Home
Newsletter Archive
Introducing Our Firm
Tax Articles
Tax FAQ
Need Help?
Our Blog
Other Websites
Michael Gray, CPA's Tax and Business Insight
October 1, 2004
© 2004 by Michael C. Gray
ISSN 1539-395X
A monthly report to help you prepare for your financial future, keep more of what you earn by minimizing your taxes, and build an extraordinary business!
Route to _______ _______ _______ _______ _______
(If you find this information valuable, please pass it on to a friend!)
Table of Contents
- Welcome baby Kyan!
- The one-handed keyboardist.
- Congratulations Danny and Vanessa.
- Our rates are increasing.
- My vacation plans.
- Happy Halloween!
- Final tax filing deadline is October 15.
- It's time to check your withholding.
- U.S. Congress passes tax extenders.
- California tax amnesty enacted.
- Do you have a large IRA account?
- Trustee compensation should be defined.
- Social security disability income is taxable.
- Questions and Answers
- Do you have employee stock options?
- Visit our new articles.
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight
Welcome baby Kyan!
My first grandchild, Kyan Gray Baker arrived at 7:30 a.m. last Saturday, September 25. He weighed in at 7 pounds, 10 ounces and was 20 inches long. He is a very healthy boy and "Mommy" Holly is also fine. Janet and I were at Marin General Hospital when the baby arrived. Dan's parents, Phil and Jane Baker, flew up from San Diego and arrived that Saturday afternoon to join the celebration. If you are interested, Dawn posted a photo of Kyan on the Web at www.taxtrimmers.com/noindex/kyan.shtml. We'll leave it up for at least a couple of months.
The one-handed keyboardist.
Thanks to a sparring injury in a karate class, I have been using one hand for keyboarding. The cast comes off on October 8. (Hooray!) I haven't been able to wear a suit with this cast. (Darn!)
Congratulations Danny and Vanessa.
Danny Quan, an accountant member of our firm, and his wife, Vanessa, had a wedding celebration with family and friends on Saturday, September 25. We wish them a long, happy life together.
Our rates are increasing.
We are sending a letter with our new rates, effective November 1. If you would like a copy and haven't received one by October 8, call Dawn at 408-918-3162.
My vacation plans.
Janet and I will be leaving for Washington, D.C. on October 20. I'll be going to a Dan Kennedy conference in Cleveland, Ohio on the way back and will return to the office on November 8.
Happy Halloween!
Hope you and your family enjoy a happy and safe Halloween. If you have a business, Halloween is the second most popular holiday after Christmas. Shouldn't you be having a spooktacular promotion?
Final tax filing deadline is October 15.
The final extended due date for 2003 calendar-year income tax returns for individuals, partnerships, trusts and estates is October 15. There are only two weeks left. 'Nuff said!
It's time to check your withholding.
October is a good month to check your withholding. Quite often either the federal or state amount will be too high or too low. If your income and deductions will be close to last year's, compare the expected withholding for this year to the tax on last year's income tax returns. If your situation has changed, consider consulting with a tax advisor about your situation.
U.S. Congress passes tax extenders.
As an election year gift, Congress passed the Working Families Tax Relief Act of 2004 (H.R. 1308.) President Bush has said he will approve the bill. Several tax breaks were scheduled to expire after 2004. The new law extends them. 1) The 15% bracket for married couples filing a joint return will continue to be double the bracket for singles through 2010. The standard deduction for married persons, filing joint returns will also be double the amount for singles through 2010. 2) The child tax credit will remain at $1,000 per child through 2010 (subject to phaseout). 3) The 10% bracket will apply to the first $14,600 of income for married, joint and $7,300 for singles in 2005, instead of the respective scheduled amounts of $12,000 and $6,000.
Shorter extensions through 2005 were passed for the increased exemption for AMT, the $250 above-the-line deduction for teachers' supplies, and research credits.
50% bonus depreciation for business assets was not extended and will expire at the end of 2004. (Buy needed depreciable assets before December 31, 2004.)
The exemption from luxury tax limits for SUVs still hasn't been changed.
A major item in the new tax law is an attempt to make a consistent definition for a dependent child for various tax provisions. When two parents share custody equally and the child lives with each parent the same amount of time during a taxable year, the dependency exemption for the child will go to the parent with the highest income. Without conforming state legislation, this new rule will result in non-conformity problems in some states, including California.
California tax amnesty enacted.
The California budget legislation recently signed by Governor Schwartzenegger includes an amnesty provision to waive penalties (not interest) for late income tax returns and sales and use tax returns. The completed and signed application for amnesty must be submitted during the period February 1 through March 31, 2005. A condition of amnesty for California income taxes or California franchise taxes is to pay taxes, penalties and interest on time for the taxpayer's 2005 and 2006 income tax or franchise tax returns.
If you think you may have a situation where you can benefit from amnesty, consult with a tax advisor for help.
Do you have a large IRA account?
Large retirement accounts present a tough tax planning problem because they may be subject to both estate tax at death and income taxes for distributions. A relatively new development to be considered for an IRA with a balance of at least $500,000 is a restricted management account (RMA). The purpose of an RMA is to provide management of the funds for long-term return. An incidental benefit of the arrangement is to receive a valuation reduction of 30 - 40% for estate tax reporting.
If you have a large IRA, ask your investment advisor whether he or she offers this service, and consult with a tax advisor and an estate planning attorney. If you can't find information elsewhere, call Michael Gray at 408-918-3161.
Trustee compensation should be defined.
I recently went to a class about accounting for trusts and estates. The instructor said that if the compensation of the trustee isn't defined in the trust instrument, it should be agreed upon with the beneficiaries when the trustee assumes his or her duties. (Professional trust companies have their own schedules of fees.)
Does your trust instrument say how the trustee should be compensated? Being a trustee is a difficult, time-consuming task.
If you are a trustee, do you have a written agreement with the beneficiaries defining how you will be compensated?
These are issues to be discussed with a lawyer who handles trust administrations.
Social security disability income is taxable.
The Tax Court recently ruled that, unlike social security retirement income, social security disability income is not eligible for exclusion and is therefore fully taxable. In this case, the taxpayer claimed the payments should be excluded as made on account of personal injury or sickness. The Tax Court found that payments under the Social Security Act were not designed to compensate for military injuries. (Reimels, 123 T.C. No. 13.)
Questions and Answers
Question
Are awards received in a wrongful death case taxable? My wife is the only sibling from her dad's estate and we have several hundred thousand dollars in bills from his hospital and nursing home we might be liable for. We reside in Illinois.
Answer
My condolences for your loss. I will only discuss the federal tax rules for your issue. You should be working with an attorney and a tax return preparer in settling your father-in-law's estate.
Amounts received for physical personal injuries (including wrongful death) are excludable from taxable income. Punitive damages are taxable income. (Internal Revenue Code Section 104(a)(2).) However, if only punitive damages may be awarded under a state's wrongful death statutes, which were in effect on or before September 13, 1995, the damages are excludable (§ 104(c)).
The CCH Federal Tax Service cites the Conference Committee Report to P.L, 104-188 (1996) H,R. Rep. No. 104-737 in concluding that nonpunitive damages received for wrongful death are excluded from income under Internal Revenue Code Section 104. The clarifying language under § 104(c) and Letter Ruling 200029020 also support this conclusion.
Damages received under a wrongful death statute are excludable from the taxable estate of the deceased person, but amounts that person would have been entitled to during his or her lifetime for pain and suffering or as reimbursement for medical expenses, etc. are includable in the taxable estate. (Revenue Rulings 69-8, 54-19, 75-127, 75-126, 83-44.)
Question
I want to buy the home next door to mine, fix it up and sell it 2 or 3 months later. What kind of taxes and fees will I have to pay? What are the negatives in selling so fast?
Answer
I don't know what fees you will have to pay. There will probably permits for the repair work. There may be commissions to real estate brokers.
If this is an isolated transaction, any gain will be a short-term capital gain, subject to regular income tax rates (maximum 35%). If you held the house for more than one year, you could qualify for long-term capital gains rates (maximum 15%). Holding the house for a longer period of time exposes you to more market risk. If mortgage interest increase dramatically, the value of the house could go down or it could be harder to sell.
If you do a lot of "rehabs", you will probably have a trade or business, not qualifying for capital gains treatment and subject to self-employment taxes in addition to regular income taxes.
Good luck!
Question
Can I file Chapter 7 for an S corporation that has no assets and no money, but owes 2004 (California) minimum tax of $800 plus penalties?
Answer
I'm not a bankruptcy attorney.
It seems to me it would cost less to pay the tax and terminate the corporation before the end of this year to stop the expense.
Question
We lost $2 million in the stock market over the last two years.
I need money to pay bills.
I have money in my wife's Roth IRA, my Roth IRA, or my SEP IRA.
- Can I take the money from the IRAs tax-free?
- Would it be better to get a home equity line of credit?
- Would it be better to get a home equity loan?
Answer
I don't have enough details to answer your questions. I am assuming you are under age 59 1/2.
The SEP-IRA is the worst candidate for funds, because withdrawals will be subject to income taxes plus penalties. There is an exception when the withdrawals are made as a series of substantially-equal payments over your life expectancy. (§ 72(t)(2)(A)(iv).)
The amounts contributed to the Roth accounts can be distributed tax-free. Amounts in excess of the contribution amounts are subject to regular tax plus the 10% early-distribution penalty.
The equity line of credit has the advantage of being able to take funds as you need them, but will probably have a higher interest rate and annual fees as compared to the equity loan.
I know you are short on funds, but you should seek more detailed help to solve your problem.
Good luck!
Question
My husband and I bought a home in Palmdale, CA on June, 2003. We want to sell the house now and buy a new home. We were told we could avoid the tax if we bought the replacement residence within a certain time frame. Is that right?
Answer
Your friend is thinking about an old tax law that has been repealed and replaced with the new "more than two years holding period" rule. If you sell your home with the facts you gave me, any gain will be taxed as a long-term capital gain. Remember California taxes long-term capital gains at the same rates as other income and will require income tax withholding for the sale of 3 1/3% of the sales price.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.
If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?
To subscribe or review past issues, go to http://www.stockoptionadvisors.com/optionalert/.
Visit our new articles!
P.S.
My daughter and her husband, Holly and Dan Baker, have 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 and their website address is www.marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at www.taxtrimmers.com/directions.shtml.
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.
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.
|
Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose,
CA
95129
(408) 918-3162
FAX: (408) 998-2766
email: mgray@taxtrimmers.com
Hours: 8am - 5pm PDT Monday - Friday
|
|
|