Michael Gray, CPA's Tax and Business Insight

January 31, 2008

© 2008 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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Tax season is here! Make you appointment now!

There are only about two and one-half months left before the tax return due date. Time to get started now!

If we prepared your income tax returns last year, you should have already received instructions in the mail. If you haven’t, please call Dawn Siemer at 408-918-3162.

To have us prepare your income tax returns, start with the online Tax Notebook organizer. Call Dawn Siemer at 408-918-3162 for instructions to get started. We also have a paper organizer if you prefer. We still need your documents (W-2s, 1099s, receipts for donations) to prepare your income tax returns.

We can prepare most income tax returns using information provided online and by mail. If you wish a personal meeting, please call Dawn Siemer at 408-918-3162 to schedule an appointment. Our calendar is filling up fast!

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Happy 67th anniversary, Mom and Dad!

My parents, Aubrey and Eleanor Gray of Saratoga, California, are celebrating their 67th anniversary today, January 31. They will be having celebrations with children and grandchildren during the next few weeks, including with my brother and most of my immediate family tonight.

We feel very blessed to continue to have my parents with us, and are very proud of their achieving a long, successful marriage.

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Yes, we do prepare income tax returns!

With our free newsletters and the information we make available at no charge on the web, some people wonder how we make a living. We prepare income tax returns and provide tax and business consulting services. We are accepting selected new clients and are thrilled when our clients and friends refer their friends, associates and family members to us. To inquire about becoming a client of our firm, please call Dawn Siemer at 408-918-3162 or send an email to her at dgsiemer@taxtrimmers.com. We must receive your tax information by March 1 to guarantee delivery by April 15.

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Wendy Zhang
Here's Wendy Zhang!

Welcome, Wendy Zhang!

Wenquiao "Wendy" Zhang has joined our firm as an intern for this tax season. Wendy graduated with a Masters of Science in Business Administration, accounting concentration from San Francisco State University in May, 2007.

Wendy is married and has a daughter born last August.

In China, Wendy was an Obstetrician/Gynecologist. She delivered a lot of babies! Her medical license was not transferable to the United States, so she decided to pursue a new career.

We are very glad Wendy has joined our team for this tax season!

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Fed makes another big interest rate cut.

On Wednesday, January 30, the Federal Reserve made its second big interest rate cut – one-half percent – in two weeks. The new "wholesale" interest rate for federal funds charged by the Federal Reserve to member banks is now 3 percent. (Last week, they made a 3/4 percent reduction.) Commercial banks have followed this action by lowering their prime lending rates to 6 percent, the lowest in almost three years.

The Fed took this action to try to calm financial markets. The US stock markets and stock markets in other countries around the world have been taking big gyrations – mostly down. It’s good to see this agency take decisive action to try to stabilize the economic system.

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Ready, set, refinance? We can help!

Getting financing for buying homes or refinancing existing mortgages has been more difficult recently. Lenders are looking much more carefully and requiring more documentation than before. Most of the mortgages that have been approved are "conforming" mortgages, with a maximum loan of $417,000. Interest rates for conforming mortgages are much lower than for jumbo mortgages.

As part of the U.S. government’s economic stimulus package, a proposal has been made to increase the lending caps for U.S. government-insured loans from $417,000 to a temporary maximum for 2008 of $729,750, with lower limits applying to less expensive areas. (For example, the $729,750 limit would apply our area of San Jose-Sunnyvale-Santa Clara, but not to Sacramento or Riverside.)

In addition, the decrease in the federal funds rate to 3% (the prime rate is normally 3% over this rate) by the Federal Reserve on January 30 and the increasing volatility of the stock market should lead to lower interest rates in the coming months, and mortgage interest rates have been declining recently. Increased demand for loans to pay income taxes during tax season could offset this rate trend.

So consider getting an application in process for refinancing. In order to "lock in" interest rates, more lenders are requiring that an application be in process. Last week, there was a huge bottleneck of "lock" requests. Be prepared.

Working together with Wymac Capital, we specialize in no points, no fees mortgage refinancing. If you live in California, we would be delighted to help you get an application in process. Call Michael Gray at 408-918-3161 to get started.

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Will I get a tax rebate this year?

In response to our nation’s economic concerns indicated by a wildly gyrating, mostly declining U.S. stock market, the President and Congress have agreed that economic stimulus action is required. Part of the stimulus will be rebates sent to some U.S. taxpayers. The details of how this rebate will work still have to be determined, but we will probably know by the end of February.

Members of Congress are concerned that some taxpayers will simply deposit the rebate in their savings accounts, defeating the purpose of increasing consumer spending. (If you’re like me, you’ll use the money to pay off some of your credit card debt. Sorry Congress, but the banks should be happy, and healthier banks are also good for the economy.)

The House of Representative passed H.R. 5140, "Recovery Rebates and Economic Stimulus for the American People Act of 2008" on January 29.

Under the House proposal, the basic credit for 2008 would be the greater of:

  1. net income tax liability up to a maximum of $600 ($1,200 for a joint return), or
  2. $300 ($600 for a joint return) if either (a) the taxpayer’s earned income is at least $3,000; or (b) his net income tax liability is at least $1 and gross income is greater than the sum of the basic standard deduction amount and one personal exemption (two for a joint return).

There would also be a $300 per child rebate.

The rebate and child rebate would phase out for 5% of adjusted gross income above $75,000, or $150,000 for a joint return.

Under the Senate proposal approved by the Senate Finance Committee yesterday, an eligible individual would receive a rebate for 2008 of $500 ($1,000 for joint returns) if (1) he files a tax return with a tax liability of at least $1; or (2) his earned income (as defined for the earned income tax credit) and social security benefits are at least $3,000. Under the Senate proposal, many more senior citizens will qualify for a rebate. The Senate also would provide a $300 per child rebate. The phase out would start at income levels twice as high as under the House version, $150,000 for singles and $300,000 for a joint return.

Nonresident aliens, dependents, estates and trusts would not qualify under either proposal.

A qualified child for the $300 rebate would have to meet the same requirements as for the existing child tax credit – under age 17, generally sharing the principal residence with the claiming parent for more than one-half of the year, and a qualifying relative. A child who isn’t a U.S. citizen, national or resident doesn’t qualify.

The Bush administration is urging Congress to come to an agreement on a final proposal as quickly as possible.

Since the rebate checks will be based on adjusted gross income reported on the taxpayer’s 2007 income tax return, you will want to file your 2007 income tax returns as soon as possible if you think you will qualify.

The rebate will not be taxable income and will have no effect on the amount of withholding or estimated tax payments required for 2008.

[Editor’s note: You will not receive an email from the IRS notifying you of this rebate. As reported in the September 2007 issue of Michael Gray, CPA’s Tax & Business Insight, those email messages are scams.]

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Suggestions if you prepare your own income tax returns.

Remember changes were passed late in 2007 that aren’t shown on the tax forms mailed by the tax authorities. Errors have also been discovered on the government forms issued by the California Franchise Tax Board.

Therefore, 2007 is not the year to hand-prepare your income tax returns. Use tax return preparation software.

The version of the software "on the shelf" at the store almost always has "bugs" in it. Be sure to download software updates to your computer before submitting the tax returns. You must have an internet connection to make the software updates, or risk having programming errors get through.

Since the forms are in error, I also recommend efiling, which also requires internet access.

Review the output carefully before efiling. Some common errors to look for include data entry errors, withholding, state tax deduction, alternative minimum tax (especially for exercises and sales of incentive stock options) and alternative minimum tax credit. Carryovers of state minimum tax credits are commonly missed.

Are you really sure you want to prepare your own income tax returns?

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Supreme Court rules investment advice for trusts subject to 2% of AGI floor.

The Supreme Court has resolved a conflict among the Courts of Appeal by finding fees paid for investment advice are subject to the 2% of adjusted gross income floor.

The trustee argued that the Trustee’s fiduciary duty to act as a "prudent investor" required the trustee to obtain investment advisory services. This duty is unique to trusts and should justify allowance of investment advisory services as an administrative expense, not subject to the 2% floor.

The Court rejected the trustee’s argument because nearly all of a trust’s expenses are incurred because the trustee has a duty to incur them.

The Court agreed with the Fourth and Federal Circuits that the test should be whether it would be uncommon, unusual or unlikely for an individual to incur the expense outside the trust context. It asserted it is not unusual for individuals to hire an investment adviser.

The Court also said that some of the investment advisory fee may be fully deductible if an investment advisor were to impose a special, additional charge applicable only to its fiduciary accounts.

(Knight v. Commissioner, 2008-1 USTC ¶ 50,132, January 16, 2008.)

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Proposed regulations on fiduciary costs subject to 2% of AGI floor.

The IRS has issued proposed regulations explaining which fiduciary costs are subject to the 2% of AGI floor. Fees for preparing Form 706 or 1041 generally aren’t subject to the floor. Investment advisory fees are. Fees for preparing gift tax returns are. If the fees are bundled, a reasonable estimate must be made of the portion subject to the floor and not subject to the floor.

(REG-128224-06, 72 Fed. Reg. 41243, July 27, 2007)

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Questions and Answers


I am in the Air Force and am stationed in California. I am trying to swap assignments with someone at a base in North Carolina. Since it is a swap, the Air Force won’t pay for me to move. I want to move so I can buy a home at a lower price than in California. Would my moving expenses be deductible?

Also, is mortgage interest 100% deductible? Are appliances bought for the home deductible? This will be my primary residence.


Since you are moving for a personal reason and not for an employment-related reason, the moving expenses would be nondeductible.

Mortgage interest for a mortgage secured by a principal residence and for the purpose of purchasing the residence are generally deductible, provided the loan doesn’t exceed $1 million. Not all mortgage interest is deductible.

Appliances bought for the home aren’t deductible.


I am single and live with my boyfriend, mother, stepfather, and younger brother. I own the house we live in together with my boyfriend. Is there any way that I could claim head of household?


In order to qualify, you would have to have a qualifying dependent. In order to do this, someone couldn’t have income above the personal exemption amount ($3,400 for 2007), you would have to provide more than one-half that person’s support, and no one else could claim that person as a dependent. The best candidate would be your brother, but is your mother willing to give up the exemption?

This is actually a more complicated question than you might think. I suggest that you get Publication 501 at the IRS web site, www.irs.gov and study it.

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

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Visit 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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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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