What California Schedule CA (540) Is For
California Schedule CA (540) (2018) is the adjustment schedule that connects your federal individual income tax return to your California resident income tax return. It “translates” federal adjusted gross income (AGI) and itemized deductions into California amounts so the state can calculate the right income tax and tax liability.
You use it because California does not follow every federal rule. For 2018, California conforms to the Internal Revenue Code as of January 1, 2015, so big federal changes under the Tax Cuts and Jobs Act (TCJA) and later laws do not automatically apply. Schedule CA (540) captures those differences line by line and sends the final California figures to Form 540.
When You’d Use California Schedule CA (540)
You file Schedule CA (540) with your 2018 Form 540 when you file a tax return for a full-year resident and there are any differences between your federal and California numbers. That includes differences in income, adjustments, or deductions. For many residents, it’s a required part of the filing requirements.
You’ll almost always need it if you have unemployment compensation, Social Security, U.S. savings bond interest, state income tax refunds, out-of-state municipal bond interest, or you itemize deductions. You also use it if you have business income, rental property, capital gains with different basis, depreciation differences, net operating losses, or pass-through income from partnerships, S corporations, or trusts.
If you later amend your 2018 federal return and the change affects California, you must file an amended California return using Schedule X plus a corrected Schedule CA (540). The same applies if the IRS adjusts your federal return and that change flows through to your California income tax.
Key Rules or Details for 2018
Federal–California Nonconformity
California follows the federal code only through January 1, 2015. Key nonconformity areas for 2018 include:
- TCJA changes to itemized deductions and the state and local tax (SALT) cap
- Mortgage interest and home equity interest limitations
- Miscellaneous itemized deductions suspended federally but still allowed in California
- Moving expenses, educator expenses, and various above-the-line deductions
- Health Savings Accounts, foreign earned income exclusion, and some student loan relief
These differences are reflected as subtractions (Column B) or additions (Column C) to your California AGI and deductions.
California-Only Exclusions
Some items are taxable on your federal return but excluded in California and go in Column B:
- U.S. government bond interest (certain Treasury obligations)
- Social Security and Tier 2 Railroad Retirement benefits
- California lottery winnings and certain paid family leave benefits
- Unemployment compensation and state income tax refunds
Removing these amounts lowers your California tax liability compared with federal.
California-Only Inclusions
Other items are not taxed federally but are income for California and belong in Column C:
- Interest from out-of-state municipal bonds
- HSA contributions and tax-favored HSA distributions
- Foreign earned income excluded under federal rules
- Some education-related and debt-relief exclusions created after 2015
Business owners, landlords, and farmers may also have depreciation, passive loss, and basis differences that increase California income.
Depreciation, Passive Loss, and NOL Rules
California has its own depreciation system and passive activity rules. You often need:
- Form FTB 3885A for depreciation and amortization adjustments
- Form FTB 3801 for passive activity loss limitations
- Form FTB 3805V for net operating loss (NOL) and disaster loss rules
The results from these forms flow into Schedule CA income lines for business, rental, and farm activity.
Step-by-Step (High Level)
Step 1: Finish Your Federal Return
Complete your federal Form 1040, Schedule 1, and Schedule A first. You can’t start Schedule CA (540) until your federal AGI and deductions are locked in.
Step 2: Fill in Part I, Column A – Federal Amounts
Copy the federal amounts for wages, interest, dividends, business income, capital gains, rental income, unemployment, and adjustments to income into Column A. These are your starting numbers before California adjustments.
Step 3: Enter Subtractions in Column B
For each line where California taxes less than federal, put the subtraction in Column B. Common examples:
- U.S. bond interest, Social Security, state tax refunds, unemployment
- Native American reservation income that’s exempt for California
- California-specific adjustments from depreciation, passive loss, or NOL forms
These reduce California income or increase allowed deductions when you file a tax return.
Step 4: Enter Additions in Column C
For lines where California taxes more than federal, enter the additions in Column C. Typical entries:
- Out-of-state muni bond interest and HSA items
- Federal foreign earned income exclusion
- Moving expenses, educator expenses, or other deductions allowed federally but not by California
Add Column C amounts to your federal totals to compute California AGI and other income tax adjustments.
Step 5: Complete Part II for Itemized Deductions
If you itemize, transfer federal Schedule A amounts to Part II, Column A, then adjust in Columns B and C for California differences. Watch for:
- SALT deduction differences (no $10,000 cap in California)
- Mortgage and home equity interest rules
- Casualty and theft losses
- Miscellaneous deductions subject to the 2% AGI floor, still allowed for California
The result is your California itemized deduction figure, which you compare to the California standard deduction.
Step 6: Carry Totals to Form 540
After you total Columns A, B, and C for income and deductions, transfer the California AGI and deduction amounts to Form 540. These numbers drive your California income tax, filing requirements, and any later past due return or amended return calculations.
Common Mistakes and How to Avoid Them
- Skipping Schedule CA when it’s required
Many taxpayers think they can ignore the schedule. If you have Social Security, unemployment, a state refund, or itemized deductions, you almost always need it. - Reversing Columns B and C
Column B is for subtractions; Column C is for additions. Mixing them up has a big impact on your income tax liability. - Missing Health Savings Account adjustments
HSA deductions are not allowed and tax-free HSA distributions often aren’t tax-free in California. Carefully follow the instructions. - Ignoring TCJA differences
Relying only on federal numbers can cause errors with SALT, moving expenses, miscellaneous itemized deductions, and more. - Not attaching supporting California forms
If you adjust for depreciation, passive losses, capital gains, or NOLs, attach the related FTB forms or the FTB may disallow the adjustment. - RDPs not combining federal data correctly
Registered domestic partners filing a joint California return must combine both federal returns in Column A.
What Happens After You File
The Franchise Tax Board (FTB) reviews Form 540 and Schedule CA together to make sure Column A matches your federal return and that subtractions and additions follow California law. If numbers don’t reconcile or a required form is missing, the FTB may adjust your return or request more information.
If the adjustments reduce your California income tax, you may receive a larger refund than you expected based on federal figures. If they increase income, you might see a higher tax liability or a bill. Schedule CA entries are also a common focus in audits, especially for depreciation, passive activity losses, and high-income itemized deductions.
If your federal return is later changed, you may need to file an amended California return with a revised Schedule CA. The timing rules for refunds and additional tax follow California’s standard amended return deadlines.
FAQs
Do I always need California Schedule CA (540) (2018)?
You need it almost any time your federal numbers don’t match California rules, which is true for many residents. If you had Social Security, unemployment, state tax refunds, or itemized deductions, you almost certainly need to complete it.
How does Schedule CA affect my individual income tax return?
Schedule CA (540) (2018) adjusts federal AGI and deductions so California can compute your correct income tax and tax liability on Form 540. The final California AGI and deduction amounts flow directly into the main return.
What if I only take the standard deduction?
Even with the standard deduction, you may still need Schedule CA if you have income that California treats differently—such as Social Security, unemployment, or interest from out-of-state bonds.
How do HSAs show up on Schedule CA?
Your federal HSA deduction is added back in Column B, and certain HSA contributions or distributions may appear in Column C as taxable income. California does not treat HSAs like federal law does.
What if I file a past due return for 2018?
If you file a late Form 540 for 2018, you still attach Schedule CA (540) (2018) with the correct adjustments. Penalties and interest apply to the whole return, and Schedule CA ensures the state is using the right income and deduction amounts.
Can I e-file Schedule CA with my California return?
Yes. When you e-file Form 540, your software normally creates and transmits Schedule CA automatically based on your entries. This reduces math errors and speeds up processing.
