Michael Gray, CPA's Tax and Business Insight

June 3, 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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Clive Baker
My grandson, Clive Baker, will soon be walking.

Second 2008 estimated tax payment is due June 15.

Remember the second estimated tax payments for calendar year taxpayers are due on June 15. If you have a change in your situation or your estimated taxes are based on your 2009 income and deductions, you should contact your tax advisor now. (Some high-income California taxpayers can no longer base their estimated tax payments on last year’s income tax returns. Ask your tax advisor if this applies to you.)

Remember California’s individual income tax rates are increased 0.25% across the board for 2009.

If we can be of service with this, call Mike Gray at 408-918-3161.

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June graduations.

Congratulations to all graduates! Your parents, families and friends are relieved and proud of you!

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Remember Father’s Day is June 21.

Hope you and your family are gathering to express your appreciation to Dads.

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Michael Gray leads live seminar on June 26.

Michael Gray will lead a live lunchtime seminar, Secrets of Tax Planning For Employee Stock Options, on June 26 at Hobee’s Restaurant in the Pruneyard in Campbell. For details, visit http://www.stockoptionadvisors.com/esoseminar09-06.pdf or call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Introductory offer for 2009 edition, Secrets of Tax Planning For Employee Stock Options.

The 2009 edition of Secrets of Tax Planning For Employee Stock Options is being printed now. If you order a copy by June 30, 2009, you can get it for half price, or $99.98 plus $15 shipping and handling and $10.64 California sales tax for California residents. To get more details or order, call Dawn Siemer at 408-918-3162.

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Need help with an extended income tax return?

We are here all year to help with your tax return preparation requirements. For an appointment, call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Educational distribution from IRA didn’t disqualify periodic payments.

The Tax Court ruled that a taxpayer who took a series of substantially equal periodic payments before age 59 ½ would not be penalized when an additional distribution was taken to pay educational expenses. The educational distribution was an additional exception allowed for early distributions and wasn’t a disallowed modification of the periodic payments election. (G.T. Benz v. Commissioner, 132 TC No. 15, May 11, 2009.)

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2010 limits for Health Savings Accounts.

The IRS has issued 2010 inflation adjusted amounts for Health Savings Accounts (HSAs). The annual limitation on deductions for individuals with self-only coverage under a high-deductible health plan (HDHP) is $3,050. The limitation for family coverage is $6,150.

An HDHP for 2010 is a health plan with an annual deductible of at least $1,200 for self-only coverage or $2,400 for family coverage. The 2010 limit on out-of-pocket expenses (deductibles, co-payments, and other amounts other than premiums is $5,950 for self-only coverage or $11,900 for families.

(Revenue Procedure 2009-29.)

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Cancellation of credit card debt was taxable income.

A taxpayer failed to meet the conditions of a bankruptcy judgment that would have cancelled certain credit card debt, because he failed to make installment payments under the bankruptcy plan. The credit card debt was reinstated and later cancelled by the credit card company. Since the debt had been reinstated and not cancelled in bankruptcy, the debt cancellation was taxable income. (Hill v. Commissioner, T.C. Memo. 2009-101, May 18, 2009.)

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Pension plans given optional adjustment for withholding.

The IRS has announced a withholding adjustment option for withholding from pension income. The current withholding tables are designed for wages and include a reduction for the Making Work Pay credit. Pensioners don’t qualify for that credit. The IRS will provide an optional table to include the withholding adjustment option. Tables in Notice 1036-P, Additioinal Withholding for Pensions for 2009, explain how to calculate optional additional withholding amounts for pension payments. This withholding method is optional so pension plans aren’t required to use it. Pensioners should monitor their withholding and request adjustments, if needed. (IR-2009-50.)

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More guidance issued for small business net operating loss election.

An optional three-, four-, or five- year carryback of an applicable 2008 net operating loss was enacted in the American Recovery and Reinvestment Act of 2009. The IRS has issued additional guidance about how to make the election.

A taxpayer that has not filed a tax return for the tax year in which the applicable 2008 net operating loss arises makes the election for an extended carryback period by attaching a statement to his federal income tax return for the year. The return and statement must be filed by the due date, including extensions for that year.

If the tax year of the applicable 2008 NOL ended before February 17, 2009, the election must be made before the later of the due date (including extensions) of the taxpayer’s return or April 27, 2009.

A taxpayer that has already filed a return and did not make the election to claim an extended carryback period (and also did not forego the NOL carryback period) can make the election by simply filing an amended return for the earliest year to which the NOL is carried. Alternatively, the "quick refund" forms 1045 or 1139 may be used, but they must be filed within six months after the due date (without extensions) of the income tax return for the year of the applicable 2008 NOL (or April 17, 2009, if later) instead of 12 months after the tax year of the net operating loss.

(Revenue Procedure 2009-26.)

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Settlement proceeds taxable despite physical injuries.

A taxpayer who received a settlement for several claims against a former employer was not allowed to exclude any amount received for physical injuries, because no amount was specified as awarded for those injuries. (J.W. Hansen v. Commissioner, TC Memo. 2009-87, April 28, 2009.)

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IRS issues new actuarial tables.

The IRS has issued new actuarial tables for valuing annuities, life estates, term interests, remainders and reversions. These tables are critical for computations relating to charitable gift planning and personal residence trusts.

The tables are effective for valuation dates after April 30, 2009. For Gift tax purposes, transfers from May 1, 2009 through June 30, 2009 may be valued using the new tables or the previous tables.

The increased life expectancy under the new tables causes life interests to have a higher value and remainders or reversions to have a lower value. Charitable remainder trusts are less desirable and charitable lead trusts are more desirable. Private annuities are also more desirable.

The differences are small, so the tables shouldn’t have a dramatic effect on most charitable, estate and gift planning decisions.

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Proposed regulations allow suspending non-elective 401(k) contributions.

Proposed regulations issued by the IRS permit suspending non-elective employer contributions to 401(k) plans when there is a business hardship. The regulations give an alternative to terminating a safe harbor plan for affected employers. They would be effective for plan amendments adopted after May 18, 2009.

To find out if you qualify for relief under these proposed regulations, consult with your tax and retirement plan consultants.

(REG-115699-09, 74 FR 23134, May 18, 2009.)

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Questions and Answers


Can you provide a reference for the acquisition date of inherited property being the date of death?


According to Internal Revenue Code Section 1014, the tax basis of inherited property is generally the fair market value on the date of death, or the alternate valuation date if that value was used on the decedent’s estate tax return.

According to Internal Revenue Code Section 1223(9), the holding period for inherited property sold within one year after the decedent’s death shall be considered to be more than one year. (A gain from the sale of capital gain property sold after a decedent’s death qualifies for taxation as a long-term capital gain.)

In Revenue Ruling 63-223, the IRS stated that depreciation determined for the period after a decedent’s death shall be computed using the fair market value as of the date of death or the fair market value on the alternate valuation date, as applicable.

These citations support the statement that the acquisition date of inherited property is generally the date of death, and that gains for inherited capital gain property sold within one year after the date of death are taxed as long-term capital gains.

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 articles!

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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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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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