Michael Gray, CPA's Tax and Business Insight

July 3, 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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Kara Swims
Kara Siemer enjoys our new swimming pool during San Jose's summer weather.

Happy Independence Day!

July 4 falls this Thursday. Janet, James and I will be enjoying the day with the Siemers at Wilder Ranch, close to Santa Cruz, California. Wilder Ranch has a community July 4 in the style of a century ago, so it has the feel of a community picnic River City, Iowa in The Music Man or in the Pollyanna story. We are looking forward to homemade strawberry shortcake, pickles and watermelon!

Hope you enjoy a happy and safe Independence Day with your family or friends, and remember the blessings of liberty that were hard fought for in 1776!

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Family celebrations.

My daughter and office manager, Dawn and her husband John Siemer are celebrating their seventh anniversary this July. My son James is celebrating his thirty-third birthday. Congratulations!

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Extension season is here.

If you would like us to prepare your extended 2012 income tax returns, please call Dawn Siemer Mondays, Wednesdays or Fridays from 9 a.m. to 5 p.m.

We can also prepare amended income tax returns to clean up tax returns that were previously filed.

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Now is the time for tax planning.

The year is already half over. How is it going? With many tax changes this year, especially for taxpayers with high incomes or high net worths, now is a good time for income and estate tax planning. To make an appointment, call Dawn Siemer Mondays, Wednesdays or Fridays from 9 a.m. to 5 p.m.

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Tax world changes for same sex married couples.

On June 26, the Supreme Court essentially legalized same sex marriages in California (by dismissing an appeal about California Proposition 8 for lack of standing) and ruled the federal Defense of Marriage Act is unconstitutional. This should mean that same sex marriage couples living in a state that has legalized such marriages are now entitled to file joint income tax returns and to claim a marital deduction for federal estate and gift tax purposes for property transferred to a spouse. When a same sex spouse files a separate return, the status should be married, filing separately.

Same sex married couples living in community property states that have legalized such marriages should also be entitled to a “stepped up” basis for the entire basis of community property inherited after the death of a spouse, as opposite sex married couples are.

Some couples will pay more taxes due to the “marriage penalty,” and some will pay less.

The details about how to handle this change, especially relating to back year tax returns, remain to be announced by the Internal Revenue Service. Married same sex couples who would benefit from the change in status should consider filing protective amended income, estate, and gift tax returns.

The Supreme Court left open the question of whether states that don’t permit same sex marriages are required to honor marriages performed in states that do.

This ruling may not be the last word on the same sex marriage issue, but right now we will have to live with the consequences of the ruling.

A Financial Insider Weekly interview with Professor Patricia Cain of Santa Clara University about tax considerations of the Supreme Court decisions will be broadcast during August 2013.

(U.S. v. Windsor (June 26, 2013), Hollingsworth v. Perry (CA-9, Feb. 7, 2012.)

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Should you terminate a bypass trust in light of recent tax law changes?

I have written a blog post on this subject at http://michaelgraycpa.com/2013/06/28/should-you-terminate-a-bypass-trust-in-light-of-recent-tax-law-changes/. A copy has been sent with paper copies of this newsletter. If you would like to receive a copy, call Dawn Siemer on Monday, Wednesday or Friday at 408-918-3162.

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Employer healthcare mandate postponed.

The Obama Administration has announced the mandate in the Patient Protection and Affordable Care Act (PPACA) that employers with more than 50 employees provide employee healthcare coverage starting in 2014 is postponed until 2015. The penalty for not providing this coverage is also postponed until 2015.

The PPACA also requires individuals to have health care insurance coverage in 2014 or pay a penalty and requires the states to have marketplace exchanges. These requirements haven’t been postponed.

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Guidelines issued for Employer Wellness Programs.

In 2015, employers with 50 or more employees will be required to provide health insurance for their employees (see above). Premium reductions are allowed when employees adhere to a wellness program.

The IRS, the Department of Health and Human Services, and the Department of Labor have jointly issued final regulations on the design of these wellness programs. Large employers should study these new regulations to determine whether to adopt such a program or whether such a program that is already in place should be modified.

(T.D. 9620.)

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Deductions for transportation to temporary worksites disallowed.

Glenn Bogue worked as an independent contractor in the construction business. He claimed tax deductions for traveling from his residence to various temporary work sites.

The Third Circuit Court of Appeals upheld the Tax Court supporting the IRS’s disallowance of the deductions.

There are three situations where the deductions would be allowed.

  1. The home office exception – if the residence is the taxpayer’s principal place of business, transportation to another place of business is tax deductible.
  2. The temporary distant workplace exception – transportation from a residence to a distant temporary worksite.
  3. The regular work exception - transportation from one regular work location to another is tax deductible.

Mr. Bogue claimed he qualified for the regular work exception. He said he stopped at a bank and building supply stores on the way to and from work. The Third Circuit upheld the Tax Court’s finding that Mr. Bogue didn’t establish that he worked or performed services in those locations. Calling a building supply store or a bank a “regular work location” strains the meaning of “work location.”

Taxpayers who wish to claim tax deductions for business transportation should be prepared to document those deductions. Study IRS Publication 463 at www.irs.gov.

(Bogue v. Commissioner, 2013-1 U.S.T.C. ¶ 50,354 (June 3, 2013).)

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New reporting requirements for some California tax-deferred exchanges.

California has passed new legislation effective January 1, 2014 that will require taxpayers who exchange California real estate for property located out of state to file an annual information return with the Franchise Tax Board. The information return will be required for the year of the exchange and each year that the gain or loss is deferred. If the taxpayer fails to file the information return, the Franchise Tax Board may estimate the net income and assess tax, interest and penalties. (Yes, this one stinks!)

(AB 92 added Revenue and Taxation Code Sections 18032, 24953. Spidell’s Flash E-mail.)

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Mexican land trusts aren’t regular trusts.

The IRS has issued formal guidance that a Mexican land trust, also called a fideicomiso, isn’t a trust under Treasury Regulation Section 301.7701-4(a). The trust has bare legal title and the owner retains control of the property, including the ability to sell or transfer it and to finance it without any interaction with the trust. The arrangement is analogized to an Illinois land trust.

This ruling should provide relief from foreign trust reporting requirements for many taxpayers. The IRS previously made a similar private ruling. A revenue ruling can be relied on by all taxpayers.

(Revenue Ruling 2013-14, June 6, 2013.)

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More businesses excused from part of Schedule M-3 reporting.

The IRS has announced on its web site that, effective for tax years ending December 31, 2014 and later, corporations and partnerships with at least $10 million but less than $50 million of total assets by the end of a tax year will be allowed to file Schedule M-1 instead of Schedule M-3, Parts II and III. Those taxpayers will still be required to complete Schedule M-3, Part I, lines 1-12. The change applies to corporations and partnerships filing Forms 1120, 1120-C, 1120-F, 1120S, 1065 and 1065B.

Those businesses will continue to have the option of completing all of Schedule M-3.

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Financial Insider Weekly broadcast schedule for July and August.

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 July and August:

July 5, 2013, attorney Scott Haislet, “The new federal tax on net investment income”
July 12, 2013, Dick Blakeley, The Blakely Group, Inc., “How family business meetings can help avoid financial elder abuse”
July 19, 2013, Craig Martin, CFP®, The Family Wealth Consulting Group, “Asset class investing”
July 26, 2013, Craig Martin, CFP®, The Family Wealth Consulting Group, “Investment diversification using alternative investments”
August 2, 2013, Peggy Martin, MSFS, ChFC, CLU, The Family Wealth Consulting Group, “Socially Responsible and Sustainable Investing”
August 9, 2013, Professor Patricia Cain, Santa Clara University School of Law, “Tax Considerations of the Federal Supreme Court rulings on same sex marriages”
August 16, 2013, Craig Martin, CFP®, The Family Wealth Consulting Group, “How to make sure your retirement portfolio outlives you”
August 23, 2013, David Beck, CFP®, Bay Area Planners, “Funding For A College Education Using Federal Tax Benefits”
August 30, 2013, David Beck, CFP®, Bay Area Planners, “Government financial help for families of deceased veterans”

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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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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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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