Some tax bills might be a mistake Published May 28, 2012 By Gabriel Verhage Volunteer Income Tax Assistance Center director MARCH AIR RESERVE BASE, CALIF. -- We recently became aware of an increased number of military members who reported receiving notices from the State of California Franchise Tax Board, stipulating they owed additional state taxes. While all documents from any government agency should be taken very seriously, several military members have reported receiving erroneous tax bills from the FTB and were unsure of how to handle the situation. If you've received a letter similar to what was described, do not panic! Your first step should be to contact the March VITA Office and schedule an appointment with us to review the document. Additionally, FTB Publication 1032 has a wealth of state tax information and is a great resource for military members. Unfortunately, even when military members accurately prepared their tax returns, there were still instances where some received demand letters from the State. Just last week, a military member requested we review a document that stated he must pay additional state taxes, but after further review, it was determined that the State was in error. Here is an example that many military members may be able to relate to: You, the military member and your wife are both Texas residents, stationed in California. Your wife's income (earned in California) was included in your joint return -- is it considered California source income? According to FTB Pub 1032, it does not have to be. To further explain, if you give up your Texas residency for California, then it is, but, if you maintain your Texas residency, it is not. According to the Military Spouse Residence Relief Act, the decision is yours! The State can also determine if you are required to pay state income tax by analyzing the interest paid on your mortgage. If the amount of interest does not correspond with their perception of what your income should be, then they can assess you with additional state income taxes. The faulty logic used by the State reveals that they do not account for non-taxable income, such as basic allowance for substance or basic allowance for housing. Also, the State is known for not recognizing other nontaxable income such as Veterans Administration disability or social security award payments. Remember, if you are notified by the State of monies owed, there are ways to handle the situation rather than just surrendering payment. NEVER, never ignore a state tax demand letter! First, call the State and ask them why they are "purposing" additional taxes against you. If they inform you that it is because they compared your federal return against your state return and determined that you owe more than what you claimed, then the following steps need to be taken: ➤ Ensure all communications with the State are conducted in writing for record keeping purposes. Explain in a clear and concise manner that you are a military member living in California by order and that you are not a resident. ➤ Submit a copy of your state driver's license, proving your state residency. In addition, include copies of your W-2s substantiating all of your income and the state which is legally entitled to claim it. This should satisfy the State and hopefully dissuade them from further attempts to impose future tax assessments. If you are notified that the tax demand is because of your mortgage interest and the state assumes you have more money than you claimed on your state return, then try the following actions: ➤ Again, document all your interactions in writing. ➤ When submitting your response, it should include all nontaxable income that supports your claim of living within your means. Your letter must list all nontaxable income such as VA disability, BAH. ➤ List the yearly amount of the nontaxable income. This should clear the issue up and hopefully it will never happen again. ➤ Make sure you follow-up with the State by contacting them in about three weeks, to ensure they have dropped the purposed additional tax demand against you. Also, ask them to send a written resolution stating that the issue has been satisfactorily resolved. If the State still insists you owe money, contact the March VITA Office and we can review the documents again to determine if both sides fully understand the issue and have seen all the facts. If it is determined that you do owe the money and are unable to pay the entire amount at that time, then you can try to work with the State on an agreeable payment agreement. Again, the worst thing you can do is to ignore the problem. For questions regarding your taxes or to have us prepare and electronically file your federal and state income taxes for free, please e-mail or call.