Michael Gray, CPA's Tax and Business Insight

December 28, 2007

© 2007 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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Kyan Baker with Santa
Kyan Baker and Santa

Happy New Year!

We will be closed on January 1. Michael Gray will be out of the office from December 30 through January 4. Thi Nguyen will be out of the office on December 31 and on January 3 and 4.

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Anastasia Crosson
Here's Anastasia

Welcome Anastasia Crosson!

Anastasia Crosson has joined us part-time to help Dawn Siemer keep on top of the administrative duties at our CPA firm. Anastasia is a Journalism major at San Jose State University and is working two part-time jobs to pay for her education. She says she doesn’t have much time for fun, but enjoys occasionally going to see a movie or eating out with friends and family. Anastasia wishes she had more time to enjoy her hobbies — Polynesian dancing and Irish step dancing! We are delighted to have her as a member of our CPA firm family.

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Remember to make last-minute donations.

Gifts of appreciated publicly traded stock make great donations because you get a double tax benefit. The donation is tax-deductible at fair market value, while the "built in" gain escapes tax.

Also, year-end gifts made with a credit card are currently deductible. (But be sure the transaction is processed by December 31.) So you don’t have to pay cash to get a current tax deduction.

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Tax organizer instructions are in the mail.

We have mailed paper organizers or online tax notebook organizer instructions to clients for whom we prepared 2006 income tax returns during 2007, and will soon be sending instructions to clients that we had planning meetings with during 2007. If you haven’t received instructions to assemble information for your income tax returns by January 15 and want us to prepare your income tax returns, call Dawn Siemer weekday afternoons at 408-918-3162.

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Make your tax return preparation appointment now.

Our tax season calendar for tax preparation appointments is also rapidly filling in. If you want to meet with us about preparing your income tax returns, call Dawn Siemer at 408-918-3162 to schedule an appointment.

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Remember estimated tax payment is due January 15.

The final estimated tax payment for 2007 is due January 15, 2008. See your tax advisor to determine if any adjustments are required for exercises of options, sales of securities, etc. during the last four months of 2007.

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A holiday gift from Congress - residential mortgage debt forgiveness tax break passes.

The Congress has passed and President Bush has approved H.R. 3648, the "Mortgage Forgiveness Debt Relief Act of 2007." The legislation is effective for discharges of indebtedness on or after January 1, 2007 and before January 1, 2010. The Act also extends the date through which mortgage insurance premiums are deductible as interest from December 31, 2007 to December 31, 2010. For more details, see the December 27, 2007 issue of Michael Gray, CPA’s Real Estate Tax Letter.

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Another holiday "gift" from Congress – 2007 AMT "patch" is finally passed.

On December 19, 2007, the House of Representatives approved the Senate-passed version of H.R. 3996, the "Tax Increase Prevention Act of 2007." (President Bush is expected to sign the legislation.)

The Act increases 2007 exemptions for computing the federal Alternative Minimum Tax to $66,250 for married persons, filing jointly (was $62,550 for 2006), $33,125 for married persons, filing separately (was $31,275 for 2006) and $44,350 for single persons (was $42,500 for 2006).

The Act does not include any revenue offsets to pay for reducing the Alternative Minimum Tax.

This political football has made tax planning difficult, and will cause many errors on 2007 income tax returns, because the exemption amounts will be in error on the forms being published by the IRS.

Remember the exemption is phased out for high-income taxpayers, so the exemption will be zero when alternative minimum taxable income is $415,000 for married persons, filing jointly, $207,500 for married, filing separately, and $289,900 for singles.

The Act also allows certain nonrefundable credits to reduce the AMT for 2007.

No provision was made for the AMT exemptions for 2008.

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Technical Corrections Act simplifies refundable minimum tax credit and increases it for some taxpayers.

Congress passed H.R. 4839, the "Tax Technical Corrections Act of 2007" on December 19, 2007.

The Act includes a provision modifying the computation of the refundable minimum tax credit. The provision is retroactively effective on January 1, 2007 through December 31, 2013. The change will enable some taxpayers to receive a bigger refund of unused minimum tax credits that are more than three years old.

For more details, see Michael Gray, CPA’s Option Alert #48, dated December 21, 2007. To get a copy, email Dawn at mgray@taxtrimmers.com or call Dawn at 408-918-3162.

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IRS puts on "Scrooge" hat and applies "wash sale" rules to IRA stock or securities purchase.

The IRS has ruled the wash sale rules apply when an individual who is not a dealer in stock or securities sells stock or securities at a loss and within 30 days, the individual directs his IRA to purchase the same or substantially similar securities. This means the loss on the individual’s sale will be disallowed. The IRS also said there will be no "basis adjustment" for the individual’s IRA account relating to the disallowed loss.

The IRS based this conclusion on a very old case that predates the existence of individual retirement accounts, Security First National Bank of Los Angeles (28 BTA 289 (1933)). In that case, an individual directed a trust to repurchase bonds for which he was claiming a personal loss.

This is an onerous ruling that may call other tax planning strategies using IRAs into question. Can the dealer status of a real estate investor be attributed to his or her IRA, resulting in taxable income to the IRA as "unrelated business taxable income"? Can offsetting option positions held in an IRA be applied to suspend the holding period of securities held by the IRA owner? We don’t really know. Disclosure may be required.

Most tax return preparers don’t know what securities are being held in their clients’ IRAs, and wouldn’t be aware there is a problem. Now they can be penalized for missing the item because they "should have known". This ruling is authoritative, because it is a Revenue Ruling, not a letter ruling. (Preparers should add it to their tax return preparation checklists.)

Humbug! (OK, I’ve got a Christmas hangover.)

(Revenue Ruling 2008-5.)

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IRS issues guidance for deducting health insurance of S corporation shareholders.

Last year, the IRS made a controversial posting on its web site that would prohibit many S corporation shareholder-employees from getting an "above the line" deduction for their health insurance. The IRS has just issued guidance that will enable most shareholder-employees who own 2% or more of the corporate stock to get the deduction. In order to qualify, the insurance must either be provided in a company plan or reimbursed by the company to the shareholder for an individual policy. The amount paid by the corporation is included in taxable wages on the shareholder-employee’s Form W-2. The health insurance amount is not subject to employment taxes. Then the shareholder-employee may deduct the health insurance as a deduction to determine adjusted gross income. (Notice 2008-1, 2008-2 IRB.)

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A Holiday gift from Joe Polish.

Joe Polish is a "marketing guru" to the carpet cleaning industry. He also conducts interviews with business leaders that are subscribed to by business persons in many different industries.

Recently Richard Branson, chairman of Virgin Airlines and many other ventures, gave a presentation at one of Joe’s boot camps, and Joe also recorded an interview with Mr. Branson. Richard Branson is known for being a renegade billionaire, and for his outrageous publicity stunts. He also is a humanitarian involved in many charitable pursuits. Joe was so excited with this material that he decided to make it available for free! So, to see a rare video presentation and get mp3 files of the recorded interview of one of the outstanding business leaders and humanitarians of our time, go to www.joepolish.com/richardbranson. Enjoy! (Thanks, Joe!)

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Questions and Answers


I inherited stock from my father in 2001. I would like to sell them to pay some bills. How do I do this?


Assuming the stock is publicly traded, take the certificates to a stock brokerage firm (like Morgan Stanley, Merrill Lynch, or Salomon Smith Barney) and ask a representative for help. If the stock isn’t publicly traded, you might not be able to currently sell it, but should register your ownership with the company in case they later make a public offering or are bought out.


Are my commuting expenses deductible?

I work for an elevator maintenance company. Their office is located in Queens, New York. I live on Long Island. I drive my car to the train station and take the train to Manhattan. I do not report to the office. I call my office each morning to see where I need to go. Can I deduct my auto miles and train ticket as unreimbursed business expenses?


Assuming you are just going to one work location, probably not.

When an employee is traveling to a temporary work location in the same metropolitan area as their employer, the commuting expenses aren’t deductible.

Transportation expenses from the first work location to additional work locations before returning home are tax deductible.

See IRS Publication 463, page 14 (Transportation). You can get a copy at the IRS web site, www.irs.gov or by calling the Internal Revenue Service.

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

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Read our new article!

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If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert at no charge or obligation?

To learn more, visit stockoptionadvisors.com/subscribe.shtml.

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Real estate investors, have you subscribed to Michael Gray, CPA’s Real Estate Tax Letter at no charge or obligation?

For details, visit www.realestatetaxletter.com.

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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.

P.S.-1 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 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 taxtrimmers.com/directions.shtml.

They also have a second restaurant, AVA, at 636 San Anselmo Ave., San Anselmo, California. AVA serves food and drinks produced in California. For reservations, call 415-453-3407. The web site is avamarin.com.

P.S.-2 Marché Aux Fleurs is being featured on the Check, Please! television show on San Francisco public television station KQED 9. The program is scheduled to play Friday, January 11 at 8:30 p.m., Saturday, January 12 at 9 a.m. and 1 p.m., and Sunday, January 13 at 5:30 p.m. (The restaurant received an enthusiastic "Yes!" review!)

To see the review now, or if you are outside the San Francisco Bay area, the video has been posted at www.kqed.org/checkplease/. It is episode 23 for Season 2.

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Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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