Michael Gray, CPA's Tax and Business Insight

September 5, 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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Mike and Janet Gray near Kualoa Ranch on Oahu.
Here are Mike and Janet Gray on an Ocean Voyage near the Kualoa Ranch on Oahu.

Fond memories of Oahu.

Janet and I recently returned from our vacation on Oahu. As you can imagine, it’s challenging getting back to "working mode," but duty calls!

It has been about 30 years since we last visited this island. Things have changed dramatically. Our hearts were broken to find the Royal Hawaiian Hotel boarded up for remodeling, and that the elegant entry and gardens have been mostly covered with shops and a Cheesecake Factory restaurant. After remodeling, you will no longer be able to see the hotel from the street. The Hawaii of the old Elvis Presley movies is gone.

We were determined to make some great new memories, and weren’t disappointed.

Waikiki is the "gathering place" of the Hawaiian Islands. It is the hub where most people first arrive to travel to the other islands. It is a good place to visit if you want to shop, get a suntan, eat at great restaurants and enjoy the night life at the restaurants, bars and showplaces.

You will discover that Oahu is a gorgeous place if you get away from Waikiki and visit the scenic places outside the city.

We went snorkeling at Hanauma Bay (we heard Shark Cove is less crowded if you have a rented car to get there), and spent a day each at The Polynesian Cultural Center (the luau and evening show are outstanding!) and Kualoa Ranch. We also went on an evening dinner cruise. All great activities.

For ocean view dining, we enjoyed the Orchid restaurant in the Halekulani Hotel for lunch, the Ocean House restaurant in the Outrigger Reef for dinner, the Shorebird in the Outrigger Reef for brunch, and afternoon tea on the Veranda at the Moana Surfrider.

If you decide to visit Oahu for the first time, required activities include paying your respects at Pearl Harbor and spending a day at The Polynesian Cultural Center for a great educational experience. If you enjoy snorkeling or scuba diving, find a place to do it – I know of Hanauma Bay and Shark Cove.

I think you can’t help having a great time when visiting any of the Hawaiian Islands.

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Panch (Kyan) Baker
Panch Baker will celebrate his 4th birthday September 25.

September family celebrations.

Thi Nguyen and Allen Le celebrated their third anniversary on September 3. My daughter, Holly Baker, will celebrate her 33rd birthday on September 16. My grandson, Panch Baker will celebrate his fourth birthday on September 25. (Kyan decided to change his name to Panch.)

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Extended calendar year corporate income tax returns are due September 15.

Crunch time arrives again. If you need help with an extended corporate income tax return, call Dawn Siemer weekday afternoons at 408-918-3162 and we’ll try to squeeze you in.

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Third quarter estimated tax payments are due September 15.

Third quarter estimated tax payments for calendar year taxpayers, including most individuals, are due September 15. If your withholding won’t be enough to avoid penalties for underpayment of estimated tax, you should be making estimated tax payments based on last year’s tax liability or an annualized computation of this year’s tax. Call Dawn Siemer weekday afternoons at 408-918-3162 to make an appointment if you need help.

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Tax planning and the Presidential election.

Barack Obama has indicated he will seek tax increases for high-income taxpayers if he is elected as President of the United States. You might want to accelerate income to 2008, which may be subject to lower income tax rates. Remember the wash sale rules do not apply to capital gains, so you can sell assets and buy similar ones back to pay taxes for long-term capital gains at the 15% tax rate for 2008. (Do not do this for disqualifying ISO dispositions without consulting a tax advisor.) Consider electing to not use the installment sale method for 2008 sales.

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How to crash the economy in your state.

Paul McCauley, who I am embarrassed to say is a CPA, and union leader Brad Rooker are promoting an initiative to impose a one-time 25% "wealth tax" (read success tax) on the assets of Californians exceeding $20 million for single persons and $40 million for married couples. The wealthiest 1 percent of California taxpayers paid 47.9% of the state’s personal income taxes for 2006, but that doesn’t satisfy McCauley and Rooker.

Of course, there is nothing to prevent these individuals from moving out of California to a more friendly state, and bringing their corporate headquarters with them. Say Steve Jobs (Apple Computer, Pixar), John Chambers (Cisco Systems), Larry Ellison (Oracle), George Lucas (Lucasfilm) and Larry Page and Sergy Brin (Google).

In addition, the wealthy don’t keep their assets as cash in a mattress. In order to pay the tax, any of them who decide to stay will have to liquidate their stock, bonds, and real estate. What do you think dumping these assets will do to the market? What do you think it will do to CalPERS, the state’s retirement system and one of its biggest investors?

These are also the people who fund our universities and charities, and bail out the state of California by purchasing municipal bonds to fund deficits.

If the state gets this money, do you really believe it will solve its money woes, or do you agree with me that it will be dissipated in nothing flat?

We should tar and feather McCauley and Rooker and they should be fired as unfit for their occupations.

More importantly, we need to speak out and not passively let their proposal be promoted as a "reasonable alternative." This is not "just politics." This relates to freedom, property rights and understanding that the real source of wealth is men’s minds. (See Atlas Shrugged by Ayn Rand.)

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Court says California can keep apportioned part of LLC fee.

The California Court of Appeals, First District has ruled that California’s LLC fee, before a recent change, was an unapportioned tax that violated the Commerce Clause of the U.S. Constitution. However, the court said the proper remedy to be applied is for the state to refund the portion of the fee paid by the taxpayer exceeding the amount that would have been required if the fee was fairly apportioned. The attorneys for the taxpayer have indicated they will appeal the decision. (Ventas Finance I, LLC v. California Franchise Tax Board, Cal. Ct. App., 1st Dist., 8/11/08.))

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AMT liability from ISO exercise relief may be coming.

The IRS has agreed to suspend collection activity for unpaid back-year AMT liabilities resulting from the exercise of incentive stock options until after September 30, 2008. There is proposed legislation that many representatives in Congress believe will soon be passed that would abate the tax liability and related penalties and interest. There is bipartisan support for the proposal. Stand by for more developments, which will be explained in detail in Michael Gray, CPA’s Option Alert email newsletter (www.stockoptionadvisors.com).

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Questions and Answers

Question

My sister told me that, since I drive 60 miles one way to work, I can claim deductions for the mileage and gas on my income tax returns. I live in northern New York and am very skeptical about this. She told me that a coworker has been doing this for about 7 or so years. I thought this might apply if you own your own company, but not for an employee commuting to work.

Answer

Automobile expenses for commuting to and from a regular work location aren’t tax deductible. See IRS Publication 463 on Travel, Entertainment, Gift and Car Expenses. You can get it at www.irs.gov. Maybe your sister’s coworker just hasn’t been caught yet. (Business owners can’t deduct automobile expenses for commuting to and from their regular work location either.)

Question

I’m 17 years old and have been investing in the stock market. My mother told me I can’t do it anymore.

My portfolio is up 19%. She says if I sell the securities, I’ll have to report it.

Will this affect financial aid for college? Will I be taxed heavily?

Answer

Since you are a dependent, your income from passive sources like investing in securities is subject to tax at your parents’ income tax brackets. For 2008, there is an $850 standard deduction of income that is not taxable, and another $850 of the income is only taxed at your personal tax rates. The nickname for the tax is the "Kiddie Tax." It is figured on Form 8615. (Your state income tax rules might be different because this is a recent federal tax law change for children over age 13.)

Sales of securities should be reported on Schedule D.

I can’t tell you how this will affect your financial aid. A small gain shouldn’t cause a problem. See your counselor at school.

If you are going to invest, you need to study the tax rules that apply. I recommend that you get a copy of 2008 Tax Facts for Investments at Amazon.com.

Question

Can an individual from another country make a gift to a US citizen without incurring a U.S. gift tax? What is the limit per year?

Answer

This is becoming a more complicated issue. Non-residents of the U.S. aren’t generally subject to U.S. gift tax, except for transfers of tangible property located in the United States. However, effective June 17, 2008, gifts by former residents or citizens of the U.S. to U.S. citizens or residents can now be subject to a transfer tax of 45%. The annual exclusion amount of $12,000 isn’t subject to the tax.

Gifts of more than $100,000 received from a nonresident alien must also be reported on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

The country of residence for the non-resident alien who make the gifts could also impose a gift tax for gifts to U.S. persons.


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.

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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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 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.

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Michael Gray, CPA
2190 Stokes St. Ste. 102
San Jose, CA 95128
(408) 918-3162
FAX: (408) 998-2766
Hours: 8am - 5pm PDT Monday - Friday

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