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Table of Contents

• Family milestones.
• Extended income tax returns almost due!
• Mark your calendars for these presentations by Michael Gray.
• Are you planning to buy a California home?
• California has a budget.
• California "domestic partners" avoid reassessment.
• Rules proposed for change in use of depreciable property.
• IRS finds no change in time of deduction of California tax.
• Depreciation rules liberalized for some vans and light trucks.
• Questions and Answers
  • Is there a luxury tax on power tools?
  • Will my wages be subject to California tax when I move?
  • Am I being double taxed for the sale of my vacation home?
  • How much taxes are due on lotto winnings?
  • Can I increase my W-4 allowances even if I don't qualify?
• Do you have employee stock options?
• Visit our new articles
• Subscribe/Unsubscribe from our newsletter.
• PS Marché Aux Fleurs

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Family milestones.

My father, Aubrey Gray, just celebrated his 85th birthday. We had a lovely family dinner with children, grandchildren, great-grandchildren and spouses. Quite a crowd. I feel very fortunate to still have both of my parents living, married to each other and in reasonably good health at (my) age 51. Dad is still at the top of my "most admired" list.

My son, James, just celebrated his 23rd birthday. Janet and I spent a day with James going out to eat and to a movie. Then we had a family pizza party. He is taking a summer class at UC Berkeley and is scheduled to graduate after the fall semester. James is on the edge of the chasm of independent adult life.

In August, Janet and I will be celebrating our 32nd wedding anniversary; my sister, Virginia, and her husband, Wade, will be celebrating their 41st; and her son, Matthew and his wife, Michelle, will be celebrating their 13th. We have some long marriages in my family. (Thank God!) My father-in-law, Wally Bowers, and my sister-in-law, Gail Johnston, are also celebrating birthdays in August. That's a lot of celebrating for one month!

I hope you and your family are well and doing your share of celebrating, too!

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Extended income tax returns almost due!

The due date based on the initial extension request for calendar year individual income tax returns is August 15, 2003. Only about two weeks to go!

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Reminder -- CPAs, Attorneys and Financial Advisors, mark your calendars for these presentations by Michael Gray.

On August 27, 2003 at 7:30 a.m., Michael Gray will join a panel of CPAs discussing the Jobs and Growth Tax Relief Reconciliation Act of 2003 for the Silicon Valley-San Jose CPAs. The two-hour presentation will conclude at 11 a.m. The location is Lou's Village in San Jose. The advance reservation investment is $40 for members of the California Society of CPAs and $50 for non-members. For details and reservations, call Valerie Bishop at 408-983-1122.

On September 17, 2003 at 11:45 a.m., Michael Gray and Naomi Comfort, Esq. (note speaker change) will make a one-hour "brown bag" presentation about Handling Retirement Accounts After A Death for the Silicon Valley Bar Association. The location is the Santa Clara County Superior Court. The advance reservation investment is $15 for members and $20 for non-members. For details and reservations, call Jim Griffiths at 650-325-7808.

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Are you or someone you know planning to buy a California home?

With interest rates starting to edge up and the value of investments and stock options increasing, many people are deciding now is the time to buy a nicer home or to buy their first home. Just this week a client couple needed to have a loan approval in place to make an offer on a home they liked. With some scrambling, we were able to have the approval in place the same day they asked for it. Loan approvals in one day are possible, but we prefer to have more lead time. (We already had most of this client's information from refinancing his current mortgage.)

Please remember we can provide financing for buying a California residence at very competitive interest rates. Because there are higher costs involved in financing a home purchase, there are out-of-pocket expenses for this type of loan for appraisal, title insurance, etc.

For details, please call Michael Gray at 408-918-3161.

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California (finally) has a budget. No new taxes!

After a long, weary battle, with the Republicans holding firm against tax increases, the California legislature has sent a budget to Gray Davis that he says he will approve. The tripling of California auto registration fees is not dealt with as part of the budget package. $8 billion of deficits are being "rolled over" to the next fiscal year. Part of the decrease in state funding for some services will be compensated for by increasing fees, including a 30% tuition hike for University of California students. (Ouch!)

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California "domestic partners" avoid reassessment.

The California State Board of Equalization recently ruled that a domestic partner who inherits real estate because of a death of his or her partner will avoid reassessment in determining local property taxes. There are two ways for same-sex couples to avoid reassessment. 1) If the property is held as joint tenants and the owners are "original transferors". 2) If the owners are registered domestic partners who pass property to a surviving partner through a will, trust or other estate plan.

When dealing with title issues like this, we recommend consulting with an attorney. Note the flexibility that couples have as registered domestic partners. The benefits of becoming registered domestic partners are steadily increasing.

By the way, the county assessors hate having another exemption from reassessment to implement.

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Rules proposed for change in use of depreciable property.

The IRS has issued proposed regulations explaining how to compute the modified accelerated cost recovery (MACRS) allowance when there is a change in use of depreciable property that would result in a change of life or method. For example, if real estate is converted from residential rental to commercial use, the depreciable life would increase from 27.5 years to 39 years. Under the proposed regulations, the depreciation method for the undepreciated balance of the basis would change as of the beginning of the year for the change in use. A more detailed explanation is beyond the scope of this newsletter. (REG-138499-02.)

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IRS finds no change in time of deduction of California tax for accrual-basis corporations.

Effective for years beginning during 2000, California changed how its franchise tax is determined. Before 2000, the franchise tax was a "privilege tax" computed based on the income for the previous year. Therefore, the related franchise tax was deductible for an accrual-basis corporation on the federal income tax return for the year after the income was earned. After 1999, the tax is computed based on the income for the current year.

The IRS has ruled, based on Internal Revenue Code Section 461(d), that the time for deducting the tax hasn't changed. According to Section 461(d), a change made by the action of a taxing jurisdiction after December 31, 1960 is disregarded in determining when the deduction for accrued taxes can be taken. Taxpayers are required to continue applying the rules in effect before 1961.

This Code section doesn't make any sense to me, especially for new corporations that have no historical method for the deduction. Evidently, the federal government was worried about state governments passing law changes that would reduce federal tax collections. (Revenue Ruling 2003-90.)

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Depreciation rules liberalized for some vans and light trucks.

The IRS has issued proposed and temporary regulations that would exempt certain vans and light trucks from the "luxury vehicle" depreciation limitations. The luxury vehicle limitations are a ceiling for the amount of depreciation that can be claimed for most vehicles during a taxable year. For new vehicles acquired after May 5, 2003 and for which 50% bonus depreciation is elected, the first-year limit is $10,710 and the second-year limit is $4,900.

Under the temporary regulations, the luxury vehicle limit will not apply to a van or truck that is a qualified non-personal use vehicle. To qualify, the vehicle must have been modified so that it is not likely to be used more than a de minimus amount for personal purposes.

For example, a van may be modified by installing shelving and painting it with the company's name.

The temporary regulations are effective July 7, 2003 and apply to property placed in service on or after July 7, 2003. (TD 9069, REG-138495-02.)

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Questions and Answers

Question

My family was going to start their own business until they received a phone call from a "tax man" who wanted to know all the power tools they had because they would have to pay a "luxury tax." Does this sound right?

Answer

The federal luxury tax has expired and never did apply to power tools. It could be someone is getting sloppy with their terminology or there is a state (not California) luxury tax that applies. The tax that usually applies each year to tools used in a trade or business is the personal property tax. For details, consult with a local tax professional or call your county assessor's office.

Question

I am moving from California to Las Vegas. I will be working from an apartment located in Las Vegas for a California business. Will my wages for work in Nevada be subject to California income tax?

Answer

It doesn't appear so. When you are not a resident of California, your earned income is sourced according to where you performed the services for which you received the income. (Income that you received from all sources while you were a California resident is taxable in California.) Your employer can help you by not reporting the income as California wages on your Form W-2. Get FTB Publications 1031 (Guidelines for Determining Resident Status) and 1100 (Taxation of Nonresidents and Individuals Who Change Residency) at the FTB web site, www.ftb.ca.gov, or call the Franchise Tax Board and ask for them to mail the publications.

Question

I just sold my vacation home at Lake Tahoe. I was told by the title company that they are deducting $9,000 for the State of California, and it is taxed as income.

Am I being double taxed?

Answer

No, but you are justified in being confused about the new rules for income tax withholding on California real estate sales. 3.5% of the sales price is withheld as a California income tax deposit. (The withholding usually doesn't apply to the sale of a principal residence.) On your income tax return, you will report taxable income on Schedule D for the excess of the sales price of the property over the tax basis and selling expenses. (This is the "taxable income" the escrow agent was referring to.) The withholding amount will be shown as an advance tax payment, just like income taxes withheld from Form W-2. Any excess withholding over the amount of income tax on your tax return is payable to you as a refund.

This withholding approach was developed as a way to get cash into the California treasury because of the current budget mess. If we ever get out, everyone hopes it will be repealed. It's becoming a deal killer.

Question

My friend just won $40,000 in pick 4. How much taxes will he have to pay?

Answer

Your friend should visit a tax advisor and pay that person to get this information.

Question

I am currently claiming two allowances on my withholding Form W-4. Am I allowed to increase those allowances even though I might not qualify for more than two? Can I say I'm tax exempt? I would rather pay the tax on April 15.

Answer

Practically speaking, you can claim up to 10 allowances and no one will do anything about it. You have to satisfy certain requirements to claim "tax exempt". See the instructions for Form W-4. You will be subject to penalties for underpayment of estimated tax unless you prepay the lesser of 100% of the tax on last year's income tax return or 90% of the tax on this year's return. (I'm assuming you have less than $150,000 of adjusted gross income.) The penalty rate right now is low.

Do you really want to set yourself up to need to scramble to get the money to pay your taxes on April 15?

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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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If you have employee stock options, have you subscribed to the ESOAA Option Alert?

To subscribe, go to www.stockoptionadvisors.com. You can review our last issue at www.stockoptionadvisors.com/optionalert/news.shtml.

Advisors may find information about joining the Employee Stock Option Advisors Association, LLC and training materials about tax planning for employee stock options at www.stockoptionadvisors.com/seminar.shtml.

Employee option holders may find information about self-study materials relating to planning for employee stock options at www.stockoptionadvisors.com/seminar.shtml.

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Visit our new articles!

• Not all dividends qualify for tax rate break
• The Personal Branding Phenomenon 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.

To receive the next issue of Michael Gray, CPA's Tax & Business Insight with more tax developments, another book review, and upcoming deadlines automatically via email, subscribe by filling out the form below.

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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.