Michael Gray, CPA's Tax and Business Insight

Table of Contents

• Tax season is in full gear.
• Bush submits his tax cut plan.
• Deduction for suspended passive activity losses allowed.
• IRS guide for lawsuit awards.
• Foreign social security benefits may be taxable in California.
• Employee Stock Option Telephone Conference Planned.
• Thank you!
• Marché Aux Fleurs.
• Visit our new articles.
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax and Business Insight.

Tax season is in full gear.

The calendar-year corporate filing deadline is March 15. The filing deadline for most individuals is April 16. (My Easter is ruined again!) For those for whom we will be preparing income tax returns and haven't given their information yet, please do so right away. It takes time even to prepare extension requests. Please give us enough lead time to give your income tax returns the attention they (and you) deserve.

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Bush submits his tax cut plan.

On February 8, President Bush formally submitted his tax cut plan. Bush is proposing a $1.6 trillion tax cut. The plan is proposed to be phased in over a period of time.

• Eventually, the current five tax rate brackets, with a maximum rate of 39.6%, would be replaced by four rate brackets, with a maximum rate of 33%.
• Since Bush is not proposing a change for the alternative minimum tax, more taxpayers would be subject to AMT under his plan. (That will be popular!)
• Bush would give marriage-penalty relief by giving two-earner joint return filers a deduction equal to 10% of the lower-earning spouse's compensation.
• The current $500-per-child tax credit would increase by $100 per year until it reached $1,000 in 2006. The income thresholds to phase out the credit would also be increased.
• The estate and gift tax would be phased out until it is repealed for gifts made and decedents dying after 2008.
• The research credit, currently scheduled to expire in mid-2004, would be made permanent.
• Charitable contributions would be changed from an itemized deduction to a deduction from gross income.
• The limit for the deduction of charitable contributions for corporations would be increased from 10% of taxable income to 15%
• Taxpayers who are over age 59 would be able to elect to have distributions made from their IRA accounts directly to charities without tax.

The devil is in the details! One thing you can count on is that what Congress passes will be quite different from what Bush has proposed. After a strong run to repeal the estate and gift tax last year, there seems to be some backlash against repeal this year. Some of the groups who would be hurt by repealing the estate tax include charities, CPAs, attorneys, financial planners, life insurance companies and banks (trust management).

Since there is momentum for tax relief this year, you should be sure to write your representatives in Congress about changes you would like to see, such as the repeal of the tax preference for incentive stock options and that wash sale rules should not apply to incentive stock options.

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Deduction for suspended passive activity losses allowed on decedent's final individual income tax return.

The IRS national office ruled in FSA 20010618 that a taxpayer transferred his interest in a passive activity because of his death. They allowed a deduction of suspended passive activity losses of 1.5 million on his final individual income tax returns, resulting in a net operating loss carryback and recovery of income taxes paid on the income tax returns for the three previous years.

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IRS guide for lawsuit awards.

Attorneys involved in civil litigation should study the new Market Segment Specialization Program audit guide for lawsuit awards and settlements.

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Foreign social security benefits may be taxable in California.

California's State Board of Equalization recently ruled that an exclusion for foreign social security under U.S. tax treaties is not binding on California. California taxed British social security payments. (Appeal of George S. Gilmour, November 28, 2000, Case No. 34337.)

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If you have employee stock options, have you subscribed to the ESOAA Option Alert?

I have scheduled a telephone conference about employee stock options on March 16, 2001.

To subscribe to the ESOAA Option Alert, go to http://www.stockoptionadvisors.com. You can review past issues at http://www.stockoptionadvisors.com/optionalert/.

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Thank you!

Doug Reed referred Jason Gilbert. Michael Proffit referred Will and Maura Rees. Paul Rosenberg referred George Sidline. Thank you for your thoughtfulness.

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P.S. Marché Aux Fleurs

My daughter and her husband, Holly and Dan Baker, have opened a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs. For the best meal of your life, call 415-925-9200 for a reservation and give them a try soon!

Visit our new articles!

• "Magic Words That Bring You Riches" book review
• What Do I Do If They Don't Respond Business Improvement article

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.