Michael Gray, CPA's Tax and Business Insight

Table of Contents

• Summer is a good time for tax and business planning.
• The second estimated tax payment for 2003 is due June 16.
• Extended income tax returns.
• "Tax Planning for Employee Stock Options" CD
• "Will you make these mistakes handling an estate or trust after a death?" CD
• We can track mortgage rates for you.
• Jobs and Growth Tax Relief Reconciliation Act of 2003 is enacted.
• Uncle Sam giveth, the states, counties and cities taketh away.
• Questions and Answers
  • Should my property tax bill have doubled?
  • What is stepped up value?
  • If I move to Nevada, are my California retirement benefits taxable?
  • Are my moving expenses deductible?
  • Is my raffle prize taxable?
• If you have employee stock options...
• Subscribe/Unsubscribe from our newsletter.
• PS Marché Aux Fleurs

Summer is a good time for tax and business planning.

This is the time of year that the activity level allows time to think. How is your year shaping up? Do you need any support in defining your goals? I have been meeting a number of people who are starting new businesses. Some don't have a clue about what is involved in running a business. Maybe we can help you prepare for the challenges ahead.

Is your estate plan in order, especially for changes in your personal situation, including marriage, divorce, birth of a child, dependent parents, or children with special needs? Recent changes in the tax laws can have unexpected results when a will or trust isn't updated to take them into account. For example, the estate tax exemption equivalent recently increased from $675,000 to $1 million for 2002 and 2003, and will gradually increase to $3.5 million in 2009, before the estate tax is repealed for one year and the exemption reverts back to the old rules. Have these contingencies been considered in your will and/or trust?

I have encountered a number of situations where an estate or trust hasn't been properly administered after a death. The family thought everything was handled by the formation of a revocable living trust. The trust documents usually require the formation of separate trusts that file their own income tax returns, and an estate tax return is often required. Neglecting these requirements can create enormous problems and expense later. Don't let it happen to your family. Get professional help.

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The second estimated tax payment for 2003 is due June 16.

If your estimated tax payment isn't based on the tax from your 2002 income tax returns, please get us the information to update your estimated tax computations or confirm the assumptions for scheduled payments are unchanged.

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Extended income tax returns.

The due date based on the initial extension request for calendar year individual income tax returns is August 15, 2003. If you have filed an extension, please send us the information to finish your income tax returns as soon as possible.

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"Tax Planning For Employee Stock Options" CD.

We have a recording of a presentation by Michael Gray on February 1, 2003. If we prepared or are preparing your 2002 income tax returns, you can get a copy as our gift to you. Just call Dawn Gray at 408-918-3162. If we didn't prepare your tax returns and you would like a copy, you can order it at www.stockoptionadvisors.com/planning.shtml or call Dawn Gray.

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"Will you make these mistakes handling an estate or trust after a death?" CD.

We have a recording of a presentation by Michael Gray on March 3, 2003. If we prepared or are preparing your 2002 income tax returns, you can get a copy as our gift to you. Just call Dawn Siemer at 408-918-3162. If we didn't prepare your tax returns and you would like a copy, the investment is $19.95 plus $1.65 sales tax for California residents and $2 shipping and handling. Fax your name, address, telephone number and credit card information to 408-998-2766, mail the information with a check to Michael Gray, CPA, 1265 S Bascom Ave., Ste. 106, San Jose, CA 95128, or call Dawn Gray.

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We can track mortgage rates for you, so you don't have to.

Interest rates continue to fall. This is still a great time to refinance, whether to get cash for remodeling your home, to finance a new business, to buy your dream yacht, or to just save interest dollars.

At no charge or obligation, we can track your home mortgage and notify you when refinancing is to your advantage.

Remember, we offer home mortgages as a service to our clients and newsletter subscribers located in California through our strategic partner, Wymac Capital. We specialize in financing with no points and no costs, if certain conditions are met.

To find out if we can reduce your home mortgage costs or help provide financing for education, home improvements, a vacation, or a new home, please call Michael Gray at 408-918-3161. There is no fee or obligation for this service.

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Jobs and Growth Tax Relief Reconciliation Act of 2003 is enacted.

President George Bush signed the new tax law on May 28. According to the newspapers, it's the third largest tax cut in history, yet it's only seventeen pages long. The Republicans have vowed to pass a tax cut every year during George Bush's presidency. Many tax proposals were not included in this law, which leads me to believe more tax legislation may be passed before the end of 2003.

Here are a few highlights.

• Certain tax reductions enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 have been accelerated, including increasing the child tax credit to $1,000 for 2003 and 2004; accelerating the marriage penalty tax rate relief for 2003 and 2004, increasing the standard deduction to twice the single person amount for married persons filing a joint return for 2003 and 2004; increasing the taxable income eligible for the 10% tax rate in 2003 and 2004 to the level scheduled for 2008; decreasing the maximum individual income tax rate to 35%; and making a modest increase in the alternative minimum tax exemption to $58,000 for married taxpayers, filing jointly and $40,250 for unmarried taxpayers. Remember, these changes are retroactive to January 1, 2003.
  
  

  (Despite the exemption increase, more taxpayers will become subject to the alternative minimum tax because of the general rate reduction and the increase of the standard deduction, which is not available when computing the alternative minimum tax.
  
  

• Advance rebate checks will be mailed to taxpayers eligible for the child tax credit based on the information on their 2002 federal individual income tax returns. The payments will be for $400 per child, and will be issued starting the end of July. (No checks will be issued when the 2002 tax return hasn't been filed yet, including unfiled returns on extension.) Taxpayers who don't receive a rebate check but qualify for the credit will get the benefit of the credit by claiming it on their 2003 income tax returns.
  
  
• Effective for capital assets sold after May 5, 2003, the five-year holding period to be eligible for the lowest income tax rates for long-term capital gains has been repealed, so now a capital asset only has to be held more than one year to qualify. The maximum tax rate for long-term capital gains for sales after May 5, 2003 is reduced from 20% to 15%. The tax rate applying to long-term capital gains for certain low-income taxpayers is reduced from 10% to 5%, and 0% for 2008. The capital gains rate reduction is scheduled to expire after 2008. (Remember the maximum tax rate for long-term gains from collectibles remains at 28% and long-term gain attributable to accumulated depreciation for real estate is still subject to a 25% tax rate.)
  
  
• Effective for taxable years beginning after December 31, 2002, most dividends from domestic corporations will be added to long-term capital gains eligible for the 15% and 5% tax rates. In order to qualify, the stock must have been held at least 60 days during the 120-day period beginning 60 days before the ex-dividend date. Dividends from certain foreign corporations eligible for benefits of a comprehensive income tax treaty with the United States will also qualify. Dividends taxed at long-term capital gains rates will not qualify as investment income to determine the limitation of the investment interest expense deduction. Taxpayers may elect to have dividends taxed as ordinary income to make more investment interest deductible. Since the dividends still aren't considered to be capital gains, capital losses in excess of the regular $3,000 limitation won't be available to offset them. (More details apply to these rules that are beyond the scope of this explanation.) Applying the long-term capital gains rate to dividends is scheduled to expire for taxable years beginning after December 31, 2008.
  
  
• Effective for qualifying property acquired after May 5, 2003 and before January 1, 2005, the 30% bonus depreciation enacted as part of the Job Creation and Worker Assistance Act of 2002 has been increased to 50%. The first-year depreciation deduction for luxury automobiles that qualify for 50% bonus depreciation has been increased from $4,600 to $7,650. (These assets mostly consist of new equipment items acquired for first-time use in a trade or business.)
  
  
• Effective for property placed in service in taxable years beginning in 2003, 2004 and 2005, the taxpayers with a trade or business may elect to expense up to $100,000 of the cost of certain depreciable assets, previously scheduled to be $25,000. Effective for the same years, off-the-shelf computer software will also be eligible for the expense election. The phase-out for the expense election amount will start at $400,000 instead of $200,000. Notably, certain vehicles that have not been classified as "luxury automobiles" because they weigh more than 6,000 pounds (mostly sport utility vehicles) qualify for this first-year deduction. Taxpayers will be able to make the expense election on an amended income tax return for the above years without IRS consent.
  
  
• Remember most states (including California) don't automatically conform to federal tax law changes. Since most of the states are in financial distress, it's unlikely they will adopt tax provisions that will decrease their revenues.

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Uncle Sam giveth, the states, counties and cities taketh away.

As the US Congress tries to stimulate the economy with tax cuts, state and city governments are hemorrhaging deficits and seeking ways to raise money. One suggestion is to increase the maximum individual income tax rate in California from 9.3% to 11%. (Remember long-term capital gains in California are taxed at the same rate as ordinary income.)

California state senator Jackie Speier has proposed repealing the S corporation rules for California tax reporting purposes for corporations with more than $20 million in gross receipts. It would be a shame to have this hard-earned conformity rule repealed. This proposed change will create much more complexity in handling multiple-state S corporations. California readers who are concerned should contact their representatives in the state legislature. (S.B. 516)

Other revenue-raising proposals are being suggested, including raising the amount paid for auto registration and enacting a sales tax on services.

I'll pass information on to you as it becomes available.

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Questions and Answers

Question

I have lived in my house for over 20 years. My brother and his wife granted their one-half interest to me. Nine months later, I received a property tax bill that doubled.

Is there anything that can be done? I remain in the house and no money was exchanged between my brother and me.

Answer

You were caught by the change of ownership rules in Proposition 13. Gift transfers of an "undivided interest" or tenancy in common can result in a reassessment of the property. This also applies when the interest of a joint tenant is terminated. There are exemptions that may apply for certain transfers, such as to certain partnerships, children, spouses, or revocable trusts. However, there is no exemption for a transfer to a brother or sister. (Revenue and Taxation Code Sections 65 and 62(f).)

If your brother had legal counsel when making the gift, he should have been advised of the consequences of the transfer.

Your brother also should have reported this transfer on a gift tax return.

Question

A client of mine has asked me about stepped up value. What exactly does this pertain to? He lost his wife last year and is getting ready to sell his home and an adjoining piece of development property. (From a real estate broker.)

Answer

You should tell your client to see a CPA and an attorney. There may be tax and legal requirements to be attended to relating to the death of his spouse.

"Stepped up basis" refers to a basis adjustment that happens at death according to the rules explained at Internal Revenue Code § 1014. Generally, the tax basis or "cost" used to determine gain or loss of inherited property is adjusted to the fair market value on the date of death or the alternate valuation date. (The alternative valuation date usually doesn't apply for spousal transfers.) Although assumed to be a "step up" or increase for inflation, the basis can also be "stepped down", such as for a used television or personal computer. The holding period is also adjusted to "more than one year", so a gain or loss will automatically be long-term.

Different rules may apply, depending on whether the property was held as community property, joint tenants, or separate property. A competent CPA will be able to tell your client the difference.

Question

I am a California state employee. If I retire and move to Nevada, must I still pay California income tax on my State retirement benefits?

Answer

Under federal law, California may not tax "qualified retirement income" received after 1995 by former California residents who move to another state. Qualified retirement income includes most state retirement arrangements, so your benefits should not be taxable if you move to Nevada. Be sure to eliminate all of your ties to California, including your bank accounts, and register to vote in Nevada to eliminate any potential issue of questions of residence.

Question

I worked for a company through a temp agency. The company is 70 miles away from my home and I commute to the site or telecommute. The contract was extended for one year, but 4 months into the second contract, the company hired me directly.

Since I now have "permanent" employment, I have decided to move within 10 miles of my work location. Can I deduct moving expenses?

Answer

No.

Question

I won $10,000 in a raffle. Is this taxable? Is this considered a luxury tax?

Answer

The excess of $10,000 over your raffle "donation" is taxable as gambling income. It is taxable on your individual income tax return and reported as "other income". Gambling losses may be deducted up to the amount of your winnings on Schedule A as a miscellaneous itemized deduction. This is not a luxury tax.

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

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If you have employee stock options, have you subscribed to Michael Gray, CPAs Option Alert?

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

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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 website at taxtrimmers.com/directions.shtml.

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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.