Michael Gray, CPA's Tax and Business Insight

September 4, 2015

© 2015 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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Minnie on the playground at the San Francisco Zoo.
Minerva Siemer on the playground at the San Francisco Zoo.

Goodbye Summer, Hello Fall!

Labor Day next Monday, September 7, is the unofficial end of summer. (Our office will be closed for the holiday.) The actual last day of summer is Wednesday, September 23. In any case, when we see the children return to school, we get into the autumn state of mind and we know the holiday season isn't far off.

The year is two thirds over. Not much time is left to achieve your goals for this year. How is it going?

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Family celebrations.

My second daughter, Holly Baker, will celebrate her 40th(!) birthday this month. Holly's son and my oldest grandchild, Kyan Baker, will celebrate his 11th birthday this month. Happy birthdays!

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Dawn Siemer's hours are changing.

Starting next week, Dawn will be working Mondays, Tuesdays and Thursdays. You can still reach her at (408) 918-3162 and leave a message any time.

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So long, Dr. Wayne Dyer.

Dr. Wayne Dyer passed away on August 29.

Dr. Dyer, who earned a Ph.D in Psychology, began his public career teaching practical self-help psychological techniques. His first book was Your Erroneous Zones. He evolved to become a spiritual teacher, raising millions of dollars for public television with his televised seminars.

Dr. Dyer believed it was no coincidence that he qualified for his Ph.D on the date Abraham Maslow passed away. Dyer believed his purpose was to help as many people as possible to reach a "self-actualized" state.

One his favorite aphorisms was, "We aren't human beings having a spiritual experience, we are spiritual beings having a human experience."

You can read about his life journey, the influences on his life and his many books in his autobiography, I Can See Clearly Now.

I am a big Wayne Dyer fan, and Janet and I have enjoyed listening to his recordings and watching his videos. I will miss him but continue to enjoy the legacy of books and recordings that he left with us.

His family said, "Our hearts are broken, but we smile to think of how much our scurvy elephant will enjoy the other side."

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Third estimated tax payments and extended calendar-year business income tax returns are due September 15.

The extended due dates for calendar-year corporations, partnerships and trusts is September 15. Be sure to get the information for your extended return to your tax return preparer right away. If you need us to prepare your tax return, call Dawn Siemer on Monday, Tuesday, or Thursday at 408-918-3162 for an appointment.

The third quarter federal estimated tax payment due date for individuals, calendar-year trusts and most calendar-year corporations is September 15. California doesn't have a third quarter estimated tax payment due on September 15 because the first two payments are "front-loaded." In some cases, taxpayers will "catch up" on unpaid California estimated tax payments on September 15.

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October due date is coming for individual income tax returns.

In case I get snowed and don't get out an October newsletter before October 15, remember that is the due date for extended individual income tax returns. Get the information to finish your tax returns to your tax return preparer right away. If you need us to prepare your tax return, call Dawn Siemer on Monday, Tuesday, or Thursday at 408-918-3162 for an appointment.

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Gain from sale of residence was taxable when it was reacquired.

The Eighth Circuit Court of Appeals upheld the Tax Court and the IRS in finding a taxpayer wasn't eligible for the exclusion for the sale of a principal residence when the taxpayer reacquired the residence.

The taxpayer sold his principal residence on an installment basis in 2006 for more than $1 million. He excluded $500,000 of gain as the sale of a principal residence. He received $505,000 installment payments and reported $57,000 installment sale gain for 2006 through 2008.

In 2009, the buyers defaulted and the taxpayer reacquired the property. The taxpayer kept the $505,000 previously received as liquidated damages. The taxpayer didn't resell the property.

Under the exclusion rules for the sale of a residence, gain isn't taxable from the reacquisition of property, except to the extent the money received exceeds the gain previously reported. In this case, the taxpayer had taxable income of $505,000 - $57,000, or $448,000.

An exception to the rule when the property is sold within one year after reacquiring the property didn't apply in this case.

(DeBough v. Shulman, 2015-2 U.S.T.C. 50,455, August 28, 2015.)

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Uniform basis reporting postponed until late February 2016.

In the Surface Transportation Act of 2015, enacted on July 31, 2015, new rules were adopted requiring using the fair market value of property reported on a federal estate tax return when selling or depreciating property.

The IRS has delayed the effective date of this new rule until it issues guidelines on how it should be implemented. It doesn't expect to do so until late February 2016.

(Notice 2015-57.)

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Unmarried couple gets to deduct more residential mortgage interest.

The Ninth Circuit Court of Appeals (jurisdiction includes California), reversed the Tax Court relating to the limitation for residential mortgage interest. The Tax Court upheld the IRS in limiting the deduction to $1 million of acquisition indebtedness plus $100,000 of home equity debt for residences co-owned by more than one taxpayer. The Ninth Circuit ruled that limitation applies on a per-taxpayer basis. (For this rule, a married couple is considered to be one taxpayer.)

The taxpayers in this case, Bruce Voss and Charles Sophy, were registered domestic partners who are residents of California. Under federal tax law, registered domestic partners are single, unmarried taxpayers. Under California tax law, registered domestic partners are taxed the same as married taxpayers.

This decision creates an opportunity for co-owners who aren't married to each other who are jointly obligated on a mortgage to file amended returns applying the mortgage interest limitations on a per-taxpayer basis. Note the limitation will be different on the California income tax return. See your tax advisor for details.

(Voss, 2015-2 U.S.T.C. 50,427.)

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Payments from ex-spouse weren't alimony.

The Tax Court ruled against the IRS and found that monthly payments received by a divorced taxpayer that were designated in the divorce agreement as alimony/child support didn't meet the federal tax requirements to be treated as alimony. There was no provision in the agreement that the payments would stop at the taxpayer's death. In addition, the ex-spouse's payment obligation would terminate if the taxpayer remarried.

Therefore, the payments weren't taxable income for the taxpayer (and weren't tax-deductible for the taxpayer's ex-spouse.) (And a family lawyer might be seeking advice from his or her malpractice insurance company.)

(Crabtree, TC Memo 2015-163, August 17, 2015.)

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Property tax appeals filing deadline is coming.

The deadline for filing for a California property tax appeal in Alameda, Inyo, Kings, Orange, Placer, San Francisco, San Luis Obispo, Santa Clara, Sierra and Ventura counties is September 15, 2015. The deadline for other counties is November 30, 2015.

See http://www.boe.ca.gov/proptaxes/pdf/filingperiods.pdf

For a video about filing appeals, see http://www.boe.ca.gov/info/AssessmentVideo/Index.html

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California conformity bills await the governor's approval.

California's legislature has sent two major bills to Governor Brown for his approval.

AB 99 (Perea) would extend California's partial conformity to the exclusion of cancellation of indebtedness income for 2014 only. Many taxpayers have extended the due date for filing their 2014 California income tax returns, hoping this relief would be passed.

AB 154 (Ting) will update the conformity date of California's income tax laws to January 1, 2015, for tax years beginning on or after January 1, 2015. There are still exceptions to the rules. For example, bonus depreciation, the Section 179 expense election, and real estate professional status will continue to be different for federal and California income tax reporting. This legislation will make preparing California income tax returns much easier.

(Spidell's Flash Email: "Two big conformity bills await Governor's signature", September 2, 2015.)

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Franchise Tax Board is auditing travel and entertainment deductions.

The Franchise Tax Board is planning to mail 10,000 to 50,000 correspondence letters to taxpayers who claimed tax deductions for travel and entertainment expenses on Schedule A for the 2011 and 2012 tax years.

The letter will request information about the taxpayer's employment, the employer's policy for expense reimbursement and details relating to the expenses claimed, including a transportation log for business mileage.

(Spidell's California Taxletter, "FTB sending 10,000 to 50,000 travel and entertainment audit notices", September 1, 2015.)

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California Supreme Court changes date of separation for divorcing couples.

The California Supreme Court has ruled that divorcing couples aren't legally separated when they continue to share the same residence. This ruling reverses historical rulings that it wasn't necessary for spouses to live in separate residences to be legally separated.

In this case, the husband stated he and his ex-spouse weren't separated until she moved out of their shared residence in 2011 and the wife claimed they were separated in 2006, when they filed for divorce.

The Court said, "living in separate residences is an indispensable threshold requirement for a finding that spouses are living separate and apart."

This ruling is important because income earned by the spouses is community property until they are legally separated. One-half the income is taxable for each of the spouses and should be divided and reported on each of their income tax returns.

(In re Marriage of Sheryl Jones Davis and Keith Xavier Davis, California Supreme Court Case No. 5215050, July 20, 2015.)

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California taxpayer was subject to California tax for IRA distribution.

Mr. Bothwell worked and lived in Canada before moving to California. While a resident of Canada, he worked for a Canadian company, Genstar, and became vested in the company's pension plan. After he left employment with Genstar, the company converted his pension account to an IRA.

In 2008, Mr. Bothwell received a distribution from the IRA and excluded it from California taxable income. He claimed that under P.L. 109-264, California was prohibited from taxing income earned outside the U.S. while he and his wife were nonresidents.

The State Board of Equalization held the Bothwells misinterpreted P.L 109-264. It prevents the state where you earned the income received from a retirement plan from taxing it, but the state where you are a resident can tax your worldwide income.

(Appeal of Bothwell, California State Board of Equalization, Case No. 713600, October 16, 2014.)

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Does your group need a speaker?

We are seeking opportunities to speak before groups. Topics include recent tax developments, tax issues relating to real estate, how estate planning has changed recently, tax issues relating to alternative investments using retirement accounts, and marketing topics such as "How I created a public access television show broadcast on eleven Bay Area stations." To make arrangements, call Michael Gray at 408-918-3161.

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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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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 4, 2015, Janis Carney, attorney at law, Carney Elder Law, "Paying for long-term care for seniors in California"
September 11, 2015, Robert E. Temmerman, Jr., attorney at law, Temmerman, Cilley & Kohlmann, LLP, "I'm an executor. Now what?"
September 18, 2015, Robert E. Temmerman, Jr., attorney at law, Temmerman, Cilley & Kohlmann, LLP, "I'm a trustee. Now what?"
September 25, 2015, Peggy Martin, ChFC, CLU, The Family Wealth Consulting Group, "Legacy planning"
October 2, 2015, William D. Mahan, attorney at law, of counsel to Gates, Eisenhart, Dawson, "Why you need a will"
October 9, 2015, William D. Mahan, attorney at law, of counsel to Gates, Eisenhart, Dawson, "Tax considerations of title"
October 16 and 23, 2015, Paul Duren, Heritage Bank, "Small business financing"
October 30, 2015, Professor Patricia Cain, Santa Clara University School of Law, "Tax concerns of same-sex couples and unmarried couples"

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.

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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 www.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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