Michael Gray, CPA's Tax and Business Insight

March 4, 2005

© 2005 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!

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Table of Contents

• Do we have your information yet?
• Corporate due date is almost here.
• Have you submitted 1099 forms for your business?
• Remember California amnesty applications are due March 31.
• Last chance to claim refunds for unfilled income tax returns.
• Michael Gray participates in estate program.
• Penalties can apply when "no tax due" returns are filed late.
• Three 2005 Hondas certified for clean fuel deduction.
• Bush administration proposes $1.4 trillion in tax cuts.
• How might our future tax system look?
• Marché aux Fleurs restaurant scores great review.
• Questions and Answers
  • Do I have to pay capital gains in two states?
  • Can I claim head of household?
  • Can I claim my son as a dependent?
  • Is a gift I received subject to income taxes?
  • Are medications tax deductible?
  • Can I use a 401(k) contribution to qualify for a Roth IRA?
• Do you have employee stock options?
• Visit our new articles.
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

Tax season is here. Do we have your information yet?

For the most part, we prioritize processing of income tax returns on a first-come, first-served basis. If we receive the information after March 15, we will probably be preparing an extension request for your income tax returns. If we don't have your information yet and you want an appointment to bring it to us, please call 408-918-3162 to make an appointment now. Don't wait for that last 1099 form or K-1, get your tax return in the preparation queue now.

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Corporate due date is almost here.

The due date for calendar-year corporate income tax returns is March 15.

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Have you submitted 1099 forms for your business?

We are working with a client on a tax audit of his "Schedule C" business. The IRS requested copies of the Forms 1099 submitted by the taxpayer and proposed to limit his deduction for applicable items to the amounts reported on Forms 1099. The forms for 2004 payments were due on February 28, 2005. Even if they are late, we recommend that you make the effort to submit these forms. They are required for payments for services rendered to a business by non-corporate taxpayers and by incorporated attorneys, doctors and dentists. They are also required for payments of interest and dividends and payments for a sale of real estate. They are also required for other payments by a business. See your tax consultant about these requirements.

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Remember California amnesty applications are due March 31.

Taxpayers who have unfiled California income tax returns or have liabilities for disputed or unreported items for years before 2003 should consider making an amnesty application. The application has to be filed by March 31, 2005. The payment of estimated liability due to the Franchise Tax Board also is required to be paid by March 31, 2005. Alternatively, installment agreements may be made as long as the balance is paid off by June 30, 2006. The income tax return or amended income tax return must be filed by May 31, 2005.

Spidell Publishing has posted amnesty applications and information at www.caltax.com. Also, the Franchise Tax Board web site is www.ftb.ca.gov.

Remember, amnesty does not apply to federal tax penalties and California does share information with the IRS.

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Last chance to claim refunds for unfiled income tax returns.

When taxpayers don't file income tax returns within three years of the original due date, the IRS gets to keep the unclaimed refund. This means to claim a refund for an unfiled income tax return for the year 2001, you must file the tax return no later than April 15, 2005.

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Michael Gray participates in estate program.

Michael Gray, CPA and attorney Naomi Comfort will give a three-hour presentation on handling retirement accounts after a death as part of a one and a half day estate planning and administration seminar presented as a Bay Area Regional Education event by the California Society of Certified Public Accountants. Part of the proceeds will provide scholarship funds for local accounting students. The program will be on Friday, April 22 and Saturday, April 23 at the Monterey Hilton, 1000 Aguajito Road, Monterey, California. The investment is $224 for members, $112 for student and candidate members, and $254 for nonmembers.

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Penalties can apply when "no tax due" returns are filed late.

California has severe financial penalties when you disregard their requests for income tax returns. A penalty of up to 25% of the total tax plus an additional 25% of the tax due can apply in some circumstances.

Space doesn't permit going into detail about all of the potential penalties taxpayers may be subject to. Please, file your tax returns on time. (Extensions of time to file protect you from penalties provided the tax is paid by the original due date of the tax return and you file the return by the extended due date.)

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Three 2005 Hondas certified for clean fuel deduction.

The IRS has certified the 2005 Honda Insight, Civic Hybrid, and Honda Accord Hybrid as eligible for the clean-fuel deduction of up to $2,000 on Form 1040. (IR-2005-14.)

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Bush administration proposes $1.4 trillion in tax cuts in fiscal year 2006 budget.

President Bush is seeking to make the reduction in tax rates and repeal of the estate tax permanent, which would cut taxes by 1.1 trillion over the next 10 years. With the other tax proposals, the tax cuts would be $1.4 trillion.

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How might our future tax system look?

A recommendation by Federal Reserve Chairman Alan Greenspan to President Bush's Advisory Panel on Federal Tax Reform suggests how the problem of mounting deficits might be resolved. In testimony before the panel yesterday, Mr. Greenspan suggested that the current tax system be replaced with a combination of an income tax together with a national consumption tax.

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Marché aux Fleurs restaurant scores great review.

The Marin Scope newspapers recently printed an excellent review for Marché aux Fleurs restaurant, including a charming photo of my daughter, Holly, her husband, Dan, and their son, Kyan.

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Questions and Answers

Question

I'm selling a rental property in Colorado. Do I have to pay capital gains to Colorado and California?

Answer

Presumably you're a California resident.

Yes. A sale of real estate is always sourced in the state it is located in. As a California resident, you are subject to California income tax on your worldwide income. A tax credit is available on the California income tax return to reduce or avoid double taxation. See California Schedule S and the related instructions. Consider consulting a professional for your tax return preparation for the year of sale.

Question

My 24 year old son lives in my home with me. I am widowed. I pay all expenses of the upkeep of the home (mortgage, taxes, heating, insurance, etc.) He is gainfully employed and can not be claimed as my dependent. A friend advised that I could still file as head of household. Is that true?

Answer

You may claim head of household status for 2004.

Effective for 2005, the child or other dependent must qualify for the dependency exemption deduction for the parent in your circumstances to qualify as a head of household.

You (and other single parents with adult children) should write or call their representatives in Congress to make a technical correction and reverse this change.

Question

I've been paying support through the courts for the past 8 years to my son, who is 8 years old. My son's mother and I have never been married. His mother hasn't been working for the past 5 years. I wish to claim my son on my tax return, but his mother will not allow it. How do I, and do I have the legal right to claim my son?

Answer

The custodial parent is generally entitled to the dependent exemption. The only way for you to get it is for her to release it to you on Form 8332.

Question

I received a cash gift from my family in Taiwan. Is the gift subject to income tax?

Answer

No. Non-commercial gifts aren't subject to income taxes. Your family should determine whether they have any liability for gift taxes in Taiwan.

Question

Are medications tax deductible? Is there a minimum, or is it even worth the trouble?

Answer

The cost of prescription medications is deductible as a medical expense on Schedule A. See the instructions for Schedule A. 7.5% of adjusted gross income is subtracted from medical expenses and the excess is an itemized deduction. Many people find it hard to deduct their medical expenses because of the 7.5% "floor".

As an alternative, find out if your employer offers a salary reduction plan or health savings arrangement. With these plans, you can put aside funds on a pre-tax basis to pay medical expenses, including medications.

Question

Do contributions to a 401(k) plan reduce adjusted gross income so that I can get under the $150,000 limit and contribute to a Roth? For example, if someone has income of $160,000 before a 401(k) contribution of $14,000, is he or she eligible to contribute to a Roth, also?

Answer

Yes. Unlike regular IRAs, participation in another qualified plan doesn't disqualify a taxpayer from participating in a Roth. The limitation is based on "modified adjusted gross income". See pages 54, 56 and 72 of IRS Publication 590 for worksheets to compute the limitation amount. The IRS web site is www.irs.gov.

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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, CPA's Option Alert?

To subscribe or review past issues, go to http://www.stockoptionadvisors.com/optionalert/.

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Visit our new articles!

• Profiles and Power and Success book review

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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 http://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 http://www.taxtrimmers.com/directions.shtml.

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P.P.S.

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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.