Michael Gray, CPA's Tax and Business Insight

November 3, 2014

© 2014 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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Janet Gray at Lover's Point in Pacific Grove.
Janet Gray at Lover's Point in Pacific Grove.

Congratulations, San Francisco Giants!

Congratulations to the San Francisco Giants for winning their third World Series in five years! And thanks to the Kansas City Royals for a nail-biting series. Janet and I usually aren't great baseball fans, but our grandsons Kyan and Clive Baker have caught the Giants fan bug from their dad, Dan. With their enthusiasm, we were inspired to watch and listen to many of the games. It was a great World Series!

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Happy Thanksgiving!

This year Thanksgiving will be Thursday, November 27. Thanksgiving is the holiday most devoted to our families in the United States. (In other countries, Christmas decorations go up right after Halloween.) Hope you have many blessings to be thankful for, as we do.

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Michael Gray will be out of the office most of November.

Michael Gray will be out of the office from November 11 through November 24. Our office will be closed for Thanksgiving on November 27 and 28. With year-end training updates to prepare for next tax season, Christmas and New Years, he also will have limited availability during December. We recommend that you reserve your year-end planning appointment now. Call Dawn Siemer weekdays except Tuesday at 408-918-3162.

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November celebrations.

My brother Stephen and I will be celebrating our 62nd birthdays this month. We're glad that we are in good health and surrounded by our family.

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Estate exemption portability election extended for some taxpayers - but time is short!

Back in February, the IRS issued Revenue Procedure 2014-18, extending the due date for estates of decedents who died during 2011 or 2012 to file an estate tax return solely to make a "portability election" to December 31, 2014. The portability election allows a surviving spouse to receive and use the unused lifetime estate and gift tax exemption of a deceased spouse.

For example, Jane was deceased on December 1, 2013. She didn't make any gifts during her lifetime and would only have a taxable estate of $500,000. Her estate was below the threshold for which a federal estate tax return is required to be filed. If the portability election was made, her surviving spouse, Judy (same sex couple), would receive Jane's unused exemption of $5,250,000 - $500,000 = $4,750,000. In order for the portability election to be made, a timely federal estate tax estate return would have to be filed for Jane.

I intentionally used the same-sex married couple example, because these are the individuals most likely to benefit from this Revenue Procedure. Before the federal Supreme Court's Windsor decision last year, they weren't eligible to make a portability election or qualify for a federal estate tax marital deduction.

If you think you or a friend or relation qualify and would benefit from making this election, see or refer them to a qualified tax return preparer now.

(Revenue Procedure 2014-18.)

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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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401(k) plans can use deferred annuities.

The IRS has issued new guidance allowing participants in 401(k) plans to invest in deferred annuities intended to guarantee income for life after retirement. The annuities will be structured using target date funds.

See your plan administrator for details.

(Notice 2014-66, October 24, 2014.)

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Retirement plan contribution limits increased for 2015.

The IRS has announced 2015 cost of living adjustments for retirement plan contributions. The 401(k) elective contribution will increase from $17,500 to $18,000. The "catch up" contribution for plan participants age 50 and over will increase from $5,500 to $6,000. The limitation for defined contribution plans, such as profit sharing plans, will increase from $52,000 to $53,000. The annual benefit limit for defined benefit plans will be unchanged at $210,000.


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Maximum social security wage base increases for 2015.

The maximum wages subject to social security taxes will increase from $117,000 for 2014 to $118,500 for 2015.

(SSA News Release and Fact Sheet.)

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California offers a tax break for donations helping fund college educations.

California is offering a 60% tax credit for 2014 for donations to fund Cal Grants. (The credit will be 55% for 2015 and 50% for 2016.) The credit is called the California College Access Tax Credit. The credit will be allowed on the California income tax return instead of a donation deduction, but the donation will still be deductible on the federal income tax return.

The credit can't be used to reduce the California regular tax below the California alternative minimum tax. Unused credits can be carried forward for six years.

In order to claim the credit, a taxpayer will have to submit an application and be granted a credit allocation. The maximum amount of tax credits that can be allocated and certified for 2014 is $500 million.

Applications will be available on the California Educational Facilities Authority web site, www.treasurer.ca.gov, beginning November 3, 2014.

(Spidell's Flash E-mail, 10/29/14 and Spidell's California Taxletter®, October 1, 2014, page 3.)

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IRS Chief Counsel says residence exclusion can eliminate the benefit of passive losses.

Suspended passive activity losses are recognized when the passive activity is sold. What if the passive activity was a residence qualifying for the exclusion for sale of a principal residence? According to the IRS Chief Counsel, the loss is applied against the gain from the sale of the residence. Since the gain might otherwise be excluded, this can eliminate the tax benefit of the "freed up" passive losses.

For example, Jane, a single taxpayer, sells her rental home during 2014 for a $200,000 gain. The home was previously her principal residence, and qualifies for the $250,000 exclusion of gain. Jane had $30,000 of unused passive activity losses when she sold the home. According to the IRS Chief Counsel, the $30,000 loss is applied against the $200,000 gain, leaving $170,000 which is excluded from taxable income using the sale of principal residence exclusion. Since the gain would be excluded from taxable income anyway, Jane would receive no tax benefit from her passive losses.

If Jane's gain before applying the passive activity loss deduction was $280,000, she would have received a tax benefit by reducing the gain by the $30,000 passive loss to $250,000, enabling her to use her full $250,000 exclusion for sale of a principal residence.

(CCA 201428008, April 21, 2014.)

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Privacy policy update.

We recently updated our privacy policy with our current hosting company and some additional information about how we collect information about our visitors. For more information, visit www.taxtrimmers.com/noindex/privacy.shtml.

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Do you need help with amended income tax returns?

We have already been meeting with folks who want a second look at their 2013 income tax returns for possible corrections. Call Dawn Siemer at 408-918-3162 on Mondays anytime, or Wednesdays, Thursdays, or Fridays before 2pm to make an appointment.

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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 November and December.

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 November and December:

November 7 and 14, 2014, Cynthia Sue Larson, MBA, Life Coach, "How to manage emotions for financial decisions"
November 21, 2014, Mari Ellen Loijens, Silicon Valley Community Foundation, "Why and how to promote charitable giving in your family"
November 28, 2014, Tom Oviatt, Wymac Capital, Inc., "Reverse mortgage developments"
December 5 and 12, 2014, Deborah Price, Money Coach, The Money Coaching Institute, "The heart of money - a couples' guide to financial harmony"
December 19, 2014, Don Pollard, CLU, ChFC, Advanced Professionals, "Update on individual health insurance under Health Care Reform
December 26, 2014, Don Pollard, CLU, ChFC, Advanced Professionals, "Group medical insurance for small businesses"

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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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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