Michael Gray, CPA's Tax and Business Insight

January 11, 2013

© 2013 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, King of the Hill
Clive Baker is King of the Hill!

Happy New Year!

The New Year is traditionally a time for setting personal and business goals. We hope we can play a part in that goal setting process, but more importantly in helping you achieve your goals. In any event, we hope 2013 will be a great year for you and your family!

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January celebrations.

My son in law, Dan Baker, is celebrating his 40th birthday this month. Hooray for Dan!

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Tax preparation materials will soon be on the way.

We are mailing instructions to our clients this week and next. If we prepared your tax returns last year and you haven’t received instructions by January 20 or you would otherwise like to receive instructions, call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Make your tax preparation appointment now.

If you would like to schedule an appointment for a tax preparation interview, also please call Dawn Siemer on a Monday, Wednesday or Friday at 408-918-3162.

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Final 2012 estimated tax payment is due January 15.

Remember the final estimated tax payment for calendar-year individuals, estates and trusts is due January 15. You might want to check with your tax advisor about reducing the payment if you had much lower capital gains in 2012 than in 2011, you are entitled to the increased federal refundable minimum tax credit, or your facts have otherwise changed.

Remember that California has a strange estimated tax deposit schedule. There was no payment due on September 15, but 30% of the estimated tax for 2012 is due on January 15, 2013.

The California estimated tax payment can be based on the rate table before modification for Proposition 30, passed in the November election. The Franchise Tax Board has announced it will waive penalties for the Proposition tax increase for 2012, provided it is paid by April 15, 2013.

In addition, if any California estimated tax deposit is $20,000 or more, the payments must be made electronically. Once a payment is made electronically, the taxpayer must continue to make future payments electronically. The payments are made at the Franchise Tax Board’s web site, www.ftb.ca.gov.

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W-2s, 1099s and DE 542 reminder.

Remember that most 2012 annual information returns, such as W-2s and 1099s, should be issued to payees by January 31 and sent to the tax authorities by February 28.

Amounts paid using a credit card should not be included on Form 1099. Those amounts are being reported by the merchant companies.

Also remember that Form 542, Report of Independent Contractors, should also be submitted for ongoing independent contractor arrangements by January 20. The due date is the earlier of 20 days after the date $600 or more of payments have been made to the independent contractor or the date a contract has been entered for $600 or more of services during a calendar year.

Although requirements for real estate operators to issue Forms 1099 were repealed, real estate operators that are real estate professionals should prepare them anyway. Some taxpayers who weren’t concerned about qualifying as real estate professionals will want to for 2013 to avoid the Medicare tax for investment income. See your tax advisor for details.

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Michael Gray quoted in San Jose Mercury News.

Michael Gray was quoted in two page one San Jose Mercury News articles, “Impass may put 2012 tax on table” on Friday, December 28, 2012 and “Take-home pay will feel pinch” on Thursday, January 3, 2013.

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Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm. Some of the sites where you can share your experiences include yelp.com, siliconvalley.citysearch.com, and Google+.

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Mentor Griff Lewis, CPA passes away.

My first job in public accounting was with Berger, Lewis & Company in San Jose. The company has grown to be one of the largest local CPA firms in Silicon Valley.

Griff Lewis was one of the founding partners of the firm, and was a mentor in my early years. Griff was a great example as a CPA and employer. Working on Saturdays was actually fun. The partners regularly expressed their appreciation to the staff and a lunch party was always offered, usually at Original Joe’s.

Griff passed away November 29. He will be missed by his family and his many friends and clients.

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Congress finally passes “Fiscal cliff” tax extensions.

President Obama signed the American Taxpayer Relief Act of 2012, HR 8, on January 2, 2013. This legislation solves the tax part of the “fiscal cliff” dilemma, but the budget part still remains to be done.

I have written a brief summary of the legislation at http://michaelgraycpa.com/2013/01/02/congress-finally-passes-tax-extenders-including-amt-relief/

Subscribers for the print edition of this newsletter will receive a printout of the summary.

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Elections briefly available to avoid tax for some 2012 IRA distributions.

The American Tax Relief Act of 2012 includes an election to exclude from taxable income certain IRA distributions received by individuals age 70 ½ or older, up to $100,000. One election is to treat direct distributions from an IRA to a charity made during January 2013 as a 2012 distribution qualifying for the exclusion. The second election is to treat IRA distributions made during December 2012 as qualifying for the exclusion provided the funds are transferred to a qualified charity by January 31, 2013. See your tax advisor for details.

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Remember to “reset” payroll on January 1.

Software providers will issue updates including the new payroll tax tables as of January 1, 2013. Be sure you have installed those updates before processing your first payroll for 2013. With the tax rate changes in the new tax law, you will probably need to do these updates more than once this year.

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California retroactively disallows qualified small business stock exclusion.

California’s Second District Court of Appeal ruled that California’s qualified small business stock exclusion is unconstitutional because it favors California corporations. (Cutler v. Franchise Tax Board (2012) 208 Cal. App 4th 1247.) The taxpayer was trying to challenge California’s exclusion so that it would be applied more liberally.

Unfortunately, the Franchise Tax Board says the ruling has the opposite effect. Since the statute is unconstitutional, it is invalid, unenforceable and ineffective. Nobody qualified for the exclusion.

For tax returns for taxable years beginning before January 1, 2008 that were accepted as filed, the statute of limitations has closed, so no action is necessary.

For tax returns for taxable years beginning before January 1, 2008 for which an audit, protest or claim is pending before the Franchise Tax Board, or for which an appeal is pending before the State Board of Equalization in which the qualified small business stock exclusion is at issue, the Franchise Tax Board will make an adjustment disallowing the exclusion.

For taxable years beginning on or after January 1, 2008, the statute of limitations is open. The Franchise Tax Board will issue a notice of deficiency for tax returns for which the exclusion was claimed. The Franchise Tax Board invites taxpayers to voluntarily file amended returns eliminating the exclusion.

(FTB Notice 2012-03.)

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IRS privately rules fideicomiso is not a trust.

Certain foreign trusts are required to file an annual report with the IRS, Form 3520.

Mexico doesn’t permit non-Mexican citizens to own real estate within 100 kilometers of Mexico’s inland borders or within 50 kilometers of its coastline. When U.S. citizens own such property, a bank holds the title as trustee in a Mexican Land Trust or fideicomiso.

In the past, the IRS has informally said such a trust is a foreign trust subject to the reporting requirment.

Now the IRS has issued a private ruling that such a trust is similar to an Illinois land trust, and shouldn’t be treated as a foreign trust under Revenue Ruling 92-105.

A private ruling can’t be relied on except by the taxpayer who applied for it. Taxpayers who don’t file Form 3520 for a Mexican Land Trust and are challenged by the IRS could cite Revenue Ruling 92-105.

There are severe penalties for not complying with the reporting requirement. Hopefully the IRS will issue updated guidance that can generally be relied upon by taxpayers for this issue.

(Letter Ruling 201245003, July 30, 2012.)

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Proposed regulations issued for Medicare tax.

The IRS has issued proposed reliance regulations for the 3.8% Medicare surtax on net investment income, which is effective on January 1, 2013. An important provision of these regulations is to permit regrouping of activities to avoid passive activity treatment.

In the past, taxpayers often weren’t concerned whether activities that were profitable were classified as non-passive, such as under the real estate professional exception. With the Medicare tax, the classification of activities as non-passive will become more important.

(NPRM REG-130507-11; NPRM REG-130074-11; Notices)(Dec. 3, 2012)

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IRS delays repair regulations.

The IRS has announced that taxpayers won’t be required to implement temporary regulations (T.D. 9564) about repairs, supplies and capitalization until tax years after 2013. Taxpayers may optionally apply the temporary regulations for tax years beginning on or after January 1, 2012.

The IRS expects to issue final regulations during 2013.

Since taxpayers can “cherry pick” beneficial sections of the regulations, this can be a reason for extending the due date of a 2012 income tax return. See your tax advisor.

(Notice 2012-73.)

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Supreme Court to hear Same Sex Marriage case.

The U.S. Supreme Court has agreed to consider whether the Defense of Marriage Act (DOMA) violates the Fifth Amendment’s guarantee of equal protection for same sex couples who are legally married under state law. The case relates to whether a New York same sex couple who were married in Canada may claim the marital deduction for the federal estate tax. (Windsor, CA-2, 2012-2 USTC ¶ 60,654.)

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Community public access television needs our help.

As you can see below, public access television is a vital part of our educational outreach to various communities. These are usually nonprofit, charitable organizations, like public television stations. Unlike those stations, most of the programming for the public access stations comes from local producers.

This programming includes the local arts, productions by students at local schools, community outreach by churches, independent local producers discussing current social issues, educational programming by local providers like ourselves and much more. In other words, public access television makes a unique, important contribution to the communities it serves.

With the difficult times we are experiencing, many public access stations are facing severe financial challenges, and might not survive without more community financial support. I urge you to consider making a donation to your local public access television station. Here is a link for a list of public access television stations in California: www.communitymedia.se/cat/linksca.htm.

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Financial Insider Weekly broadcast schedule for November and December.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 8:00 p.m., Pacific Time. You can watch it on Comcast channel 15 for San Jose and Campbell. The show is broadcast as streaming video at the same time at www.creatvsj.org.

Here are the scheduled interviews for January and February:

January 4, 2013, attorney Mark Erickson, “Divorce – California style – Basics”
January 11, 2013, attorney Mark Erickson, “Divorce – California style – The Family Business”
January 18, 2013, attorney Mark Erickson, “Divorce – California style – The Family Residence”
January 25, 2013, attorney John Hopkins of Hopkins & Carley – “How to promote community giving as a family value”
February 1, 2013, attorney John Hopkins of Hopkins & Carley – “Succession planning for a family business”
February 8, 2013, David Beck, CFP® of Bay Area Planners, “How to prepare for the challenge to families of financing a college education”
February 15, 2013, Professor Patricia Cain of Santa Clara University School of Law, “Tax developments for same sex couples”
February 22, 2013, Professor Patricia Cain of Santa Clara University School of Law, “Estate and gift tax planning for same sex couples”

Financial Insider Weekly is also broadcast as follows:

Past episodes are available at https://www.youtube.com/user/financialinsiderweek.

Let me know any ideas that you have for topics or guests. Guests will usually have to be located in or near the Silicon Valley in California.

Hope you can watch or record the show. Please tell your friends about it!

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

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

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Visit our new article!

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Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Want to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

I'm also on Facebook, LinkedIn, and Google+.

you can also follow me on other social media sites, Facebook, LinkedIn, and Google+.

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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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Check out my blog.

I have also started a blog at michaelgraycpa.com. Check it out!

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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 www.taxtrimmers.com/directions.shtml.

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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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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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