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Table of Contents

• Happy Thanksgiving!
• Review your withholding now.
• My Thanksgiving gift to you.
• How I spent my autumn vacation.
• Dawn leaves for her Far East adventure.
• Thinking of buying a California home?
• Will the expense election be reduced for SUVs?
• Standard mileage rate increases for 2004.
• Retirement contribution limits increase for 2004.
• 2004 Social Security wage base.
• New depreciation tables issued for vehicles.
• Vehicles qualifying for Clean Fuel Deduction.
• Questions and Answers
  • Can I purchase real estate with my IRA?
  • How will the new tax rate on dividends affect AMT?
  • Will my parents have to pay gift taxes?
  • Will my parents have to pay tax on stock I gave them?
  • Do I have to pay more taxes when I buy an SUV?
• Do you have employee stock options?
• Visit our new articles!
• PS Marché Aux Fleurs
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight

Happy Thanksgiving!

With Halloween tonight and Thanksgiving on November 27, the end of the year is clearly underway. Now is the time to make an appointment with your tax advisor for any end of the year planning issues you need to deal with.

We wish you and your family a Happy Thanksgiving. We hope this has been a year of blessings for you to be thankful for.

We are certainly thankful for the opportunity to serve many wonderful people as clients.

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Review your withholding now.

November is a good month to review your income tax withholding from wages and retirement payments. There is still enough time left in the year for changes to have an impact. Remember that, unlike estimated tax payments, withholding is considered paid evenly through the year, making it a useful tool to avoid penalties for underpayment of estimated tax. With the reductions in income taxes under the new tax law, many people will have over-withholding. On the other hand, the lower rate schedules adopted after the new law was passed will result in some taxpayers who have increases in non-wage income but are paying their estimated tax based on last year's tax being under-withheld.

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My Thanksgiving gift to you.

On Tuesday, November 18, we will have a Client Appreciation event -- a call-in day. Clients and newsletter subscribers may call me (Michael Gray) at 408-918-3161 from 9 a.m. to noon, Pacific Time and I will respond to their questions at no charge or obligation. Please be organized, because calls will be limited to ten minutes. This obviously means I won't be able to do any in-depth research or complex computations. If you don't reach me, don't leave a message, but keep dialing. I can't return calls made during this period.

From 9 a.m. to 10 a.m. is reserved for clients for whom we prepared income tax returns last year.

From 10 a.m. to noon will be "open telephone".

Since this is a free service, I can't guarantee your results. I'll give it my best shot. I will tell you if I don't know the answer to your question and may recommend that you seek paid advice.

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How I spent my autumn vacation.

Janet and I find it hard to leave for our vacation until after October 15. This year we visited the capital of Halloween -- Salem, Massachusetts, Prince Edward Island, Cape Breton Island in Nova Scotia, and returned to Boston, Lexington and Concord to retrace the Freedom Trail and the early battles of the American Revolution. The autumn colors were fantastic, especially on Cape Breton Island. We especially enjoyed meeting some of my father's family at Gabarus, Nova Scotia and visiting the former homes of Lucy Maud Montgomery, Louisa Mae Alcott, Henry David Thoreau, Henry Wadsworth Longfellow, and Ralph Waldo Emerson.

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Dawn leaves for her Far East adventure.

Our administrative assistant and webmaster, Dawn Gray, is leaving tomorrow for a three week adventure in Nepal. She should have some great tales to share on her return.

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Thinking of buying a California home? Get a loan pre-approval now.

Getting an approval in place before shopping for your home will help reduce the closing period so you can move in and enjoy your new home sooner.

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 costs for this type of loan.

The end-of-year doldrums in the stock market is helping mortgage interest rates drop, creating another potential refinancing opportunity.

For details, please call Michael Gray at 408-918-3161. Agent for Wymac Capital, Inc. Michael Gray's California Real Estate Broker License number is 01269331.

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Will the expense election be reduced for SUVs?

Certain vehicles with a gross vehicle weight over 6,000 pounds are not subject to the luxury vehicle depreciation limitations. Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, passed earlier this year, the cost of these vehicles that are used for business are eligible for an expense election (IRC Section 179) to deduct up to $100,000 in the year of acquisition. Some people view this as a tax loophole. There has been some talk in the Senate Finance Committee of reducing the maximum deduction for these vehicles to $25,000.

No proposed legislation has been introduced yet, but be alert. I doubt such a change would be retroactive, but it's possible the change could be retroactive as a "technical correction."

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Standard mileage rate increases for 2004.

The optional standard mileage allowance for vehicles used for business is increased from 36¢ for 2003 to 37.5¢ for 2004.

In the past, taxpayers have only been able to use the standard mileage allowance for one vehicle at a time, which ruled out using it for a fleet of cars or for "his and her" family cars. After 2003, businesses may elect to use the allowance for up to four vehicles used simultaneously. This will eliminate an "audit trap" that is now catching many taxpayers with small businesses.

The rate for medical care or for moving expenses is increased from 12¢ per mile for 2003 to 14¢ per mile for 2004. The rate for charitable mileage remains at 14¢ for 2004. (Rev. Proc. 2003-76.)

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Retirement contribution limits increase for 2004.

The defined benefit plan annual benefit limit will increase from $160,000 for 2003 to $165,000 for 2004. The annual additions limit to defined contribution plans (including profit sharing plans and ESOPs) will increase from $40,000 for 2003 to $41,000 for 2004. The maximum annual compensation limit for various qualified plan computation purposes will increase from $200,000 for 2003 to $205,000 for 2004. The elective deferral for 401(k) plans will increase from $12,000 for 2003 to $13,000 for 2004. The elective deferral for SIMPLE plans will increase from $8,000 for 2003 to $9,000 for 2004.

The catch-up contributions for employer plans other than a SIMPLE Code Section 401(k)(11) or a regular Code Section 408(p) SIMPLE plan for individuals aged 50 or over will increase from $2,000 to $3,000. For SIMPLE Code Section 401(k)(11) or regular Code Section 408(p) SIMPLE plans, the catch-up amount will increase from $1,000 for 2003 to $1,500 for 2004. (IR 2003-122.)

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2004 Social Security wage base.

The wage base to compute the Social Security tax will increase from $87,000 in 2003 to $87,900 in 2004. The tax rate to compute the Social Security tax remains unchanged at 6.2%. The Medicare tax is unchanged at 1.45%, with no wage limitation. Self-employed persons double these percentages, because they pay both the employer and employee taxes for self-employment tax.

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New depreciation tables issued for vehicles.

The IRS has issued tables showing the 2003 depreciation limits for automobiles and trucks to which the "luxury" limits apply. For the first time, the limits are being adjusted for inflation. Since the index referred to for automobiles is different from the index for trucks and vans, the limitations are different for different groups of vehicles. The application of different first-year limitations when the 30% and 50% first-year depreciation deductions are elected create more alternative table limitations. I don't have the time or the space to list all of the details here. If you need to have the amounts for tax planning, consult with your tax advisor or refer to Revenue Procedure 2003-75 at the IRS web site.

Remember that California and some other states have not adopted 30% or 50% bonus depreciation or the new expensing limits, so different depreciation limitations may apply on the federal and state income tax returns.

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Vehicles qualifying for Clean Fuel Deduction.

The IRS recently announced the 2004 Toyota Prius is eligible for the clean-burning fuel deduction. A taxpayer who purchases a new Toyota Prius may claim a tax deduction of up to $2,000 on Form 1040. Other cars that have qualified include the 2001, 2002 and 2003 Toyota Prius, the 2000, 2001 and 2002 Honda Insight and the 2003 Honda Civic Hybrid.

The clean-burning fuel deduction is being phased out. The $2,000 deduction may be claimed for 2003. The future scheduled limits are $1,500 for 2004, $1,000 for 2005, and $500 for 2006. (IR-2003-114.)

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Questions and Answers

Question

I want to purchase real estate with my IRA. Is that possible? If so, will I have to pay all those nasty penalties?

Answer

An IRA is allowed to own real estate. Typical IRA trustees, such as stock brokerage companies and most banks, will refuse to accept real estate. You have to find a trustee that will accept the property, and they typically charge high maintenance fees.

Remember that income distributed from an IRA is typically taxed as ordinary income, so there is a high tax cost involved in using an IRA to hold real estate. A Roth account is a better alternative.

There are many potential issues from holding rental real estate in a retirement account, including subjecting the account to an income tax on unrelated business income. You should definitely get some detailed professional guidance before you go ahead with this.

Question

With the new 15% maximum federal income tax rate on dividends, what is the effect on the AMT? Will the tax on dividends remain at 15%, or will they be taxed at the AMT rate of 26%/28%?

Answer

The 15% maximum income tax rate also applies when computing the alternative minimum tax. Since the income is subject to tax at the same rate, but certain deductions, including state income taxes, are not deductible for AMT, more taxpayers will be subject to AMT thanks to this tax change.

Question

I have a question regarding gift tax. If my parents make a gift to my husband and me of $100,000, do they have to pay tax on it? Since they have never given any money to anyone before, wouldn't the Unified Credit apply so they wouldn't have to pay any tax?

Answer

Yes.

Question

I am planning to give my father and mother some stock with a value of $22,000 to meet the annual exclusion exception.

When my parents sell the stock, are they liable for paying any taxes to the IRS? Does the online broker withhold any taxes from the sale?

My parents are citizens of India who came to the United States on a visitor visa. Last year, we claimed them as dependents on our tax return and plan to do so again this year, because they meet the substantial presence test.

Answer

The first question is whether your parents are actually residents of the United States. Based on what you have told me, it doesn't appear so unless they have made an election to be taxed as U.S. residents.

If your parents are not taxed as U.S. residents, you may not claim a dependent deduction for them.

If they are non-residents, the sale of stock results in income from intangible assets, taxable in the country of residence (India).

If they are taxable as U.S. residents, the gain will be taxable in the United States. The income could disqualify them for the dependent deduction on your income tax return for the year of sale.

It appears to me that no federal income tax withholding is required for the sale of securities by a nonresident alien. You can confirm this with your stock broker.

Note that different rules apply for estate tax. If your parents own the stock of a U.S. company at their death and they are not U.S. residents, the stock will still be subject to U.S. estate tax.

There could also be tax issues for India and foreign tax credits involved if any income is double-taxed.

These rules are very complex and I'm not an expert in this area, so I recommend that you hire and consult with a tax consultant who is familiar with these rules before going ahead.

Question

I am looking into buying a family car. Some of the SUVs look good. Is there some law about more tax I have to pay for owning an SUV?

Answer

Mostly more taxes included in the cost of the additional gasoline you will use. You might also check with your insurance agent about the cost of insuring an SUV compared to a more conventional car or truck.

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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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• Ask for the Money

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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.