Michael Gray, CPA's Tax and Business Insight

Table of Contents

• Have you brought in your tax return information, yet?
• Will you make these mistakes handling an estate or trust?
• We can track mortgage rates for you.
• Bush tax plan is submitted for negotiation.
• Armed Forces Act includes tax for U.S. individuals who leave.
• New box for California trusts sparks controversy.
• Questions and Answers

  Can tax deferred exchange money be transferred to a residence?

  What do we need to do before accepting donations?

  Can I claim the mileage to and from work as a deduction?

  What should I do with 1099 MISC forms I receive?

  Is there a combined S limitation for SEP contributions?

  Has California conformed to the 25% SEP limitation?

  Are punitive or physical damages taxable?

  Can I claim a deduction for paying margin calls?

• Do you have employee stock options?
• Visit our new articles
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight.

Have you brought in your tax return information, yet?

Most of our tax return interviews are done. If you need one, please schedule it now with Dawn Gray at 408-918-3162. Getting your information in early will help us get your tax returns to you well before April 15, which will help make it a much less stressful deadline for you and for us. As we expected, more clients will be receiving refunds this year, which is another reason for getting your tax returns done early.

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Reminder!! -- "Will you make these mistakes handling an estate or trust after a death?"

This is the title of a FREE presentation by Michael Gray on Monday, March 3 at the Community Room of the Campbell Library. The presentation will be from 7 to 8:30 p.m. The Campbell Library is located at 77 Harrison Avenue in Campbell. Seating is limited. For reservations, call Dawn Gray at 408-918-3162. Bring a friend!

Why would you want to come to this seminar? After a death, family and friends are dealing with the emotions of loss. At the same time, critical tax decisions must be made and other legal and record keeping matters must be attended to. Making mistakes when handling an estate or a trust after a death can cost a family thousands of dollars. In this FREE seminar, Michael Gray, CPA will share experiences of mistakes he has seen or helped families avoid when dealing with estate and trust issues in his tax practice.

We hope to see you there!

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We can track mortgage rates for you, so you don't have to.

This is still a great time to refinance, whether to get cash for remodeling your home, to finance a new business, to buy your dream yacht, or to just save interest dollars.

At no charge or obligation, we can track your home mortgage and notify you when refinancing is to your advantage.

Remember, we offer home mortgages as a service to our clients and newsletter subscribers located in California through our strategic partner, Wymac Capital. We specialize in financing with no points and no costs, if certain conditions are met.

To find out if we can reduce your home mortgage costs or help provide financing for education, home improvements, a vacation, or a new home, please call Michael Gray at 408-918-3161. There is no fee or obligation for this service.

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Bush tax plan is submitted for negotiation.

President Bush has submitted his tax plan to Congress, including the proposal to eliminate income taxes on corporate dividends. Although the bill may skate through the House of Representatives, it probably won't be accepted by the Senate without major modifications. This is the beginning of a negotiation process that may create an opening for incorporating other tax proposals. How about relief for employees with stock options who suffered losses with the stock market decline? How about allowing bigger deductions for capital losses? Your ideas? Write your representatives in Congress.

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Armed Forces Act includes tax for U.S. individuals who leave.

The Senate Finance Committee has approved the Armed Forces Tax Fairness Act of 2003. Most of the provisions of the Act provide relief to military personnel, including liberalizing rules for the home sale exclusion for taxpayers in the military. A provision for non-military persons would impose an income tax on taxpayers who relinquish their U.S. citizenship (except certain dual-citizen individuals) and long-term U.S. residents who terminate their U.S. residence. The tax would be based on the unrealized gain of their U.S. property, except for real estate. There would be a $600,000 exemption for single persons and a $1,200,000 exemption for married persons, filing jointly. (Real estate sales are still subject to U.S. tax after expatriation for non-citizens.)

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New box for California trusts sparks controversy.

The California Franchise Tax Board quietly added a new box to it's fiduciary income tax return, Form 541. It is asking for a disclosure of the fair market value of a trust's assets as of the end of the taxable year. Preparers of California income tax returns were surprised by the new requirement. Trust assets may include real estate, collectibles, antiques, and closely-held business interests that are hard to value. For now, the Franchise Tax Board is asking for a "best guess." There is no tax consequence relating to the disclosure, except an indication whether a trustee should have filed an estate tax return if the trust was part of a decedent's taxable estate. The box might be dropped on next year's forms.

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Questions and Answers

Question

My parents sold a house I was renting from them in November, 2002. They did a tax-deferred exchange using $80,000 worth of equity from the sale of the house to buy a condo for $168,000.

I am getting married and moving out of the condo into my fiancee's home. Is there any way the "exchange" money ($80,000) can be transferred and applied to the equity of their home?

Answer

I don't see a way based on the facts you have presented. A personal residence generally doesn't qualify for a tax-deferred exchange. If your parents want to buy another residence, they could sell their current residence and claim the exclusion for that sale. Then they could move into the condominium and qualify it for the exclusion after two years. Then they could sell the condominium and buy the residence they want. They should not move into the condominium until more than one year after the tax-deferred exchange was completed.

Question

My softball team is trying to get sponsorship from businesses in our area. We will open an account at the local bank. Our team is non-profit. Will we need a tax identification number? What else is involved?

Answer

This isn't really a short answer question. Since you are trying to get sponsorships, it may be you should set up a formal organization for your team, including filing for non-profit status - possibly even as a charity. As such, you will need an employer identification number. (The bank will ask for one to open the account.) I really think you should consult with an attorney who is familiar with these issues to discuss your alternatives.

Question

Can I claim the mileage to and from work as an income tax deduction? This is my own personal vehicle. My employer doesn't reimburse me for mileage.

Answer

Mileage to and from your residence and place of work is a personal expense and is not deductible.

Question

I receive Form 1099 MISC forms for my business. The income is reported as part of total sales for the business. Is there anything I need to do other than submit a copy of them to the IRS?

Answer

All you need to do is check to be sure the Form 1099 MISC agrees to your records and keep the form in your files. If there are any discrepancies, you should tell the issuer and request that a corrected form be issued. You don't need to send a copy to the IRS.

Question

Can a husband and wife who are employees of an S corporation each contribute $40,000 to a SEP or is there a combined S limitation?

Answer

The limitation is separately computed for the husband and wife employees. There isn't a combined S limitation.

Question

Has California's conformity to the 25% SEP limitation been resolved?

Answer

The litigation about whether California's tax legislation signed by Governor Davis during 2002 was legally passed is not concluded. Meanwhile, I don't think you will be penalized in following the new rules as they are being administered by the Franchise Tax Board. (Use the new limitation.)

Question

Are punitive damages taxable? Are physical damages taxable, even if I didn't go to the hospital?

Answer

Punitive damages are generally taxable. Damages for physical injuries generally aren't taxable. Consider getting help from an attorney who is familiar with these issues in drafting your settlement or lawsuit. This is a complex area of the tax law that requires more than a short answer.

Question

How do I claim a deduction for a loss for paying margin calls?

Answer

Paying a margin call is not tax deductible. It is the repayment of a debt. If you sell stock at a loss to get the cash to pay the margin call, the stock sales and related capital losses are reported on Schedule D.

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Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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Visit our new articles!

• "The Elements of Style" Book Review

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P.S.

My daughter and her husband, Holly and Dan Baker, have opened 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. For the best meal of your life, call 415-925-9200 for a reservation and give them a try soon! For directions, visit our website at taxtrimmers.com/directions.shtml.

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P.P.S.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.