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Michael Gray, CPA's Tax and Business Insight
June 2, 2006
© 2006 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
- Next estimated tax payment for individuals due June 15.
- Congratulations, graduates!
- "Survivor" gets the opportunity to test his skills in jail.
- Our "money sale" is over.
- Extension of tax breaks enacted.
- Michael Gray speaks on the new tax law.
- US Armed Services gets tax break.
- Sample Roth 401(k) amendments issued.
- Corporation loses right to appear in court.
- Grandparent gets gift tax break for prepaying grandchildren’s school tuition.
- California subjects LLC with California resident managing member to tax.
- Questions and Answers
- Principal Residence questions answered.
- Where can I find success stories?
- Can my son’s father claim him as a dependent?
- Are personal injury settlements paid out of pocket deductible?
- Do you have employee stock options?
- Do you have real estate tax issues?
- Read our new article!
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight
Next estimated tax payment for individuals due June 15.
The next estimated tax payment for individuals and other calendar year taxpayers is due on June 15. If your payments aren’t based on last year’s income tax returns, you should contact your tax advisor about updating your estimated tax computations.
If we can be of service relating to this, call Mike Gray at 408-918-3161.
Congratulations, graduates!
It’s the season for student graduations. Congratulations, graduates! Now it’s time to find summer or other jobs, attend the "school of hard knocks" and find out how the "real world" works. Good luck! We are counting on you to rise to the occasion and become responsible business and community leaders.
"Survivor" gets the opportunity to test his skills in jail.
Richard Hatch, the winner of the first "Survivor" show series, has been sentenced to 51 months in prison for tax evasion. He has also been ordered to pay $474,971 of unpaid taxes for 2000 and 2001 plus interest and penalties.
Hatch neglected to report his $1 million prize, $320,000 received for radio appearances plus other items. He says that he thought the producers of the "Survivor" show were supposed to pay the taxes for him.
Lawyers for Hatch say they are appealing the decision.
Our "money sale" is over.
The special GMAC below prime rate home equity line of credit offer has been discontinued. We advise that home owners who believe they would like a reserve line of credit for things like paying medical expenses, education expenses or remodeling their homes find out what is available at their own bank and consider getting the line in place now. There may be fewer financing alternatives in the near future.
Extension of tax breaks enacted.
President Bush signed the Tax Increase Prevention and Reconciliation Act on May 17, 2006.
Here are a few of the provisions enacted:
- Extension of reduced tax rates for long-term capital gains and qualified dividends through 2010.
- Extension of alternative minimum tax relief (increased exclusions) for 2006.
- Extension of increased limit for expensing business assets through 2009.
- Changes in requirements for offers in compromise, including required tax deposits and potential for automatic approval, effective for offers submitted on or after July 16, 2006.
- More children up to age 17 subject to Kiddie Tax, effective 2006.
- More taxpayers eligible to convert regular IRAs to Roth IRAs for tax years beginning after 2009.
You should consult with your tax advisor about how you are affected by this new tax law. Also, be aware that more tax legislation may well be passed during 2006.
Michael Gray speaks on new tax law.
Michael Gray will explain the Tax Increase Prevention and Reconciliation Act at a luncheon meeting of the Tax Interest Group, Silicon Valley San Jose chapter of the California Society of Certified Public Accountants on June 21, 2006.
The presentation is oriented for professional tax advisors.
The meeting will be from noon to 1:30 at the Original Hick’ry Pit, 980 E. Campbell Ave., Campbell. The investment with advance registration is $30 for CalCPA members and $35 for non-members. For reservations, call Stephanie Stewart at 408-983-1122.
US Armed Services get tax break.
Under the Heroes Earned Retirement Opportunities Act, members of the U.S. Armed Services may elect to treat otherwise excludable combat pay as earned income to determine the amount that may be contributed to an individual retirement account or Roth. These taxpayers may also make IRA or Roth contributions for 2004 and 2005 retroactively during a three-year period beginning on the enactment date.
Sample Roth 401(k) amendments issued.
Starting January 1, 2006, 401(k) plans may offer a non-deductible Roth account option to eligible employees. The IRS has finally issued sample amendments to adopt this election that plan sponsors can use as a model.
(Notice 2006-44.)
Corporation loses right to appear in court.
On February 14, 2005, NT, Inc. petitioned the Tax Court to redetermine IRS proposed deficiencies for its 1998 and 1999 federal income tax returns.
On August 1, 2005, the California Franchise Tax Board suspended NT’s corporate powers, rights and privileges for failing to pay California income taxes. The California secretary of state certified the suspension.
The IRS moved to dismiss the NT’s Tax Court petition because its corporate powers were suspended.
The Tax Court ruled in favor of the IRS.
Remember that states like California can suspend corporations that don’t meet their obligations to file required reports and income tax returns or to pay their tax liabilities due to the state. Compliance is especially important when you have litigation in process in which the corporation is a party.
Corporations should consult with their legal counsel about this issue.
(NT, Inc. v. Commissioner, 126 T.C. No. 8 (4/19/06).)
Grandparent gets gift tax break for prepaying grandchildren’s school tuition.
A grandparent made an arrangement with a private school to prepay tuition for the elementary school education of his or her grandchildren. The tuition payments were non-refundable. The school was not obligated to guarantee enrollment of each grandchild. The grandparent or parents of the children would pay any future tuition increases.
The IRS ruled these payments met the requirements for exclusion from gift tax and generation-skipping tax for direct payments of education or medical expenses.
In this case, the grandparent was able to eliminate a lot of cash from future estate or generation-skipping tax while incurring no current transfer tax liability—a great tax break.
(LTR 200602992.)
California subjects LLC with California resident managing member to tax.
The California Board of Equalization has ruled that an LLC registered to do business in Montana was doing business in California, subject to California LLC tax and fees, solely because the managing member was a California resident. (Appeal of Mockingbird Partners, LLC (May 17, 2006) California State Board of Equalization Cash No. 306061.)
The State Board of Equalization made a similar ruling for a Nevada LLC when the managing member was a California resident in Appeal of International Health Institute, LLC (March 7, 2006) California State Board of Equalization Case No. 305199.
Questions and Answers
Dear readers:
Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?" (www.realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.
Question
I was once convicted of theft and forgery. The judge sentenced me to two years probation and restitution. That was in 2003. Today the repercussions of that mistake affects my ability to find employment. Prior to my conviction, I had no criminal record.
Do you know of any success stories where people have embezzled money, paid their debt to society and have been restored back into the work force?
Answer
Although I can’t recite such examples, they exist. I suggest that you visit a large public library and ask a librarian to help you find some. O. Henry wrote many of his famous novels while in jail.
There are so many recovery groups for different situations, there has to be one or more for people in your situation. Look for one on the web. Ask your parole officer for suggestions.
Here’s one story that you might find of interest. There was a homeless person that started visiting a library to keep warm on cold winter days. He read many books there. Then he wrote a book, called The Greatest Salesman In The World. He was able to get the book published, and it became a best seller. Then he wrote more books and gave lectures. He became the editor of Success magazine. The name of that homeless man was Og Mandino. He wrote some of the greatest inspirational books of all time. Read some of those.
Keep clean. Be patient. Study some of the books for which we’ve written reviews at www.profitadvisors.com/reviews.shtml. You can borrow most of them at no charge at your public library.
Question
My son’s father and I are currently in the process of writing up our court papers for visitation and support in Indiana. We were never married.
Since we were never married, does he have any right to claim my son as a dependent on his income tax returns? I make way less money and can’t pay my bills without the exemptions I claim.
I am worried that he is going to want to provide that we have to alternate claiming the exemption on alternative tax years. Since we were never married, does he have that option?
Answer
You have said this man is your child’s father. This does provide the possibility that he could claim your child as his dependent. If the child is living with you for more than one-half of the year, you are entitled to claim the child as your dependent by default. He can only claim that your child is his dependent if you agree to waive claiming the exemption and to let him claim it.
Question
Are personal injury settlements paid out of pocket deductible? You have discussed the taxability of the award, but not the deductibility.
Answer
It depends. You will need to see a tax advisor about your facts.
When the injury relates to a business, such as from a product liability lawsuit or an accident on a hotel property, the expense is usually deductible as a business deduction.
When the injury is personally inflicted, such as a civil suit for assault, the payment is not deductible.
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 www.stockoptionadvisors.com/subscribe.shtml.
We are starting a newsletter devoted to real estate tax issues.
Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. The subscription rate is $19.95 per month. For a sample issue, visit www.realestatetaxletter.com.
Visit our new article!
- "The Tipping Point" Book Review
P.S.
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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.
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Michael Gray, CPA
2190 Stokes St., Suite 102 San Jose, California 95128-4512 (408) 918-3162 Fax (408) 998-2766 email: mgray@taxtrimmers.com |
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