Recommend Our Site to Your Friends!

Print This Page

Table of Contents

• Back to school.
• Third quarter estimated tax due date is coming.
• Extended due date for calendar-year corporations is coming.
• Special capital gains election revisited.
• Key date approaches for inherited IRAs.
• Depressed stock market creates refinancing opportunity.
• Tax credit allowed for hybrid vehicle.
• Reliance on attorney's tax advice bars attorney-client privilege.
• IRS stops K-1 matching program.
• Graduate-level tuition reduction for college employee's isn't excludable.
• Installment sale elections can save California tax.
• Questions and Answers

  Will I owe capital gains taxes when I sell my condo?

  How are points relating to refinancing accounted for?

  What is the penalty for taking money out of a SAR-SEP?

  Are there any courses on trust deeds or any places I can learn about them?

• Do you have employee stock options?
• Visit our new articles
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

Back to school.

Labor Day is next Monday. Traditionally, Labor Day means its time for school to start, but start times now vary. My son, James, started classes at UC Berkeley last Monday.

With school starting, it's appropriate to remember the tax favored plans available for saving for a college education. The earlier you start saving, the better. Grandparents can contribute to tax-favored accounts, but should coordinate those gifts with the children's parents. For details, call me at 408-918-3161.

Return to Table of Contents

Third quarter estimated tax due date is coming.

The due date for the third estimated tax payment for individuals and calendar-year corporations is September 16, 2002. With an expected decline in income, many taxpayers didn't base their 2002 payments on their 2001 tax. It may be the estimated tax payment should be adjusted based on the changes in your income or deductions for this year. Please see your tax advisor if you need help with this.

Return to Table of Contents

Extended due date for calendar-year corporations is coming.

The extended due date for calendar-year corporations is also September 16. There is no second extension for corporations.

Return to Table of Contents

Special capital gains election revisited.

Remember an election is available to treat capital assets or business assets as sold and re-purchased at the beginning of 2001. This election may be made on an original income tax return or on an amended income tax return no later than six months after the original filing due date (October 15 for individuals).

The purpose of the election is to qualify the assets for a new 18% maximum capital gains rate for assets held more than five years for assets acquired after December 31, 2000. The election may be made on an asset-by-asset basis.

We recommend the election should be considered when there are tax attributes, including unused capital losses, minimum tax credits, net operating losses and passive activity losses that can be used to reduce or eliminate the tax for the deemed sale. If you have one or more of these, you should meet with your tax advisor to determine whether you should make the election by October 15, 2002. (Notice 2002-58.)

Return to Table of Contents

Key date approaches for inherited IRAs.

The IRS recently issued new guidelines for required minimum distributions from IRAs. When an IRA owner is deceased, the account owner's designated beneficiary is determined based on the beneficiaries designated as of the the account owner's date of death who remain beneficiaries on September 30 of the year following the year of the account owner's death. (Treasury Regulations § 1.401(a)(9)-4, Q&A 4(a).)

If a non-qualifying beneficiary (not a person or qualifying trust) can be removed by September 30, the qualifying beneficiary can receive the IRA benefits based on a lifetime computation. Otherwise, the account must be distributed within five years after death. For example, Uncle Ralph designated his nephew, Sam, and Whatsa Matta University as the beneficiaries of his IRA. Ralph passed away on December 31, 2001. If the share of Whatsa Matta U is distributed before September 30, 2002, Sam's share can be distributed over his lifetime.

For 2002, taxpayers may elect to rely on proposed regulations that determine the beneficiaries as of December 31 of the year after death, but the required minimum distribution for the qualified beneficiaries will be slightly higher. Starting 2003, only the September 30 date may be used.

Return to Table of Contents

Depressed stock market creates refinancing opportunity.

Remember the depressed stock market is driving mortgage interest rates to record lows.

We can provide competitive mortgage refinancing services to our subscribers who are California residents through our strategic partner, Wymac Capital. For a complementary rate quote, call Mike Gray at 408-918-3161. If you wish, we can track rates relating to your mortgage and tell you when there is a refinancing opportunity.

Return to Table of Contents

Tax credit allowed for hybrid vehicle.

The IRS has certified new Toyota Prius automobiles (model years 2001 - 2003) as qualifying for the clean-burning fuel deduction. The deduction is set for a particular model based on documentation provided by the manufacturer to the IRS. The maximum deduction is currently $2,000, and will decline to $1,500 in 2004, $1,000 for 2005, $500 for 2006 and zero after 2006. The deduction amount for the Prius is $2,000. Taxpayers who bought a Prius during 2001 should file an amended return to claim the deduction. (IR-2002-93.)

Return to Table of Contents

Reliance on attorney's tax advice bars attorney-client privilege.

The Tax Court ruled that when a taxpayer claimed reliance on an attorney's advice as a defense against penalties, the taxpayer waived the attorney-client privilege. Claiming reliance on the attorney's advice placed the advice at issue in the case and entitled the court to examine the attorney's memorandums relating to the advice rendered. (T. Johnston, 119 TC No. 3)

Return to Table of Contents

IRS stops K-1 matching program.

The IRS recently started a program to match the information reported on 2000 income tax returns to Schedule K-1 information reported for taxpayers by partnerships, S corporations, estates and trusts. There were too many errors on the notices being issued relating to the program, so they stopped issuing notices. The IRS is considering making changes to Schedule E, where the ordinary income and losses from Schedule K-1 are reported, to make it easier to match the information.

Return to Table of Contents

Graduate-level tuition reduction for college employees isn't excludable.

Although there is an exclusion for undergraduate tuition reductions for college employees, their spouses and children as a working condition fringe benefit, the exclusion does not apply to graduate-level tuition. (Field Service Advice 200231016.)

Return to Table of Contents

Installment sale elections can save California tax.

Part of a recently enacted tax law, AB 1115, changes how installment sales of non-California property are reported for tax years beginning on or after January 1, 2002. Under the new rules, a sale of non-California property for which the gain is reported under the installment sale method that was sold before becoming a California resident will be taxable when the taxpayer becomes a California resident. Also under the new rules, if a California resident sells non-California property and elects to report the gain using the installment method and becomes the resident of another state, the gain will not be taxable by California after the taxpayer becomes a resident of the other state.

(Under the California tax laws before the change, an installment sale of non-California property made before becoming a California resident was not subject to California tax. An installment sale of non-California property by a California resident continued to be subject to California tax if the taxpayer later became a resident of another state.)

These changes suggest two tax planning strategies, outlined below.

1. John is a resident of Texas. He sells an apartment building in Texas on September 1, 2002, and receives an installment note as part of the sale proceeds. John may be moving to California because of a job transfer. John files a non-resident California income tax return for 2002, and elects out of installment sale reporting for the sale of the apartment building. (All of the gain is reported for 2002, but none is taxable by California because the gain does not have a California source.) Since John is not reporting the gain under the installment method for California, future collections on the installment note will not be taxable if he later becomes a California resident. (The election must be on a timely-filed income tax return for the taxable year of the sale. The election won't be available if a late return is filed after John moves to California.)
   
   
2. Jane is a resident of California. She sells a piece of land in Colorado on September 15, 2002, and receives an installment note as part of the sale proceeds. Jane may be moving to Nevada for her retirement. Jane should report the sale on her 2002 California income tax return using the installment method. She will avoid California income taxes for principal collections on the installment sale received after she becomes a resident of Nevada.

Return to Table of Contents

---

Questions and Answers

Question

I have owned a condo for a year. My parents deeded the property to me. They stated a sales price of $100,000, for which I was issued a note. They are reporting gifts for a note of $20,000 per year.

I want to sell the condo for $150,000. Will I owe a capital gains tax?

Answer

Since you never made any payments, there is a potential issue about whether there was a sale or gift of the condo. If the transfer was a gift, your tax basis is the same as your parents'. If the transfer was a sale, your tax basis is $100,000. Based on the "sale" assumption, you would report a capital gain of $50,000 if you sold the condo now.

Remember, though, that you can exclude up to $250,000 from the sale of a principal residence provided you have used it as a principal residence for more than two years when the property is sold. I suggest you continue to live in the condo and use it as your principal residence until you meet the "more than two years" requirement before you sell it. The issue of "gift" vs. "sale" will be eliminated since the sales price is expected to be less than $250,000.

Question

How do you account for points relating to refinancing a principal residence when you refinance the residence again, six months later?

Answer

If you refinance the residence with a different lender, the unamortized balance of the points is deductible as interest as of the date of the second refinancing.

If you refinance the residence with the same lender, you continue amortizing the points over the original term (or until the mortgage is paid off, if sooner.)

Question

What is the penalty for taking money out of a SAR-SEP?

Answer

A SAR-SEP is a Salary-Reduction Simplified Employee Pension. They were generally repealed when SIMPLE plans were enacted, so new SAR-SEPs may not be established after December 31, 1996.

The retirement account in which the funds are held is a type of IRA, so early withdrawals are treated like an early distribution from an IRA. The federal penalty is 10%.

There are exceptions for distributions to certain unemployed individuals up to the amount paid for qualifying medical insurance premiums, certain qualified higher education expenses, and certain first-time homebuyer expenses. You should see a tax advisor if you think you might qualify for an exception.

The early distribution and related penalty are reported on Federal Form 5329.

Question

Are there any courses on trust deeds or any places I can learn about them?

Answer

Try asking your local librarian. Also, try calling some of the lenders under "real estate loans" in the yellow pages that handle loans for people with credit problems. Good luck!

---

Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

Return to Table of Contents

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

To subscribe, go to http://www.stockoptionadvisors.com. You can review our last issue at http://www.stockoptionadvisors.com/optionalert/news.shtml.

Advisors may find information about joining the Employee Stock Option Advisors Association, LLC and training materials about tax planning for employee stock options at http://stockoptionadvisors.com/seminar.shtml.

Employee option holders may find information about self-study materials relating to planning for employee stock options at http://stockoptionadvisors.com/seminar.shtml.

Return to Table of Contents

Visit our new articles!

• "You can't multiply zeros"
• "Unlimited Power" Book Review

Return to Table of Contents

P.S.

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! For directions, visit our directions page at http://www.taxtrimmers.com/directions.shtml.

Return to Table of Contents

P.P.S.

To receive the next issue of Michael Gray, CPA's Tax & Business Insight with more tax developments, another book review, and upcoming deadlines automatically via email, subscribe by filling out the form below.

Return to Table of Contents

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.