Michael Gray, CPA's Tax and Business Insight

November 3, 2020

© 2020 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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Costumed dolls
Janet's dolls are dressed to celebrate Thanksgiving!

Happy Thanksgiving!

Thanksgiving falls on November 26 this year. With social distancing, etc. this year, many of us will have smaller celebrations. This is one holiday people of all faiths or no faith can share. Being thankful and counting your blessings is one of the best things you can do for your emotional health. Even when things aren't working out, you can still be thankful for past good memories.

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Family celebrations.

My brother, Steve, and I are celebrating our birthdays this month. Thank goodness we are both healthy and enjoying spending time with our family.

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Social Security wage base increased for 2021.

The Social Security Administration has announced the wage base for computing Social Security tax is increased from $137,700 for 2020 to $142,800 for 2021. The Social Security tax rate is 6.2%.

The Medicare tax rate will be 1.45% for the first $200,000 of wages ($250,000 for joint returns, $125,000 for married persons filing separate returns) plus 2.35% Medicare tax on wages in excess of the listed thresholds.

For self-employed persons, the self-employment tax will be 12.4% OASDI for the first $142,800 of self-employment income; plus 2.90% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 for married, filing separately, plus 3.8% for self-employment income in excess of the listed thresholds.

Beneficiaries of Social Security and SSI will receive a 1.3% cost of living adjustment for 2021.

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Qualified retirement plan thresholds for 2021 announced.

The IRS has published the updated thresholds for qualified retirement plans for 2021. The maximum voluntary employee contribution to a Section 401(k) plan is unchanged at $19,500. The maximum catch-up contribution for individuals aged 50 or over is unchanged at $6,500. See the Notice for other plans.

(Notice 2020-79, October 26, 2020.)

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2021 tax rate schedules, various thresholds announced.

The IRS has published the 2021 tax rate schedules and various thresholds. The estate tax exemption equivalent is increased to $11,700,000 from $11,580,00 for 2020. The annual exemption for taxable gifts is unchanged at $15,000 per donor, per done. The exemption for gifts to a spouse who is not a citizen of the United States is increased to $159,000 from $157,000 for 2020.

(Revenue Procedure 2020-45, October 26, 2020.)

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Federal income tax return deadline extended for California wildfire victims.

The IRS has added Santa Clara County to the list of California counties for which the filing deadline of a federal income tax return has be extended to December 15, 2020. Here is a list of the counties on the list: Butte, Lake, Monterey, Napa, San Mateo, Santa Clara, Santa Cruz, Solano, and Yolo. Individuals and households who reside or have businesses in theses counties qualify for relief. Taxpayers who reside in or have businesses in localities added later to the disaster area designation will automatically receive filing and payment relief.

The relief also applies to the estimated tax payment due on September 15, 2020.

(CA-2020-06, August 26, 2020 and updated September 14, 2020 and September 29, 2020.)

Relief has also been extended for these California counties relating to wildfires that began on September 4, 2020: Fresno, Los Angeles, Madera, Mendocino, Napa, San Bernardino, San Diego, Shasta, Siskiyou and Sonoma. The due date for 2019 income tax returns with an extended due date of October 15, 2020 for these counties is further extended to January 15, 2021. See your tax advisor for details.

(IR 2020-237, October 19, 2020.)

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Filing deadline extended for Hurricane Delta victims.

The IRS has announced relief for victims of Hurricane Delta that began on October 6, 2020. Hurricane Delta victims have until February 16, 2021 fo file their 2019 federal income tax returns and to file certain other returns and make certain payments. Louisiana parishes qualifying for relief include Acadia, Calcasieu, Cameron, Jefferson Davis and Vermillion. Other locations designated as disaster areas relating to Hurricane Delta will also qualify for relief.

(IR-2020-236, October 19, 2020.)

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Filing deadline for FBAR extended for natural disaster victims.

The Financial Crimes Enforcement Network has announced that the deadline to file Reports of Foreign Bank and Financial Accounts (FBAR) for the 2019 calendar year is extended to December 31, 2020. (This should include victims of California's wildfires during 2020.)

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IRS extends deadline for non-filers to apply for economic impact payment.

The IRS has extended the deadline for taxpayers who normally don't file a federal income tax return because their income is below the filing thresholds to apply for a 2020 economic impact payment to November 21, 2020. Previously the deadline was October 15, 2020. There is a non-filer's tool at the IRS website, https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here.

(IR 2020-229, October 5, 2020.)

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Fax filing for quick refund claims ends December 31, 2020.

The IRS has announced on its website that the last day taxpayers can use a temporary procedure allowing them to fax quick refund claims using Form 1139 or Form 1045 is December 31, 2020. After that date, the fax numbers will no longer be operational.

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Capital account reporting requirements for partnerships changes for 2020.

The IRS has issued draft 2020 Form 1065 instructions for partnerships. The instructions state that partner capital account information should be reported using tax basis. This is consistent with what the IRS proposed for 2019, but agreed to delay for a year.

According to the proposed instructions, partnerships filing form 1065 for 2020 are to calculate partner capital accounts using the transactional approach for the tax basis method. Reporting using another method, such as generally accepted accounting principles, won't be permitted.

The IRS plans similar revisions to Form 8865.

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California new construction assessment exclusion for disaster restoration.

Governor Newsom signed AB 2013 on September 24, 2020. The legislation provides base-year property tax transfer for the restoration of real estate destroyed by a governor-declared disaster, effective for disasters declared on or after January 1, 2017.

The reconstructed property must be comparable, which means it must be similar in function, size and utility. The restored property may not have a full cash value exceeding 120% of the damaged original property, determined just prior to the date of the damage or destruction.

If the full cash value of the reconstructed property is less than the original property's adjusted base year value, the lower value will become the reconstructed property's base-year value.

If the full cash value of the reconstructed property exceeds the 120% threshold, the amount exceeding the 120% will be added to the transferred base-year value.

In order to get this relief, the property owner will have to apply for it with his county assessor. If it applies to you, contact your county assessor to find out the application procedure.

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IRS conservation easement settlement initiative.

The IRS has provided information on a settlement option offered by the Office of Chief Counsel for syndicated conservation easement (SCE) transactions.

The IRS has designated certain SCE transactions as listed transactions requiring special disclosure. It regards the transactions as abusive. In Notice 2017-10, the IRS describes an investment where the investor receives a charitable contribution that equals or exceeds 250% of the investor's investment. The charitable contribution deduction is for a conservation easement that is grossly overvalued in an appraisal.

The IRS has offered to settle this issue with the partnerships that claimed the deduction. Under the terms of the settlement, the deduction is disallowed, all partners must agree to settle, the partnership must pay the full amount of tax, penalties and interest, investor partners can deduct the cost of acquiring their partnership interests and pay a reduced penalty of 10% to 20%, and promoter partners must pay the maximum penalty asserted by the IRS (typically 40%) with no deduction for costs.

The settlement is only available for partnerships with cases pending before the Tax Court.

(Chief Counsel Notice 2021-001.)

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IRS Micro-Captive Insurance settlement offer.

The IRS has announced a limited-time settlement offer for certain taxpayers who participated in abusive micro-captive insurance transaction.

The IRS said it will soon begin sending out offer letters to certain taxpayers under audit who participated in abusive micro-captive insurance transactions.

The terms of the settlement offer and the time limit to respond were not specified in the IRS release.

(IR 2020-241, October 22, 2020.)

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If you exercised ISOs during 2020, should you use the "escape hatch"?

Remember if you exercised ISOs during 2020 and didn't sell the stock, your AMT adjustment will be based on the fair market value of the stock on the date of exercise. However, if you sell the stock before the end of the year of exercise, the AMT adjustment is eliminated. Ordinary income is reported for the excess of the selling price over the option price. I call this strategy "the escape hatch."

For example, Jean Employee exercised an ISO for 1,000 shares of XYZ stock on March 1, 2020. The fair market value of the shares on March 1, 2020 was $55 per share and the option price was $5 per share. If Jean didn't sell the stock, she would report additional AMT income of $55 - $5 = $50 X 1,000 shares = $50,000. On December 15, 2020, Jean sells the stock for $15 per share. The AMT adjustment is eliminated and Jean reports $15 - $5 = $10 X 1,000 shares = $10,000 of ordinary income for regular tax and AMT.

There is an important requirement to get this tax benefit. A loss would have to be "allowable" if the stock was sold at a loss. A common transaction that would disqualify an escape hatch is a wash sale. A wash sale happens when replacement shares or an option to acquire replacement shares are acquired during the period 30 days before or 30 days after the sale.

For example, if Jean purchased 1,000 shares of XYZ Software for $16 per share on December 10, 2020, she would still have a disqualifying disposition of the ISO shares, but she would have $50,000 of ordinary income because the escape hatch wouldn't apply. Her short-term capital loss of $15 - $55 = $40 X 1,000 shares = $40,000 would be disallowed as a current deduction. The disallowed loss would be added to the tax basis of the replacement shares. Therefore, the tax basis of the replacement shares would be $16 + $40 = $56 X 1,000 shares = $56,000.

If you are going to use this "escape hatch" strategy, I suggest not waiting until the last minute. One of my clients was thinking of doing this, and an employee unexpectedly sued the company for an employment-related matter. The company's stock was locked up for employees because of the lawsuit. My client wasn't able to use the "escape hatch" strategy.

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Year end planning - should you "harvest" losses before the year end?

The stock market has been very active this year. If you have sold securities (or other assets) for capital gains, review the securities (or other assets) you are holding for potential capital losses. If you sell the loss shares before the end of the year, you can offset the losses against your gains. This is even more important if you could be subject to the 3.8% federal net investment income tax. You could bring your adjusted gross income below the $250,000 threshold for married persons filing joint returns or $200,000 for singles.

Remember the wash sale rules. If you purchase shares of the same security during the period 30 days before and 30 days after a sale at a loss, the loss is disallowed for the same number of shares.

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Want help with your promotions, web pages, newsletters, blog posts, emails or books?

Michael Gray is available for promotional and content writing assignments, including chatbots. Want more information? Call Michael Gray weekdays at 408-918-3161.

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Do you love Disney?

I have created a Facebook group, called Disney Magic, for members to share Disney photos, experiences and tips. I am also posting developments for Disney films, television shows, and amusement parks there. If you are on Facebook, you can use this URL to join: https://www.facebook.com/groups/2006739209578437/, or search "Groups" on Facebook. You have to use the "join" button to join the group. This is a private group, and I will approve your membership.

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Attention Accountants! Speed up processing your 2019 business closings!

Do you still have 2019 business income tax returns on extension that need to be done? Check out this trial balance software, EZ Trial Balance, that's super-easy to set up and use. There is a desktop version and an online version. The online version includes consolidations and ratio analysis for analytical review. http://www.eztrialbalance.com

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Attention business owners with remote workers or remote customers!

Are you concerned about protecting your conversations and communications from hackers? Now there is a secure collaboration application including (unlimited) team member assignments, video conferencing (no Zoom bombing!), text messaging, voice messaging, PDF capture, electronic signature and large file transfer. Remote computer access feature is almost complete. Communications take place in a secure envelope. Cloud application so no installation is required on your computer network. Meets IRS security standards. http://www.securelycollaborate.com

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Check my blog for coronavirus-related tax developments.

We have been sending most of my blog posts relating to coronavirus-related tax developments to you. You can find them at www.michaelgraycpa.com.

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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 and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

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Financial Insider Weekly past episodes

After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes available at https://www.youtube.com/user/financialinsiderweek.

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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
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

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