Tax professionals’ 2025 California Filing Season Guide
- Viktoriya Barsukova, EA, MBA
- 2 days ago
- 3 min read
With filing season right around the corner, tax professionals need to stay on top of the biggest adjustments and filing tips that they'll need to correctly file their client's F
orms 540. Between OBBBA, California's big conformity bill, and the Los Angeles wildfires, there's a lot to stay on top of. Here's a list of the top 10 things to know for filing 2025 California returns.
Los Angeles wildfires notation requirement Los Angeles wildfires have to be noted on the 2025 tax return by following tax software prompts or writing LA County wildfires at the top of the return in order to avoid estimated tax underpayment penalty notices. Although the first through third 2025 estimated tax payments were all postponed until October 15th, underpayment penalty notices will automatically be sent if the disaster is not indicated on the 2025 return. And we know that notices may still be sent out to some taxpayers, but this will minimize the chances.
Alimony deductions remain for 2025 Alimony payments are still deductible on the 2025 return and reportable by payees. California's conformity to federal treatment of alimony deductions only applies to divorce or separation agreements entered into after 2025.
Wildfire settlement exclusions differ from federal rules California's wildfire settlement exclusion amounts may differ from the wildfire disaster relief payment exclusion allowed on the federal return. The California exclusion applies to both business and individual losses, whereas the federal exclusion only applies to individual losses. Also, the California exclusion is not limited if losses, expenses, or damages were otherwise covered like through insurance.
Business interest expense limitation drafting error Personal income taxpayers and partnerships subject to the business interest expense limitation on their federal return should consider extending their 2025 California return. Due to a drafting error, California inadvertently conformed to IRC 163 subsection J for personal income taxpayers, but not corporate taxpayers. This should be fixed retroactively with legislation in 2026, but until this legislation is enacted, personal income taxpayers will be subject to the limitation.
New exclusion for retired uniformed service members Certain retired uniformed service members such as from the Army, Navy, Air Force, Marines, and Coast Guard qualify for a new California gross income exclusion of up to $20,000 for retirement pay from the uniformed services if their federal AGI does not exceed certain limits. A similar exclusion also applies to annuity payments received by California taxpayers from a U.S. Department of Defense survivor benefit plan. No similar exclusion is available on the federal return.
Personal casualty losses on the California return Our sixth Form 540 tip is that personal casualty losses claimed on a California return can be claimed by non-disaster victims, but only if the taxpayers itemize their deductions. They're also subject to the 10% of AGI and $100 per casualty limitations. On the federal return, only federal disaster victims can claim the loss, and those with qualified disaster losses can claim the loss even if they don't itemize and are not subject to the 10% of AGI limit. However, they are subject to a $500 per casualty limitation.
Section 529 account withdrawals Section 529 account withdrawals made after July 4th, 2025 that are used to pay for a child's K-12 tuition or related expenses or for post-secondary credential programs will continue to be included in gross income on the California return and are subject to the 2.5% early withdrawal penalty, even though these amounts are excluded from gross income on the federal return.
California home mortgage interest deduction rules California continues to allow a personal interest deduction for interest paid on up to $1 million in acquisition debt and $100,000 of home equity debt, even if not used to improve the home, whereas federal law limits the deduction to $750,000 and no deduction is allowed for interest paid on home equity loans.
Charitable contribution deduction limits The charitable contribution deduction cap remains at 50% on the California return and 60% on the federal return.
California nonconformity to TCJA business provisions California continues to not conform to most of the TCJA business provisions, including 100% bonus depreciation, increased IRC Section 179 expenses, amortization of research expenses for foreign research, the increased business meal expense deduction limitations, and the increased deduction amounts for luxury autos.
Tax professionals’ 2025 California Filing Season Guide - To listen to this podcast, go to: https://traffic.libsyn.com/secure/spidellpublishing/SCM_12-07-25.mp3
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