Michael Gray, CPA's Tax and Business Insight

November 3, 2022

© 2022 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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A road lined with trees loaded with yellow, red and orange leaves.
Happy Autumn season! We don't have scenes like this now in San Jose, California. Our autumn colors come much later in the year.

Happy Thanksgiving!

Thanksgiving falls on November 24 this year. 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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Make your year-end planning appointment now.

Halloween has passed and the Holidays are here! Now would be a good time to review your tax situation with Ms. Thi Nguyen, CPA. Write to her at thi@atl-cpa.com to make an appointment.

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Dan Kennedy anthology released.

Entrepreneur Books has released an anthology of the best ideas from twelve of marketing teacher Dan Kennedy's books, called The Best of No B.S. There's 560 pages of text, including several checklists. I highly recommend all of Dan Kennedy's books. Here's a resource of his distilled marketing and business wisdom. You can get it at Amazon.com, bn.com, or your favorite bookseller.

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Election available for casualty losses from Hurricane Ian.

An election is available to deduct casualty losses from Hurricane Ian on the 2021 individual income tax return or the 2022 individual income tax return. For 2021 returns that have already been filed, amended returns may be filed to claim the losses. See your tax advisor.

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Make passthrough entity elective tax payments by the year-end.

Calendar-year end passthrough entities should make an effort to pay any remaining tax by December 31, 2022. According to IRS Notice 2020-75, the tax must be paid in order to claim a current tax deduction. The tax payments reduce the taxable income passed through to the owners.

See your tax advisor for details. The elective tax payment isn't a do-it-yourself project.

(Spidell's California Taxletter®, November, 2022, p. 9, "2022 passthrough entity elective tax payments.")

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The Employment Development Department is watching employee classification.

During the past several years, guidelines have been created for classifying employees under AB 5. The controversy is whether a worker may be classified as an independent contractor. Under AB 5, even most temporary workers should be classified as employees. See your labor attorney for details. The Employment Development Department has stepped up its audits, identified thousands of misclassified workers and assessed hundreds of thousands of dollars of taxes and penalties.

Don't blow this issue off. Make proper classification of workers a priority for your business.

(Spidell's California Taxletter®, November 2022, p. 2, "EDD worker classification audits.")

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Social Security threshold announced for 2023.

The Social Security Administration has announced that the threshold for Social Security tax for 2023 will be $160,200. Social Security benefits will also increase by an 8.7% cost of living adjustment for 2023.

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Estate tax exclusion amount increased for 2023.

The estate tax exclusion amount for an individual who is deceased in 2023 will be increased to $12,920,000 from $12,060,000 for 2022.

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Gift tax exclusion increased for 2023.

The annual exclusion for taxable gifts is $17,000, per donor, per donee. It was $16,000 for 2022. The annual exclusion for gifts to a spouse who is not a U.S. citizen is increased to $175,000 for 2023 from $164,000 for 2022.

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Large gifts received from foreign persons.

Large gifts from foreign persons are reportable on Form 3520. For 2022, the gifts are reportable when the aggregate value of gifts received in the tax year exceeds $18,567. Previously, the annual threshold for cumulative gifts from a foreign person was $100,000.

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2023 retirement plan limitations announced.

The IRS has published the 2023 retirement plan limitations with cost of living adjustments.

(Notice 2022-55.)

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Successor trustee wasn't an authorized representative in Tax Court.

The Tax Court ruled that a successor trustee of a decedent's revocable living trust wasn't authorized to represent the decedent in Tax Court. The determination is made under state law. A California successor trustee was previously permitted to represent a decedent. The Tax Court said the administrator for a Florida decedent's estate must be appointed by the state probate court. (Sander v. Commissioner, T.C. Memo. 2022-103.)

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California to require separate tax basis capital account reporting for 2022 partnership tax returns.

The IRS required tax basis capital account reporting starting in 2021. The Franchise Tax Board allowed taxpayers to use the Federal amounts on their Schedules K-1 (partner's information return). Effective for tax years beginning in 2022, California will require California tax basis capital account reporting on California partnership Schedules K-1. The most common difference between California and Federal reporting is depreciation. There are many other potential differences.

Now that October 17 is behind us, it would be wise for California tax return preparers to assemble the information for California tax basis capital accounts now to prepare for next tax season.

Small partnerships are exempt from the requirement, provided the partnership:

(Spidell's California Taxletter®, November 2022, p. 1, "California tax basis capital account reporting.")

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If you exercised ISOs during 2022, should you use the "escape hatch"?

Remember if you exercised ISOs during 2022 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, 2022. The fair market value of the shares on March 1, 2022 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, 2022, 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, 2022, 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. 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 plus $3,000. 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. Consult with your tax advisor.

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Do you sell services or software to CPAs?

Maybe I can help with writing promotional material and marketing ideas. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.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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Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

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Michael Gray, CPA
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