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Michael Gray, CPA's Tax and Business Insight
June 30, 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
- Happy Fourth of July!
- Wedding bells will soon be ringing for Dawn Gray and John Siemer.
- Our July birthdays.
- The year is half over. How’s it going?
- Should you submit an offer in compromise before July 17th?
- Big tax increase for US expatriates.
- Michael Gray speaks on new tax law.
- No tax when inherited IRA is transferred to special needs trust.
- IRS explains telephone excise tax refund.
- Assets sold to family partnership included in decedent's estate.
- New York gives employees with home offices a break.
- Questions and Answers
- Do you have employee stock options?
- Do you have real estate tax issues?
- Read our articles!
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from this newsletter.
Happy Fourth of July!
For many of you (and for us), this is a four-day weekend. Enjoy yourselves and have a safe holiday. Remember to be thankful for the blessings of liberty that were the ideals of our founding fathers, and to be vigilant in preserving our liberties during these perilous times.
Wedding bells will soon be ringing for Dawn Gray and John Siemer.
Our webmaster and my daughter, Dawn, will be celebrating her wedding day on July 9. She and John Siemer will have their wedding ceremony in the Cathedral Grove at Roaring Camp and Big Trees park in Felton, California. As usual, my job is to write checks and show up for the ceremony. Congratulations Dawn!
Our July birthdays.
My father, Aubrey Gray, is celebrating his 88th birthday on July 16th. Congratulations, Dad! We’re glad you’re still with us.
My son, James Gray, is celebrating his 26th birthday on July 28th. James seems to be coming into his own. He has been working hard preparing to teach an Ethics class at San José State University this fall.
The year is half over. How’s it going?
Time can slip away from us. How is your year going? Have there been any major events with tax or financial planning consequences? Is anything major coming up soon? Should we schedule a mid-year planning conference? Call Michael Gray at 408-918-3161 to schedule an appointment.
Should you submit an offer in compromise before July 17, 2006?
Offers in compromise can be used to reduce federal tax liabilities for taxpayers in financial distress. They can also be used to make settlements in situations when there is a dispute over a tax issue (doubt as to liability). In the past, a feature of offers in compromise was to suspend collection activity by the IRS.
Effective for offers in compromise submitted on or after July 17, 2006, a payment of 20% of the proposed "lump sum" balance due must be paid when the offer is submitted. A lump sum offer is any offer of payments to be made in five or fewer installments.
Any periodic payment offer in compromise (to be paid in six or more installments) must be accompanied by the first proposed installment. The taxpayer must continue to make payments under the proposed schedule, or the offer will be considered withdrawn.
Considering the additional hardship of the requirement of making these payments before the offer is accepted by the IRS, anyone who is considering making an offer in compromise should submit their offer before July 17, 2006.
See your tax advisor or tax attorney. If you would like our help to prepare an offer in compromise, call Mike Gray at 408-918-3161.
Big tax increase for U.S. expatriates.
In order to pay for extending certain tax benefits, like low rates for long-term capital gains and qualified dividends, the Tax Increase Prevention and Reconciliation Act includes offsetting revenue raising provisions. A group that will be hit with a big tax increase is U.S. citizens or permanent residents working abroad. Effective 2006, the methods of computing the foreign earned income exclusion and housing allowance exclusion have been changed. More important, tax rates that apply to compute the regular tax and the alternative minimum tax non-excluded income are computed "as if" excluded income was taxable. In other words, higher marginal tax rates will apply to taxable income.
If you are a U.S. expatriate working overseas, consult with a tax advisor immediately to prepare for a big increase in your tax bill next April.
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 Committee, Peninsula Silicon Valley chapter of the California Society of Certified Public Accountants on July 20, 2006.
The presentation is oriented for professional tax advisors.
The meeting will be from noon to 1:30 at Hobee’s Restaurant, 1111 Shoreway Road, Belmont, CA 94002. The investment with advance registration is $25 for CalCPA members and $35 for non-members. For reservations, call Jane Dunbar at 650-802-2465.
IRA beneficiary not taxed when inherited IRA transferred to special needs trust.
A taxpayer was disabled and his mother acted as his legal guardian. He was eligible to receive Medicaid and other public benefits.
His guardian set up a special needs trust. The taxpayer was the sole beneficiary, and the guardian was the trustee. The trust was not considered an asset of the taxpayer to preserve his right to public benefits. Under the terms of the trust, income and principal would be distributed to the taxpayer or accumulated for his benefit.
When the taxpayer’s father died, he inherited an interest in his father’s IRA. The guardian proposed to transfer his interest in the IRA to another IRA for the benefit of the special needs trust and the taxpayer.
The IRS ruled that the special needs trust was a grantor trust, which means the income and deductions of the trust should be reported on the taxpayer’s individual income tax return. Since a grantor trust is "owned" by the grantor, there is no change in ownership for a transfer by the grantor to the trust. Therefore, the transfer of the IRA to the trust is not taxable, and he will be taxed on IRA distributions as they are made to the trust.
(Letter ruling 200620025.)
IRS explains telephone excise tax refund.
The IRS has given up fighting to collect federal excise taxes for long distance telephone calls. The tax was based on charges relating to distance and time, but the IRS was trying to collect the tax for charges based on minutes. The IRS will also refund excise taxes collected for long distance and "bundled services" billed after February 28, 2003 to July 31, 2006, plus interest. Taxpayers who do not receive a refund of these charges from their telephone carrier(s) will apply for the refund on their income tax return for the first taxable year that includes December 31, 2006.
The IRS will specify safe harbor amounts that may be applied for by taxpayers without documentation. Otherwise, taxpayers will have to comb their old telephone bills or otherwise document the refund claim.
Telephone service providers may apply for refunds not claimed by their customers using Form 720X, Amended Quarterly Excise Tax Return, and pay the refunds to their customers.
A federal excise tax still applies for local-only service charges.
(Notice 2006-50.)
Assets sold to family partnership included in decedent’s estate.
Lillie Rosen passed away during 2000 at age 92. Lillie’s representatives had previously transferred her cash and securities to a family limited partnership, and made gifts on her behalf to her descendents. Since Lillie had insufficient income and assets to pay for her care, the limited partnership advanced funds to pay her living expenses and additional cash gifts to family members.
The Tax Court held in favor of the IRS that the assets that Lillie had transferred to the limited partnership were included in her taxable estate. The court found the transfer was not a bona fide sale, and that the partnership was not formed for a legitimate and significant non-tax reason. The formalities of a business were not observed, and the assets were used to pay her personal living expenses. The transfer was simply a way to avoid federal estate and gift tax.
This case and a number of other rulings illustrate the importance of not being too "greedy" with estate planning transfers. If Lillie had retained sufficient assets outside the partnership to pay her personal living expenses and the partnership had been conducted properly, the tax benefits of the transfer probably would have held up in court.
(Estate of Rosen v. Commissioner, T.C. Memo. 2006-115 (6/1/06).)
New York gives employees with home offices a break.
The New York Department of Taxation and Finance has announced that, beginning January 1, 2006, a non-resident or part-year resident employee whose assigned or primary work location is in New York state may treat any normal work day spent at a home office outside the state as a day worked outside the state under the convenience of the employer test, provided the home office is a bona fide employer office. (TSB_M-06(5)(I) (5/15/06).)
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?" (realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.
Question
What is the tax consequence of winning a raffle prize? Which prize would have a better tax result: a home worth $800,000 or $500,000 in cash?
Answer
Raffle prizes are taxable income. The tax for a home worth $800,000 would be higher than for $500,000 cash. The home would still be a better prize, after income taxes. If you wanted to keep the home, you could probably borrow the money using a mortgage secured by the home to pay the tax.
Question
Is selling a covered call considered by the IRS to be a short sale?
Answer
No. A covered call is different from a short sale. A short sale is a fixed obligation to sell something that will be delivered in the future. A call is an option to sell, which may or not be exercised in the future, even if you possess the underlying asset to be sold in a covered call.
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 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 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.
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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