Michael Gray, CPA's Tax and Business Insight

April 6, 2009

© 2009 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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Happy Spring Holidays!

Spring is here! Easter is on April 12, this year. Passover is on April 9. We hope you enjoy celebrating whatever Spring holidays you observe with your family.

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Only 12 days left in tax season! Time to think about extensions.

There isn't enough time left to give preparing tax returns the attention they deserve, but we can help a few more new clients with extensions and finish their returns later. To make an appointment, please call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Kara Siemer
My granddaughter, Kara Siemer, celebrates Spring and her 2nd birthday!

April family celebrations.

April is a big birthday month for my family. My daughter, Dawn Siemer, her husband John and daughter Kara all celebrate birthdays very close together. Kara will be celebrating her second birthday. My mother, Eleanor Gray, is celebrating her 87th birthday. Thank God she is still fairly healthy and thinking clearly. With the end of tax season, Easter and birthday celebrations, it's going to be a busy month.

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Thanks for your condolences.

Thanks to those who wrote email condolences for my father's passing.

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Our office was burglarized.

When I arrived at our office last Saturday morning, I discovered that someone broke into our office through the back door and stole three computers.

The theft has been reported to the San Jose Police Department.

Fortunately, our server, where we store almost all of our confidential information (including computerized tax processing files), was left undisturbed. Our "hard copy" client files also were undisturbed.

There was some information, including email messages and attachments, that might be accessible on the computers, so please watch for any unusual activity. We do not have any credit card information on our computers.

We are praying the thieves were teenagers who will just wipe the hard disks, but we don't know.

We plan to get a burglar alarm system in place and the landlord is having the doors reinforced to avoid break-ins in the future.

We have a recovery plan, have already replaced the computers, and continue to process income tax returns to conclude tax season. (How fast would you recover if you had a similar experience?)

The security of your information is important to us and we apologize for any disruption or concern you experience as a result of this incident.

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California sales tax increase effective April 1, 2009.

In case you don't read your mail or the newspaper, sales tax rates increased in California effective on April 1, 2009. The new rates are posted online at www.boe.ca.gov/sutax/pam71.htm.

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New federal withholding tables issued effective April 1, 2009.

The IRS has issued new federal income tax withholding tables in Publication 15-T. You can download the Publication at the IRS web site, www.irs.gov. The new tables should be used for 2009 payroll payments starting April 1, 2009. If you are using computerized payroll software, you should download updated federal withholding tables.

Withholding has changed to implement the Making Work Pay Credit enacted on February 17, 2009 in the American Recovery and Investment Act of 2009.

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Michael Gray gives a briefing on new federal tax legislation.

I will be giving a two-hour breakfast briefing about the American Recovery and Reinvestment Act of 2009, otherwise known as President Obama's economic stimulus legislation, at the Los Gatos Lodge in Los Gatos, California. Although the seminar is for the Silicon Valley San Jose chapter of the California Society of CPAs, others who are interested may also come, including attorneys, financial planners and professional fiduciaries. Registration is at 7:45 a.m. and the presentation will start at 8 a.m. Pre-registered investment is $45 for members, $23 for student and candidate members, and $55 for non-members. To register or for more information, call Stephanie Stewart at 408-983-1122.

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Michael Gray is interviewed in the media.

I have had several media appearances recently to promote the Real Estate Tax Handbook. You can hear an interview on the Financial Lifeline Radio on March 30.

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Michael Gray, CPA is now on Facebook.

Want updates on our upcoming events and media appearances? Michael Gray, CPA is now on Facebook. Become a fan and be the first to hear about what's new.

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Would you like to be notified about offers for excellent business improvement information?

We are affiliating with various business improvement experts who have excellent material to offer. If you would like to be notified with the details, please email Dawn Siemer at dgsiemer@taxtrimmers.com.

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What is the most important marketing skill for a small business owner?

I believe the most important marketing skill for a small business owner is copywriting – the ability to craft a compelling sales message to be used in media. With this skill you can leverage your sales message – it's salesmanship multiplied! Even if entrepreneurs don't write their own material, they need to be able to recognize if a piece has major flaws to avoid throwing their money away on a worthless campaign.

John Carlton is a master copywriter who has been the “secret weapon" of some major advertising agencies. He has written “control" promotions for major direct mail companies, like Rodale and Boardroom Publishing.

Now John is sharing how he writes winning marketing campaigns in his Simple Writing System course. I have the course and it's excellent. For April 6 – 8, 2009 only, a two-month personalized live coaching package is being offered with the course. After those dates, you can only get the DVD training course.

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Extensions - and when you don't have the money to pay the tax.

(This is a reprint from past newsletters.)

What do you do when you don't have the money to pay the tax?

My first recommendation is to file your income tax returns, certified mail, by the initial filing date. One of the nastiest penalties in the IRS's arsenal is for late filing - 5% per month to a maximum of 25%. Some people who owe money don't file their returns because they are afraid. THIS IS A HUGE MISTAKE! The best approach is to be honest about your situation and work with the tax authorities to resolve it.

When you file an extension, any balance of tax due when the tax return is filed represents an exposure for the late filing penalty.

Please don't misunderstand me. I regularly use extensions for my clients and myself as a workload "safety valve." We often don't have the information to complete a return by the due date. They just aren't appropriate when there will be a significant balance due that won't be paid by the original filing due date.

Remember the automatic extension of time to file for 2008 individual income tax returns is for six months to October 15, 2009.

Remember to state a good (high side) estimate of total tax liability for 2008 on line 4 of federal Form 4868 or the extension will be invalid. According to the Treasury regulations for the requirements to file a valid automatic extension request, "an application for extension must show the full amount properly estimated as tax for the taxable year." (Reg. § 1.6081-4(a)(4).) The regulations relating to reasonable cause for failure to file a tax return state that if a taxpayer satisfies the requirement of showing the full amount estimated as tax, the taxpayer has a reasonable cause for failure to file during the extension period provided (1) the excess of the amount of tax shown on the return over the amount of tax paid by the original filing date (including the amount paid with the extension form) is no greater than 10 percent of the amount shown on the return (restated, 90% of the tax is paid by the due date), and (2) any balance due shown on the return is paid with the return. (Reg. § 301.6651-1(c)(3).)

(For California taxpayers, the extension is paperless so the amount of the tax need not be stated. You are still required to pay at least 90% of the tax by the original due date with Form FTB 3519 to avoid the late filing penalty.)

If you have filed an income tax return for 2007, you can process your federal extension electronically (using tax return preparation software or through a tax return preparer). If you make a tax payment using a credit card, you can extend your income tax return by calling 888-729-1040 or 800-272-9829 by April 15. (For California extension payments, the extension is 1555.) Better call early to beat the rush! Mailing a paper form is still acceptable and is the only way a person who didn't file a 2007 income tax return can request an automatic extension.

You can also make a credit card payment online at www.pay1040.com or www.officialpayments.com. California also has a web payment option at www.ftb.ca.gov.

A taxpayer can still avoid the late filing penalty by demonstrating a "reasonable cause," but this can be a hassle and the taxpayer is at the mercy of the subjective judgment of a representative of the tax authority.

Should you borrow using a margin account? In most cases, this is not a good choice because of the exposure to margin calls if the market declines.

Should you use an equity advance loan, secured by your principal residence? In some cases it might be to your advantage, if you can get a favorable interest rate. Remember that interest for an equity loan not used for a home improvement is only deductible on a loan amount up to $100,000. This interest is not deductible when computing the alternative minimum tax.

Remember that IRA accounts and even other retirement accounts can be temporary sources of funds. Distributions from IRAs that aren't minimum required distributions can be rolled over to another IRA or returned to the same IRA within 60 days after a withdrawal. This exception only applies to one rollover per year. (You must wait more than one year after a rollover is completed before making another one.)1

Certain distributions from other qualified plans can also be rolled over within a 60-day period to an IRA or another qualified plan.2 Using IRAs or qualified plans as a temporary source of funds to pay taxes can be useful if the funds to complete the rollover will soon be available, such as when there is a lockout "window" that will soon be open. The cost of an error can be high, because if the rollover isn't completed before 60 days have expired, the distribution may be subject to tax as ordinary income plus a 10% early distribution penalty.3

The IRS has a form for installment agreements, Form 9465. They would prefer that you submit the form with your income tax return. You can take up to five years to pay off your tax liability. An advantage of arranging an installment agreement is the penalty for late payment of tax is reduced from 1/2% per month to 1/4% per month. In addition to penalties, interest is charged for late tax payments. The interest rate is adjusted quarterly. Recently, the rate has been eight percent.

Another alternative is to make an Offer in Compromise, Form 656. With this procedure, the IRS actually can reduce your tax based on your ability to pay. You don't have to wait until you have owed the tax a long time to use this procedure. I think it's best to work with an attorney, CPA or enrolled agent when making an Offer in Compromise. If the amount is large, an attorney is probably the best choice. (This may be an exercise in futility. The IRS has recently been rejecting almost all offers. You are required to make a non-refundable deposit of 20% of the compromised tax in most circumstances. It's sad, because taxpayers really need this relief.)

Although it may provide relief from your other creditors, bankruptcy doesn't offer much help for recent debts for income taxes. When you make payments on your tax bill, be sure to specify to apply the payments to taxes due. Penalties and interest are dischargeable in bankruptcy, but income taxes aren't.

It may be to your advantage to plan how to use regular tax or alternative minimum tax capital loss carryovers or minimum tax credit carryovers. You might need to generate capital gains, which can be difficult when you're in financial distress.

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First individual estimated tax payment is due April 15.

(This is a reprint from past newsletters.)

Remember to review your estimated tax situation for 2009.

There is no estimated tax penalty provided the taxpayer pays at least 90% of the tax (including AMT) on the current year's tax return through withholding and/or equal quarterly estimated tax payments.

For taxpayers who have no more than $150,000 of adjusted gross income ($75,000 for married persons, filing separately) on the previous year's income tax return, there is no penalty for underpayment of estimated tax provided at least the income tax on the previous year's income tax return (including AMT) is paid in equal quarterly estimated tax payments plus withholding.4 For taxpayers who have more than $150,000 of adjusted gross income ($75,000 for married persons, filing separately) on the previous year's income tax return, there is no penalty for underpayment of estimated tax provided at least, for 2008, 110% of the income tax on the previous year's income tax return (including AMT) is paid in equal quarterly estimated tax payments plus withholding.5

Remember California now requires 30% of the estimated tax liability to be paid for each of the first two quarters of 2009 and 20% each for the last two quarters. Taxpayers who have uneven income and deductions may also compute their estimated tax on an "annualized" basis. You multiply the year to date income and deductions to arrive at amounts for a year, compute the tax for that amount, then pay amounts to cumulatively pay in 1/4, 1/2, 3/4 and 100% of those amounts. You should probably get help from a professional tax return preparer to do this.

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First calendar corporation estimated tax payment is due April 15.

Calendar-year Corporations almost always have to pay the minimum California tax payment of $800 by April 15, 2009. In addition, regular corporations have federal and California estimated tax payments due on that date. The estimated tax payments may be based on the income tax on last year's income tax returns, provided there was a tax on the return. If there was no tax, the estimated tax must be computed based on the current year's income. Corporations that had taxable income exceeding $1 million in any of the last three years may only base their first estimated tax payment on last year's income tax returns, the rest must be based on the current year's income.

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Last chance to make an IRA or Roth contribution for 2008.

Remember the final due date for IRA and Roth contributions for 2008 is April 15, 2009. We don't think making an election to have a tax overpayment deposited to an IRA or Roth account is a good idea for income tax returns filed during the last two weeks of tax season. It's too easy for a refund to be delayed past the due date.

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Remember second California real estate tax payment is due April 10.

With the income tax deadline, most of us are focused on April 15, but the second California real estate tax payment is due April 10, and there is a nasty penalty for a late payment. Consider yourself reminded!

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Questions and Answers

Question

I lived in California for nine months and earned income there. For the last three months of the year, I worked in another state where there is no state tax. Am I subject to California tax only for the income that I earned there?

Answer

Yes, provided you have actually changed your residence to the other state. You should file Form 540NR. You can get the form and instructions at the California Franchise Tax Board web site, www.ftb.ca.gov.


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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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.

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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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1 Internal Revenue Code § 408(c)(3) RETURN
2 Internal Revenue Code § 402(c) RETURN
3 Internal Revenue Code § 72(t) RETURN
4 Internal Revenue Code § 6654(d)(1) RETURN
5 Internal Revenue Code § 6654(d)(1)(C) RETURN


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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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