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Michael Gray, CPA's Tax and Business Insight
July 2, 2004
© 2004 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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Table of Contents
- Happy July 4!
- Note the July schedule.
- Our family news.
- New required retirement plan distribution rules issued.
- Final regulations issued for computing MACRS depreciation when use of property changes.
- Legally married same-sex couples can't file joint federal income tax returns.
- Buy-sell agreement disregarded in determining estate tax value of stock.
- Questions and Answers
- What happens if I use my IRA to pay for my ex's half of the house?
- Do I owe tax on the profit of a house I lived in for 13 months?
- Will the state return money withheld from the sale of my home?
- Can I apply the primary residence rules to the sale of two condos?
- Is commuting deductible outside normal business hours?
- Do you have employee stock options?
- Visit our new article.
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight
Happy July 4!
We wish you and your family a happy and safe Independence Day. Our office will be closed on Monday, July 5 for extended celebration.
Note the July schedule.
Michael Gray will be out of town on July 15 and 16. If you need help, call Danny Quan at 408-918-3163.
Our family news.
Daughter Holly Baker and her husband Dan have bought their first home in San Raphael, California -- just in time to prepare for the arrival of our first grandchild in September. Congratulations Holly and Dan, we are very excited for you! (Grandma Janet is crocheting up a storm of hats, booties, scarves and ponchos!)
New required retirement plan distribution rules issued.
The IRS has issued regulations for required distributions from defined benefit (traditional pension) retirement plans and annuity contracts issued from defined contribution (profit sharing, 401(k), money purchase pension, ESOP) plans. Under the new regulations, increases from a flat monthly benefit will be permitted for cost of living adjustments, plan amendment increases, death benefit, return of contributions after the owner's death, increases for annuity contracts purchased from insurance companies, and increases for annuities paid from 401(a) qualified trusts.
These regulations add to the information provided by previous regulations issued for defined contribution plans and IRAs back in 2002. They are effective June 15, 2004, but may be used to determine required minimum distributions for calendar years beginning on or after January 1, 2003. (T.D. 9130.)
Final regulations issued for computing MACRS depreciation when use of property changes.
The IRS has issued final regulations for how to report MACRS depreciation when the use of property changes that are substantially the same as proposed regulations issued during 2003. Some of the changes covered include conversion from business to personal use, conversion from personal to business use, and change in use from one business use to another (such as commercial rental to residential rental.)
When you have one of these situations, I highly recommend consulting with a tax advisor who has studied these regulations. (T.D. 9132.)
Legally married same-sex couples can't file joint federal income tax returns.
The IRS answered a request for information and reminded taxpayers that, under "The Defense of Marriage Act", marriage is defined under Federal law as "the legal union between one man and one woman as husband and wife. A "spouse" is defined as "a person of the opposite sex who is a husband or wife." Therefore, legally married same-sex couples can't file joint federal income tax returns.
Buy-sell agreement disregarded in determining estate tax value of stock.
The Tax Court disregarded a buy-sell agreement to determine the estate tax value of stock. The buy-sell agreement didn't meet the safe harbor requirements under Internal Revenue Code Section 2703. A ruling like this one can create a hardship for a decedent's family, because the agreement is legally binding, but may result in an estate tax liability exceeding the amount paid for the business interest. Be sure any buy-sell agreement for your business has been reviewed by an attorney for compliance with these rules. (Estate of Blount, TC Memo 2004-116.)
Questions and Answers
Question
I just got divorced. I would like to know if I can cash in my IRA to pay for my house, that my ex got half of. If so, what percentage do I lose and what are my tax consequences?
Answer
If you cash in your IRA to buy out your ex-spouse's share of the residence, the proceeds will be taxed as ordinary income and be subject to a 10% federal early distribution penalty (assuming you're not over age 59 1/2). In order to qualify for the "first-time homebuyer" exception to withdraw $10,000 penalty-free, you must not have had an ownership interest in a principal residence during the two-year period ending on the date the new home is acquired.
It's too bad you didn't ask before your property was divided. You could have allocated the IRA to your spouse tax-free and allocated the residence to yourself. Consider consulting with your attorney to see if you can take any corrective action.
Question
I had a property quick-claim deeded to me. I made payments on the mortgage, which the sellers kept in their names. After living in the home for 13 months, I am going to sell it. I don't want to commute more than an hour each way anymore. Do I owe tax on the profit, which will be $90,000 less selling costs and the down payment on a new purchase?
Answer
Yes. The capital gain should qualify for the 15% maximum federal rate. The down payment for a new purchase does not reduce your taxable gain. Most states, including California, give you no tax break for long-term capital gains, so the gain may be taxable at the same rate as other income on your state income tax return. If you could hold out until you've lived in the home for more than two years, you can avoid the tax entirely.
Question
I am selling my home after living in it for one year. The state is going to withhold income taxes from the sales proceeds. My realtor told me that the withholding will come back to me when I file my income tax return. Is that true?
Also, can I deduct the selling expenses from the sale of my home? The commission will be $40,000.
Answer
You should claim the withholding as a tax payment on your state income tax return. (For 2003, California withholding is reported at line 40 on page 2 of Form 540.) Remember to include the withholding in your state tax deduction on Schedule A of your Federal income tax return. Whether you get the withholding back depends on how much taxable gain you report for the sale.
The selling expenses are included as part of your investment to determine whether you have a gain or loss from the sale. A taxable loss from the sale of a personal residence is not deductible from other taxable income.
Question
I have 2 condos that I want to sell. I bought one of them in August, 1998 and I lived thare as my primary residence for four years. I then bought another condo and moved into it as my primary residence during September, 2002. My father became the tenant of the first condo during October, 2002 and still lives there as his primary residence. Can I sell both condos and not pay tax on the gains since I will have lived in both as primary residences for at least two years out of the last five?
Answer
No. You can only claim the exclusion for one sale every two years, so you will have to choose which of the sales to use it for.
Question
I know that commuting from home to work is not deductible, but is commuting to work from home outside normal business hours?
Answer
No. There is no distinction between commuting during regular business hours or outside normal business hours.
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 article!
- Start With No Book Review
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 www.marcheauxfleursrestaurant.com. For the best meal of your life, call 415-925-9200 for a reservation and give them a try! For directions, visit our website at www.taxtrimmers.com/directions.shtml.
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.
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.
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Michael Gray, CPA
2190 Stokes St., Suite 102 San Jose, California 95128-4512 (408) 918-3162 Fax (408) 998-2766 email: mgray@taxtrimmers.com |
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