Michael Gray, CPA's Tax and Business Insight

September 4, 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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The Baker family at the Giant Artichoke in Castroville.
Dan, Holly, Kyan and Clive Baker at the Giant Artichoke in Castroville. Holly and Kyan have September birthdays.

September milestone.

I missed an opportunity to mention the 50th anniversary of Martin Luther King's "I have a dream" speech on August 28 in the last newsletter. I believe very strongly that embracing others as brothers and sisters, regardless of race or creed, should be a personal and national priority.

An event that contributed to the rally in Washington, D.C. in 1963 was the enrollment of James Meredith as the first black student at the all-white University of Mississippi on September 30, 1962. President Kennedy sent U.S. troops to force compliance with the law. Three people died in the fighting and 50 were injured. James Meredith was injured while participating in a civil rights march in Mississippi, recovered, and continued to march.

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Family celebrations.

My daughter, Holly Baker, is celebrating her birthday during September and her son and my grandson, Kyan Gray Baker, is celebrating his ninth birthday.

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The year is two thirds over.

Now that school has started, the year will be roaring to a close. Will you be ready?

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. at (408) 918-3162.

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Extension season is here.

There are only about one and a half months left to finish 2012 individual income tax returns (extended due date October 15) and only about two weeks left to finish 2012 calendar year business tax returns (extended due date September 16). 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. at (408) 918-3162. Be aware that our time for personal meetings will be very limited.

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

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Third quarter estimated tax payment date approaches.

The federal estimated tax payment for the third quarter is due September 16. If you are making your payments based on this year's tax information, it's time to get in touch with your tax advisor. California doesn't have a third quarter payment for individuals, because the payments for the first two quarters are "front loaded."

However, some taxpayers subject to California tax may find they will be over the $1 million threshold where their estimated tax payments can't be based on last year's income tax returns. They might have to deposit a make-up payment on September 16 to avoid late payment penalties.

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IRS provides guidance for same-sex spouses.

In response to the Supreme Court's Windsor decision, the IRS has issued Revenue Ruling 2013-17 with guidance for same-sex married couples and registered domestic partners.

The IRS has ruled that same sex couples who are legally married in foreign or domestic jurisdictions shall be considered married for federal income tax purposes, even if they live in a state that doesn't recognize such unions. This ruling follows a previous ruling in Revenue Ruling 58-66 that couples who had a common law marriage and moved to a state that didn't recognize such marriages are still considered married for federal income tax purposes.

The rule also applies for the eligibility for employee benefits under the federal tax laws, such as the exclusion for employer-provided employee medical insurance covering a spouse.

"Husband" and "wife" will be interpreted to include a same sex spouse.

Registered domestic partners, civil unions or other similar formal relationships recognized under state laws that are not denominated as a marriage under that state's law are not considered to be marriages under the federal tax laws. (Some states recognize these relationships as marriages. Consult with legal counsel for the applicable state.)

The ruling is effective September 16, 2013, but taxpayers have the option to apply it sooner, including filing amended income tax returns for years for which the statute of limitations hasn't expired.

(Revenue Ruling 2013-17, August 29, 2013.)

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Beneficiary of an inherited annuity allowed a tax-deferred exchange for replacement annuity.

The IRS has privately ruled that an individual who was receiving death benefits under annuities purchased by her mother can replace the annuities by direct transfer for replacement annuities to another company in order to receive a bigger payout. The exchange will be tax-free under Internal Revenue Code Section 1035(a)(3).

(LTR 201330016, April 16, 2013.)

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IRS provides late S election relief.

The IRS has issued consolidated simplified methods for taxpayers to request late S corporation elections in Revenue Procedure 2013-30. The guidance includes procedures for late Electing Small Business Trust elections, Qualified Subchapter S Trust elections, Qualified Subchapter S Subsidiary elections. Previous relief procedures are consolidated into a single document.

(Revenue Procedure 2013-30.)

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Misclassification of employee can result in penalties for the employee.

You might think that only the employer can be subject to penalties if an employee reports as an independent contractor, but that's not necessarily the case.

The Ninth Circuit Court of Appeals upheld a Tax Court decision that Michael Rosenfeld wasn't entitled to claim a tax deduction to a Simplified Employee Pension (SEP) account. Mr. Rosenfeld had reported as an independent contractor, but the IRS found he was an employee. Since the deduction wasn't allowed, Mr. Rosenfeld was also subject to a penalty for an excess contribution to a retirement plan.

Ouch!

(Rosenfeld v. Commissioner, 2013-2 U.S.T.C. 50,467, August 8, 2013.)

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Minister not allowed housing allowance exclusion.

A minister didn't receive a salary from his church, but the church paid his personal credit card charges, his home mortgage and home utility expenses. He claimed these payments should be excluded from his income because he made a vow of poverty.

The Tax Court upheld the IRS in finding the payments were taxable income.

The taxpayer failed to meet the requirements of the housing allowance exclusion. The requirements are (1) the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel; (2) before the payment of the rental allowance, the employing church or other qualified organization must designate the rental allowance pursuant to official action, which may be evidenced in an employment contract or by any other appropriate instrument; and (3) the designation must be sufficient in that it clearly identifies the portion of the minister's salary that is the rental (housing) allowance.

There was no evidence of an official action between the church and the taxpayer, so the requirements for exclusion weren't met.

In addition, the minister failed to file an election to be excluded from self-employment tax under a vow of poverty, so he was also subject to self-employment tax.

(Rogers v. Commissioner, T.C. Memo. 2013-177, August 1, 2013.)

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Same sex spouse entitled to death benefit.

A federal District Court has ruled the surviving same-sex spouse of a deceased employee was entitled to receive the pre-retirement survivor annuity provided to spouses under the employer's qualified employee benefit plan. The couple was married in Canada, and lived in Illinois. Although Illinois hasn't legalized same-sex marriages, it recognizes such marriages performed in other states.

(Cozen O'Connor, P.C. v. Jennifer J. Tobits, et al, 2013-2 U.S.T.C. 50,453, July 29, 2013.)

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New time and stations for Financial Insider Weekly in Santa Cruz County, Watsonville and Capitola.

The broadcast time in Santa Cruz County, Watsonville and Capitola has changed to 6 p.m. on Wednesdays and 2 p.m. on Fridays. The program is now broadcast on Comcast Channel 26 in Santa Cruz County and on Charter Communications Channel 72 in Watsonville and Capitola.

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Financial Insider Weekly broadcast schedule for September and October.

Financial Insider Weekly is broadcast in San Jose and Campbell on Fridays at 9:30 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 September and October:

September 6, 2013, attorney Naomi Comfort, Silicon Valley Elder Law, PC, "Tax planning for elders and their caregivers"
September 13, 2013, attorney Naomi Comfort, Silicon Valley Elder Law, PC, "Retirement and long-term care planning"
September 20, 2013, attorney Ray Sheffield, "Estate planning for retirement benefits"
September 27, 2013, Richard Lambie, professional fiduciary, "Selection and compensation of a professional fiduciary"
October 4, 2013, attorney Robert E. Temmerman, Jr., Temmerman, Cilley & Kohlmann, LLP, "I'm an executor! Now what?"
October 11, 2013, attorney Robert E. Temmerman, Jr., Temmerman, Cilley & Kohlmann, LLP, "I'm a trustee! Now what?"
October 18, 2013, James Brown, ASA, CFP®, Perisho, Tombor, Brown CPAs, "The role of a business valuation specialist"
October 25, 2013, attorney Naomi Comfort, Silicon Valley Elder Law, PC, "Special needs trusts"

Financial Insider Weekly is also broadcast as follows:

Past episodes of Financial Insider Weekly are posted on YouTube. One way to watch them is to go to our web site, www.financialinsiderweekly.com, and click on "Past Episodes."

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.

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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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 www.taxtrimmers.com/directions.shtml.

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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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