Californians facing challenging tax season

Live in California and earn $250,000 last year? Yes, you'll probably pay more in state taxes. Paying back a student loan? You might be able to deduct more from federal taxes than you expected. Commute to work? You could get a break, too.

Whether you're filing taxes with a few taps of a smartphone app or hiring a professional to handle your returns, sorting out what's new and what will affect you poses new challenges this season. The flurry of tax code changes late last year and early this year has compressed the filing season to just a few weeks, forcing many tax preparers to work overtime just to keep up.

"It's a nightmare," said Bradford Hall, a Certified Public Accountant with Hall & Co. in Irvine. "Everybody is behind. Everybody is scrambling. Everybody wants to know what the new tax rates are going to be for them."

With tax returns due in just over a month, here's a rundown of some of the notable changes this year.

STATE CHANGES

Many affluent California residents will see their state tax bills rise after voters in November approved a tax hike on top earners. And unlike many federal changes enacted during the fiscal cliff negotiations, California's tax increase is retroactive to the beginning of 2012.

Proposition 30, dubbed the "millionaire's tax," boosted personal income tax rates by as much as 32 percent for individuals earning more than $250,000.

Under newly created tax brackets, income between $250,000 and $300,000 for individuals will be taxed at a rate of 10.3 percent, earnings between $300,000 and $500,000 will be subject to a rate of 11.3 percent, and income between $500,000 and $1 million will be taxed at 12.3 percent. Previously, all income between $250,000 and $1 million was taxed at 9.3 percent.

California's top earners, meanwhile, will face a 13.3 percent tax bill for all income above $1 million, up from 10.3 percent. People earning $1.5 million in taxable income last year could see their tax liability rise by nearly $30,000, according to the California Taxpayers Association.

"This has a huge impact on individuals," said Russell Fox, principal of Clayton Financial and Tax. "A lot of them are going to be in for a rather rude surprise."

Through early March, California taxpayers have received average state refunds of $668, down 6 percent from last year.

Though wealthy taxpayers will shoulder most of the burden, Prop. 30 also increased the state's sales tax by one-quarter of 1 percent.

The measure, which passed with 54 percent of the vote, is expected to bring in about $6 billion annually.

The state tax hikes have sparked complaints from people such as golfer Phil Mickelson, and have generated discussion about the possibility of well-to-do residents moving to other states with lower tax rates.

"We have the highest taxes in the nation," said Kris Vosburgh, executive director of the anti-tax group Howard Jarvis Taxpayers Association. "What more do (state lawmakers) need?"

FEDERAL CHANGES

This year, many tax professionals were more surprised by what didn't change with federal taxes than what did.

Last-minute negotiations in Congress extended a number of tax code provisions that had been set to expire, including the child tax credit and deductions for educator expenses and mortgage insurance premiums. Lawmakers extended through 2017 the American Opportunity Tax Credit for tuition and related expenses. They also extended the earned income tax credit, which gives low-income individuals a credit of up to $5,891; last year, 194,000 Orange County taxpayers took advantage of it, according to IRS figures.

Congress also extended the Mortgage Forgiveness and Debt Relief Act of 2007, which allows underwater homeowners to avoid paying taxes on up to $2 million of debt that was forgiven through foreclosure, short sale or loan restructuring.

"These are all positives, but they won't look any different than they were the year earlier," said Kim Rueben, a senior fellow and director of the state and local finance initiative at the Tax Policy Center, a nonpartisan research group.