Estimating the 2022 PTET prepayment
For tax years beginning on or after Jan. 1, 2021 and before Jan. 1, 2022, the initial year of the California PTET election, the tax payment was due by the original due date of the California return for the electing entity, rather than June 15. If a PTET payment was made for a tax year beginning in 2021 by the original due date of the return, the June 15 prepayment for a 2022 tax year PTET election must be at least equal to 50% of the PTET due for 2021, even if the 2021 return is on extension and has not yet been filed. Furthermore, if the 2021 PTET payment made by the due date of the original return is less than the PTET liability ultimately determined and reported on the 2021 return when filed, the 2022 PTET prepayment due June 15 must be at least 50% of the actual PTET liability as determined and reported on the 2021 return, not the estimated amount paid by the due date for the 2021 return. Entities that did not make a PTET election for a tax year beginning in 2021 are required to make a $1,000 prepayment for 2022.
PTET credit reduction
Legislation enacted in February changed the ordering rules related to the use of tax credits by California resident individuals. As a result of the recent legislation, the California other state tax credit (OSTC) is used prior to the PTET credit for tax years beginning in 2022. However, for purposes of computing the OSTC, an individual’s California tax liability is determined without any reduction for the OSTC but is reduced by all other California credits including the PTET credit. Therefore, the benefit related to the PTET credit for California resident individuals is reduced if an individual is required to file income tax returns in other states and the OSTC credit covers all or a significant portion of the individual’s California state tax liability.
Additionally, for tax years beginning on or after Jan. 1, 2022, income tax withholding payments paid to California on behalf of a nonresident individual are taken into account. Applying income tax withholding payments first means that any income tax withholding paid will reduce the amount of tax to which the PTET can be applied and, because the PTET is not refundable, nonresidents with significant withholdings could lose the benefit of the PTET credit in the year the entity paid the tax. However, the PTET credit may be carried forward for up to five years.
