputted it as part of the W2 form. I had to manually work around TurboTax’s limitation by changing the deduction amount in the 1040 Schedule A form (line 5, “State and local Income taxes”). The latest version of TurboTax will recognize the CA SDI input on the W2 form, tag it as a “CA SDI” type, and deduct it properly on the Schedule A form.
In California, as an alternative to CA SDI, employers have the option to administer their own disability insurance plans, which must provide equivalent benefits as the CA SDI plan does. This is called the California Voluntary Plan Disability Insurance, which appears on your W2 as “CA VPDI” or CAVPDI. Because the costs of the plan, including administration and any employee subsidies, are considered a deductible business expense, some companies may decide to go with a CA VPDI after running the numbers and finding out that they could get a net gain.
When the CA VPDI first appeared, it was unclear as to whether or not an employee can deduct the CA VPDI on the federal income tax return. It is a mandatory fee indirectly mandated by the state after all. And from what I heard, the IRS did not correct the forms submitted by those who treated the CA VPDI the same as a deductible CA SDI. Unfortunately, the IRS eventually decided that the CA VPDI was not deductible by employees in the IRS Rev. Rul 81-194 ruling, which stated:
“Amounts withheld from wages of employees for contributions to voluntary plans are nondeductible personal expenses under section 262 and are not deductible as taxes, business expenses, or medical expenses.”
This IRS ruling is not a big surprise. This decision resulted in more tax revenue for the federal government, so it was actually a no-brainer decision. California followed suit by issuing an update to the Schedule CA 540 instructions to omit wording which suggested that the CA VPDI was deductible on the federal income tax reform.
So, just remember that you can deduct CA SDI, but you can’t deduct CA VPDI. The latest version of TurboTax will recognize the CA VPDI on the W2 form as a “CA VPDI” type and won’t deduct it in the 1040 Schedule A form.
Just in case, don’t forget that you can deduct your car’s vehicle license fee, which is a part of the yearly DMV vehicle registration. The vehicle license fee amount can be found in the itemized costs on the DMV vehicle registration renewal form that you get each year. It is a mandatory state fee and can be deducted on your federal income tax return.
Free Tax Software
I suggest filing your income taxes late so that you can borrow the TurboTax software CD (preferably, the version that includes one free state) from your family or friends once they are done with it. This will save you the cost of purchasing TurboTax, which varies from $40 and up. Alternatively, the online version of TurboTax provides free federal filing, but requires an additional $27.99 for a state filing.
I believe that the above information still applies if you use other tax software, like TaxCut.