BILL ANALYSIS Ó
AB 505
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 505
(Melendez) - As Introduced February 23, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal Income Tax Law: exclusion: veterans:
concurrent retirement and disability pay.
SUMMARY: Excludes from gross income Concurrent Retirement and
Disability Pay (CRDP) payments, as defined. Specifically, this
bill:
1)Excludes from gross income, for taxable years beginning on or
after January 1, 2016, CRDP payments received by an eligible
individual during the taxable year.
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2)Defines an "eligible individual" as an active, reserve, or
retired member of the United States (U.S.) military who served
in active duty.
3)Defines "CRDP" as payments received by an eligible individual,
as provided in Section 1414 of Title 10 of the U.S. Code.
4)Provides that no inference shall be drawn with respect to the
property tax treatment of CRDP payments received before
January 1, 2016.
5)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
1)Provide that "gross income" includes all income from whatever
source derived, including compensation for services, business
income, gains from property, interest, dividends, rents, and
royalties, unless specifically excluded.
2)Exclude from gross income certain types of income received by
an individual as a result of the individual's active service
in the Armed Forces of the U.S. as follows:
a) A pension, annuity, or similar payment for personal
injuries or sickness that resulted from combat-related
service in the Armed Forces or a disability annuity
(Internal Revenue Code (IRC) Section 104);
b) Compensation received for active service by a member of
the U.S. Armed Forces below the grade of commissioned
officer for any month during which the individual served in
combat zones or was hospitalized as a result of wounds,
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disease, or injury incurred in a combat zone (IRC Section
112);
c) The premium paid into a survivor annuity account for the
qualified survivors of military personnel;
d) Disability retirement pay that is computed on the basis
of the percentage of disability (IRC Section 104);
e) Dividends and proceeds from maturing government
endowment insurance contracts under the National Service
Life Insurance Act of 1940 and all other acts relating to
veterans;
f) Interest left on deposit with the Veterans
Administration (VA);
g) Veterans' benefits under any law administered by the
U.S. Department of Veterans Affairs (VA), including amounts
paid to veterans or their families in the form of
educational, training, or subsistence allowances,
disability compensation and pension payments for
disabilities, compensation for participation in a work
therapy programs (38 U.S.C. §5301 and following); and,
h) Armed Forces allowances. (IRC Section 265.)
3)Defines "combat-related injuries" as injuries incurred as a
direct result of armed conflict, while engaged in
extra-hazardous service, or in the performance of duty under
conditions simulating war.
4)Does not exclude from gross income CRDP, which is paid for
non-combat related injuries.
5)Exempts from taxation military death benefits paid to
qualified survivors. (IRC Section 134).
EXISTING STATE LAW generally conforms to the federal tax law
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with respect to various exclusions from gross income of amounts
received as veterans' benefits.
FISCAL EFFECT: The Franchise Tax Board (FTB) staff estimates
that this bill will result in an annual General Fund loss of $14
million in the fiscal year (FY) 2015-16, $24 million in FY
2016-17, and $24 million in FY 2017-18.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"Currently, service members who have sustained injuries while in
battle receive compensation for their sacrifice in the form of
Combat-Related Special Compensation (CRSC). CRSC payments
received by an eligible individual who performed service in a
combat zone are exempt from state and federal taxes.
"Concurrent Retirement and Disability Pay (CRDP) are payments
received by an eligible veteran who is retired and entitled to
receive disability income. Currently, these payments are not
excluded from federal and state tax liability.
"Our retired veterans have selflessly put their lives on the
line for this country. This bill would simply allow those who
are injured or disabled to be able to take full advantage of
their disability benefits. Relieving these brave men and
women of CRDP tax liability is the least this state can do to
honor those that have sacrificed so much."
2)Existing Tax Treatment of Military Compensation under Federal
and State Laws . Prior to the enactment of the Tax Reform Act
of 1986, a variety of benefits for military personnel were
excluded from gross income under federal law and various
regulations. In 1986, Congress determined that in the future
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no such exclusions would be permitted except under some
provisions of the IRC, but "grandfathered" all of the previous
non-Code exclusions. (IRC Section 134).
Benefits administered by the Department of Veterans Affairs,
including disability compensation, are not subject to federal
income tax. As explained by the FTB staff, before 2002
federal law "prohibited the concurrent receipt of military
retired pay and disability compensation from the VA for the
same period of service. Consequently, the retired pay of a
military retiree was reduced by the amount of disability
compensation received from the VA." In 2002, federal law was
amended to authorize the payment of additional compensation
for a combat-related disability to certain military retirees,
known as Combat-Related Special Compensation (CRSC). The CRSC
payment is considered disability compensation and is excluded
from gross income under both federal and state tax laws. In
2003, Congress authorized additional payments to those
military retirees whose retired pay was reduced by the amount
of disability compensation administered by the VA. However,
the new retired pay, known as Concurrent Receipt of Disability
Pay (CRDP), is currently subject to both federal and state
income taxes.
3)What Does This Bill Do ? This bill is intended to create an
exclusion from gross income for one type of military retiree
compensation - CRDP payments. CRSC compensation is paid for
combat-related injuries and, as explained above, is considered
disability compensation. CRSC compensation is currently not
taxable under the federal and state laws. In contrast, CRDP
payments are paid to a retired member of the U.S. military for
noncombat-related injuries and are taxable under both federal
and state law. Thus, this bill provides an exclusion from
gross income for CRDP compensation received in taxable years
beginning on or after January 1, 2016.
4)Income Limitation . This bill provides an exclusion from gross
income for CRDP to all military retirees, regardless of their
income. Tax exemptions are often granted with some type of
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income limitation.
5)Non-Conformity to Federal Law . State conformity with federal
law promotes greater simplicity and eases administration of
complex tax laws. By providing an exclusion from gross income
for retired pay and survivor annuities, this bill would bring
California out of conformity with the federal law.
6)FTB's Implementation Concerns . The FTB staff notes that,
because for federal purposes gross income includes both
military retirement pay and CRDP, "it is unclear how the
department would be able to validate the CRDP exclusion for
state purposes." The FTB staff is concerned that "the lack of
guidance could cause disputes between taxpayers and the
department and require the department to open up an audit in
order to verify the amount of gross income reported by
taxpayers."
7)FTB's Technical Concerns . The FTB staff recommends a technical
amendment to replace the phrase "eligible individual" with
"qualified retiree," which would be consistent with Title 10
of the U.S. Code Section 1414.
8)Sunset Date . This bill lacks a sunset date to allow periodic
legislative review of this tax expenditure. The Committee
staff recommends an amendment to add a sunset date.
9)Prior Legislation :
a) AB 2329 (Melendez), of the 2013-14 Legislative Session,
is substantially similar to this bill. AB 2329 was held on
the Assembly Appropriations' Suspense File.
b) AB 2004 (Knight), of the 2011-12 Legislative Session,
would have allowed an individual to exclude from his/her
gross income Combat-Related Special Compensation and
Concurrent Retirement and Disability Pay payments, as
defined. AB 2004 was held on the Assembly Committee on
Appropriations' Suspense File.
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c) SB 401 (Wolk), Chapter 14, Statutes of 2010, provided
specified date conformity to the IRC, including the gross
income exclusions for combat-related injury pay and
combat-related disability pay.
d) AB 53 (Klehs), Chapter 1138, Statutes of 1987, repealed
the pension and retirement pay exclusions as a result of
active duty in the Armed Forces.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file
Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098
AB 505
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