Recommend Our Site to Your Friends!

Print This Page

Table of Contents

• Happy New Year!
• Fourth quarter estimated tax payment is due.
• Organizers and Tax Notebook instructions are in the mail.
• Michael Gray speaks at free seminar on January 15.
• Loan pre-approvals.
• Taxpayer succeeds in avoiding tax on personal injury settlement.
• HSAs enacted in Medicare Act.
• Estimated tax exception disallowed for late base returns.
• IRS attacks certain Roth abuses.
• Questions and Answers
  • Can I move the money in my Roth IRA?
  • Can taxes on installment sale income be mitigated?
  • Will I owe taxes on the sale of my house in California?
  • How can I change the fair market value of prizes?
  • Can I deduct loss of 401(k) stock on my income tax returns?
  • Is my mileage to and from college deductible?
• 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 New Year!

An opportunity to make a fresh start.

Someone once said a definition of insanity is to continue to do the same thing and to expect different results.

What changes would you like to see in your life for 2004? Is this just a flight of fancy or something important according to your values and priorities? If you are sincere in your desire, have you made a list of activities for you to accomplish at scheduled times to make what you desire happen? A goal could be called a dream with a date. Making deadlines really does help us get things done by providing needed focus. Without taking action, your list of New Years resolutions is only a list of fanciful wishes. I hope you will take action to accomplish more of your constructive heart's desires.

Go for it!

Return to Table of Contents

Fourth quarter estimated tax payment is due.

Remember the fourth quarter estimated tax payment for 2003 is due January 15, 2004. If you need to have your final payment reviewed, call your tax advisor for an appointment now!

Return to Table of Contents

Organizers and Tax Notebook instructions are in the mail.

We have sent paper organizers or instructions for using the internet-based tax notebook organizer to our clients. If we prepared your individual income tax returns last year and you didn't receive your instructions to prepare your 2003 income tax returns, or we didn't prepare your income tax returns last year but you would like an organizer for us to prepare your 2003 income tax returns, please call Dawn Siemer at 408-918-3162.

If you're doing your own taxes this year, consider using the tax organizer on our website at www.taxtrimmers.com/organizer.shtml.

Return to Table of Contents

Michael Gray speaks at free seminar on January 15.

Michael Gray, CPA and attorney Naomi Comfort will give a presentation on Handling Retirement Accounts After A Death at the Saratoga Public Library community room from 7 to 9 p.m. on Thursday, January 15. There is no charge for this public service presentation. Please come, and bring a guest. For directions and reservations, call Dawn Siemer at 408-918-3162.

Return to Table of Contents

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.

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.

Return to Table of Contents

Taxpayer succeeds in avoiding tax on personal injury settlement.

A taxpayer was kicked by a Chicago Bulls player while filming a professional basketball game. The player had fallen on a group of photographers on the sidelines. The taxpayer sued the Chicago Bulls for physical injury, and the Bulls settled the claim out of court. The IRS said the payment was not for a physical injury; the settlement was to eliminate a nuisance and the Bulls believed the taxpayer actually suffered little or no physical injury. The Tax Court ruled the exclusion depends on the origin of the claim, not the validity of the claim. The court allocated the award to a tax exempt amount for the physical injury and a taxable amount for the taxpayer's promise not to publicize the settlement or take other actions. (Amos, Jr., CCH Dec. 55,363(M).)

Return to Table of Contents

HSAs enacted in Medicare Act.

Congress has passed and President Bush signed on December 8 the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (H.R. 1). A feature of the Act, effective January 1, 2004, is Health Savings Accounts (HSAs). HSAs are replacing a previous medical insurance program, Medical Savings Accounts. HSAs provide a way to get "above the line" deductions for medical expenses. They will be available for taxpayers who have qualifying high-deductible medical insurance coverage. The minimum allowable deductible is $2,000 for family coverage and $1,000 for self-only coverage. Copayments can't exceed $10,000 annually for married and family coverage and $5,000 for individual coverage.

Individuals can deduct HSA contributions up to the deductible amount on the medical insurance policy, to a maximum of $5,150 for family coverage and $2,600 for self-only coverage. Individuals born before 1950 can contribute and deduct an additional $500 for 2004.

Income earned by the HSA is not currently taxed to the HAS owner. Withdrawals to pay medical bills of individuals covered by the plan are not taxable. (Unused amounts are carried over.) Other payments are taxable and subject to a 10% penalty. Payments made on or after reaching age 65 or due to death or disability are taxable but not subject to the penalty, so there is a retirement planning feature. HSAs may not be paid out over an extended period after death, like some other retirement accounts.

Employers can make tax-deductible payments to HSAs for employees, and the payments are not currently taxable for the employees. Employers who offer HSAs must do so for all of their eligible workers.

The IRS has also issued guidance for HSAs in a question and answer format. (Notice 2004-2.)

This is not a complete explanation of HSAs. You will be hearing publicity about them, and should discuss their advantages and disadvantages with tax and medical benefits advisors. The ideal candidate for a HAS is young and healthy.

Return to Table of Contents

Estimated tax exception disallowed when base year return is filed late.

A taxpayer didn't make estimated tax payments because he believed the tax on the previous year's income tax return would be zero. The tax return on which his estimate was based was filed many years later, after the IRS issued a deficiency notice. The Tax Court found the late-filed tax return should be disregarded as a "return" for purposes of computing the "required annual (estimated tax) payment". The estimated tax penalty was determined by the IRS based on the actual tax for the year. The lesson here is FILE YOUR TAX RETURNS ON TIME. There are many bad side effects from late filing, so give your filing obligation the attention it deserves. (Mendes, 121 T.C. No. 19.)

Return to Table of Contents

IRS attacks certain Roth abuses.

The IRS announced that it believes certain tax-avoidance transactions using Roth accounts are abusive and they intend to disallow them. The IRS gave the example of a corporation owned by a Roth account buying accounts receivable at a discount from another corporation owned by the Roth participant to shift income to the Roth-owned corporation. The IRS proposes to use its authority under Internal Revenue Code Section 482 to disallow the discount, treat it as a dividend to the Roth participant and a contribution to the Roth, subject to an excess contribution penalty. The IRS could also find the arrangement to be a prohibited transaction, which would disqualify the Roth.

This type of an arrangement is now a "listed" trnsaction, subject to an "audit me" special disclosure on the participant's income tax return.

With the tax-exempt characteristic of Roth accounts, the IRS will be watching carefully what tax avoidance schemes taxpayers and their advisors create for them. If you have an unusual approach for shifting income to a Roth account, be sure you have good advice and are not too greedy. (Notice 2004-8.)

Return to Table of Contents

---

Questions and Answers

Question

I have experienced a substantial loss on a Roth IRA investment in a mutual fund. I have lost confidence in the fund management and want to redeem the residual amount.. I wish to put the money in another investment, keeping it classed as a Roth IRA. How can I do this?

Answer

The best way to transfer the Roth account is a trustee-to-trustee transfer. Decide where you want to transfer the new account. Then talk to representatives at both companies to discuss their procedures to accomplish the transfer.

Alternatively, you can rollover a Roth distribution, just like you can for a regular IRA. You receive a cash distribution from one account and deposit the proceeds within 60 days to the new rollover account. When you make a rollover, you have to wait more than one year before doing it again.

Since you have a loss on the account, consider just distributing the account without making a rollover. You can claim a miscellaneous itemized deduction for the loss. (But watch the limitations for miscellaneous itemized deductions!)

Question

My client made an installment sale of some real estate. The buyer refinanced the property and paid off the installment sale early. Now my client owes tax on $500,000 of gain. Is there anything my client can do?

Answer

Probably not. If the property was a principal residence, the residential gain exclusion could apply. Otherwise, an early payment of the installment sale results in the balance of the gain being taxable. Does your client have any investments with built-in losses that can be sold to offset against the gain? That is a possibility.

Also, if the gain was a long-term capital gain from collections after May 5, 2003, it may be taxable at the new 15% maximum tax rate for long-term capital gains.

It's not necessarily a bad thing to get your cash in hand from an installment sale, even when you have to pay some tax. The risk of loss has been dramatically reduced.

In the future, your client should consider including a prepayment penalty in installment sale contracts. He should consult with a real estate attorney to find out what state laws apply to prepayment penalties in this situation.

Question

We have lived in California for over 4 years and lived in our primary residence in Folsom, California for over 3.5 years. On June 25, 2003, we moved to Hawaii. Our house is now pending sale and has been unoccupied since June 25th. The closing was targeted for December 19th with a 30-day maximum to December 28th. The contingent sale of the buyers's property fell through, but they had a backup offer. This is pushing the closing of our property to January 2, 2004.

Since this property has been our primary residence for 2 out of the last 5 years, we qualify for the federal exclusion of the gain. I assume the exclusion also applies to California taxes as well, right? Are there any tax implications in pushing the closing into 2004?

Also, it looks like since our residence qualifies for the exclusion, that California will not forcibly withhold 3.33% of the sale price. Please confirm this.

Answer

Based on what you have told me, it appears the sale of your residence should qualify for the exclusion on both your federal and California income tax return, subject the applicable limitations. (Consult with a local tax person about Hawaii.) Also, the sale should not be subject to California withholding.

Question

My son won on the "Price is Right". He hasn't received all of the prizes, but most of them (furniture and a car). I know the "fair market value" cannot possibly be the amount quoted on the show. If the 1099 comes with the game show price quote, what do you do to offset that amount on your income tax returns? We live in New Jersey, but California is requesting 7% withholding by CBS.

Answer

Your son may have a fight on his hands. Sometimes the game shows offer a cash settlement instead of the prizes, and that looks like an attractive choice to me considering income taxes will have to be paid on the award. He needs to establish, using advertisements, catalogues and/or affidavits, what the fair market value of these items actually is. He should file a California non-resident income tax return to attempt to recover some of the withholding. He can claim a (limited) state tax credit for the California tax on his New Jersey income tax return. This is one situation where he should definitely be working with an income tax return preparer (preferably a CPA or enrolled agent) to present and document the best case possible.

Question

I had a loss on KMart stock held in a 401(k) plan. Can I deduct this as a loss on my income tax returns?

Answer

Since you did not report income relating to the amount put in the 401(k) plan, you have no basis in the stock and can't claim a loss for the stock.

Question

Is my mileage to and from college (150 miles weekly) deductible on my income tax return?

Answer

Not unless the deduction can be justified as a business expense.

---

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

Return to Table of Contents

If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?

To subscribe or review past issues, go to http://www.stockoptionadvisors.com/optionalert/.

Return to Table of Contents

Visit our new articles!

• CashFlow - Investing 101 Game Review

Return to Table of Contents

P.S.

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 http://marcheauxfleursrestaurant.com. They are taking a well-deserved vacation in Italy for the first two weeks of January. For the best meal of your life, call 415-925-9200 after January 12 for a reservation and give them a try! For directions, visit our website at http://www.taxtrimmers.com/directions.shtml.

Return to Table of Contents

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.

Return to Table of Contents

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.