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Michael Gray, CPA's Tax and Business Insight
July 30, 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
- Viva Las Vegas!
- Our family news.
- Extended income tax returns almost due!
- Do you have a will or trust?
- A special message for entrepreneurs, businesspeople, and sales people.
- Michael Gray will appear in San Jose seminar for CPAs.
- California has a budget.
- Court limits IRS tax shelter summons.
- New large and mid-size business disclosure required.
- Deduction disallowed for charitable split dollar life insurance policy.
- IRS issues guidance about "grantor trusts."
- Guidance issued for vehicle donations.
- IRS gives a retroactive break for nonpersonal use vehicles.
- Questions and Answers
- What deductions can I claim for my job?
- Will my wife and her sister have to pay taxes on the inheritance they passed along to my daughter?
- How will Ken Jennings be taxed on his Jeopardy winnings?
- Can I get an exclusion on the sale of my home if I move for my job?
- What tax is due when a parent quit claims a property to their child?
- What taxes must a widower pay on the sale of his home?
- Do you have employee stock options?
- Visit our new article.
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight
Viva Las Vegas!
Janet and I visited Las Vegas during July for a convention of California CPAs. Janet enjoyed shopping for "grandbaby" goodies. The highlight was Celine Dion's concert at Caesar's Palace. Way cool! They must have one of the world's largest rear-projection screens for that show.
The keynote speaker for the CPA conference was an FBI agent talking about fraud. He pointed out that organizations, like Enron and Worldcom, that have experienced scandals tend to have internal cultures that aren't ethical. American businesses need to emphasize the importance of honesty and fair dealing in their messages to employees and the public and in the actions of their executive group. The timing of his presentation was perfect, since Martha Stewart was sentenced the day before. He pointed out that Martha Stewart had made her situation worse by lying and falsifying documents.
Our family news.
Janet and I helped our daughter Holly Baker and her husband Dan move into their home in San Raphael, California. Quite an exciting occasion!
During July, we celebrated the 86th birthday of my father, Aubrey Gray, and the 24th birthday of my son, James.
August is a big month of celebrations in my family, including the 33rd wedding anniversary for Janet and me, the 42nd wedding anniversary for my sister Virginia and her husband Wade, and the 13th for their son Matthew and his wife, Michelle. My father-in-law, Wally Bowers, and sister-in-law, Gail Johnston, are celebrating August birthdays. Whew!
Extended income tax returns almost due!
The initial extension due date for calendar year individual income tax returns and gift tax returns is August 16, 2004. Only about two weeks to go!
Do you have a will or trust?
I am often amazed when interviewing new clients to learn they don't have a will or trust - especially families with young children. Even continuing clients procrastinate about taking care of this essential matter. Old wills and trusts should be reviewed to consider changes in the tax laws and your family situation. When I occasionally look at the obituary section of the newspaper, it is sobering to see that young people occasionally suddenly pass away from illness or accidents. Their families can be left in desperate financial situations. If you have been putting this off, I urge you to set a personal deadline to have an estate plan in place by the end of this year.
A special message for entrepreneurs, businesspeople and sales people.
My friend and marketing guru Dan Kennedy has just updated three of his excellent books that have been out of print: No BS Business Success, No BS Time Management and No BS Sales Success. You really should have these books in your library of business books. They also make great gifts for business associates. In order to launch these books up the ratings charts, Dan has asked that we buy or order them during the week of August 15, 2004.
Dan is giving three different free telephone seminars (one for each book) at 3 p.m. Eastern time (12 noon Pacific time) on August 16, 23, and 30. The seminars will each last about an hour. For details and to register, visit the website www.nobsbooks.com. Be sure to call early for the seminars, because the telephone lines will be jammed!
Michael Gray will appear in San Jose seminar for CPAs.
On August 18th, Michael Gray will participate in a panel answering questions for a luncheon presentation, "Small Practitioners Handling Residential Mortgages", for the Personal Financial Planning Committee, Silicon Valley San Jose CPAs at Blake's Steakhouse & Bar, 17 N. San Pedro St., San Jose, California. The principal speaker is Peter Moss of Wymac Capital, Inc. The investment is $30 for members, $40 for nonmembers. For reservations, call Valerie Bishop at 408-983-1122.
California has a budget.
Governor Schwarzenegger has been learning by hard knocks how challenging the political process is. The California legislature has passed its budget late, again. Although a tax increase is not part of the budget, it is balanced mostly using borrowing with bonds to pay for a $12 billion revenue shortfall.
Court limits IRS tax shelter summons.
The IRS suffered a setback in its campaign against tax shelters. The U.S. District Court for the Northern District of Illinois held that documents from outside counsel were protected by the attorney-client privilege. In-house memoranda prepared by the firm's own lawyers also were protected from disclosure.
The ruling blocks 20 summonses issued by the IRS against CPA firm BDO Seidman, LLP. BDO Seidman was the client in this case. Clients of BDO Seidman are also asserting privilege claims. Their claims will be ruled on separately at a later time.
(BDO Seidman, LLP, DC-Ill. June 28, 2004.)
New large and mid-size business disclosure required.
The IRS has issued a final draft version of Schedule M-3. The new schedule replaces Schedule M-1 for "C" corporations filing Form 1120 and reporting more than $10 million in assets. The purpose of the form, which is a reconciliation of book income to taxable income, is to highlight potential abusive tax shelter transactions. The form will be required for tax years ending on or after December 31, 2004.
The IRS has also indicated it may develop similar disclosure forms for partnerships and S corporations.
Deduction disallowed for charitable split dollar life insurance policy.
A married couple purchased a life insurance policy and gave a tax-exempt organization the right to buy an interest in the policy in a "split dollar" arrangement. Under the arrangement, the taxpayers would pay 10% of the annual premium but would be entitled to 44% of the initial death benefit. The taxpayers retained the sole right to borrow on the policy or surrender the policy. The taxpayers transferred $36,000 to the charity with the understanding the charity would use the funds to pay premiums on the life insurance policy, and claimed a deduction for the $36,000 "donation".
The Ninth Circuit Court of Appeals upheld the Tax Court's decision to disallow the deduction, because the taxpayers received consideration in return for the donation. The life insurance policy provided "substantial benefits" to the taxpayers that were disproportionate to their payment of 10% of the premiums.
(Addis, CA-9, July 8, 2004.)
IRS issues guidance about "grantor trusts."
A "grantor trust" is a trust considered to be owned by the taxpayer who created it. A revocable living trust is considered to be a "grantor trust" that is included in the grantor's (creator's) taxable estate and the income and deductions of the trust are reported on the grantor's income tax returns.
Some irrevocable trusts are designed to have their information reported on the grantor's income tax returns but to be excluded from the grantor's estate tax returns as incomplete gifts. (The most common trust of this type is an irrevocable life insurance trust.)
The IRS just issued a ruling about the effect of provisions for settling income taxes in the trust. If the trust document provides the trustee is required to reimburse the grantor for income taxes relating to income of the trust included in the grantor's income tax return, the trust assets will be included in the grantor's taxable estate. If there is no such provision or the reimbursement is optional, the trust will not be included in the grantor's taxable estate unless it fails another test.
If you have such a trust, you should have your attorney review the document to be sure the trust will not be included in your taxable estate.
By the way, since the income taxes are the personal liability of the grantor, the payment of those taxes by the grantor is not a taxable gift.
(Revenue Ruling 2004-64.)
Guidance issued for vehicle donations.
The IRS has identified tax deductions for donations of vehicles to charities as an area of abuse by taxpayers. Did you know a written appraisal is required when claiming a donation exceeding $5,000 for a vehicle? To help both donors and charities become more familiar with the rules, the IRS has issued two publications: Publication 4302, A Charity's Guide to Car Donations and Publication 4303, A Donor's Guide to Car Donations.
Congress is also concerned about abuses for vehicle donations. The House of Representatives is considering requiring an appraisal for charitable deductions of more than $250. The Senate is considering limiting the deduction to the amount received by the charity from selling the vehicle.
IRS gives a retroactive break for nonpersonal use vehicles.
The IRS has issued final regulations eliminating the "luxury car" depreciation limits for "nonpersonal use" vehicles used in a trade or business. In order to qualify as a nonpersonal use vehicle, the vehicle must be a light truck or van, not used for personal purposes except for a de minimis amount, and configured to be incompatible for personal use. Significantly, the limitation is eliminated retroactively to all open years. Taxpayers may file amended returns (by December 31, 2004) or treat the change as a change in accounting method. Taxpayers who use a truck or van almost exclusively for their business should consult with their tax advisor about any actions they should take. (T.D. 9133.)
Questions and Answers
Question
- I just began a job in Massachusetts and I am commuting 133 miles per day to and from work. I am in construction and my workplace changes quite frequently, but most of my company's work is located a good distance from my house. The assignment I have now is a training job for a few months after which I hope to be reassigned closer to home. Do you think I can claim an employee business expense for my transportation costs? What is the standard mileage rate?
- My fiancée and I moved to Massachusetts from New Orleans. We used a Penske truck, and she drove her car up here. What deductions can we claim? I moved for my job, and she is also seeking a job.
- Can I deduct the cost of tools that I buy for my work?
Answer
- This is actually a difficult question. A taxpayer may deduct daily transportation expenses incurred to travel between the taxpayer's residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works. A taxpayer who doesn't normally work in the metropolitan area in which he or she lives doesn't qualify for the deduction. A taxpayer was able to claim the deduction when he worked at his employer's local field office 25% - 27% of his working days and worked at various temporary locations on the other days. If, after your training job period, you can get your job requirements to fit this situation of having local work assignments in addition to the out of town assignments, you should be able to qualify for the deduction. The standard business mileage rate for 2004 is 37.5¢ per mile. This deduction is claimed on Form 2106 and Schedule A as a miscellaneous itemized deduction (not deductible for AMT.)
- Go to the IRS web site (www.irs.gov) and see IRS Publication 521 on Moving Expenses. Your fiancée needs to find a job within one year of the move to qualify to claim her expenses. The deduction is claimed on Form 3903 and is deductible as an adjustment to gross income (line 27 on 2003 Form 1040.)
- Employees can deduct expenses relating to tools that they buy for their work. If the tools have a useful life exceeding one year (they aren't supplies), they should be depreciated. See IRS Publication 535. This deduction is claimed on Form 2106 and Schedule A as a miscellaneous itemized deduction (not deductible for AMT.)
Question
My wife and her sister inherited a home from their father. Our daughter lived with her grandfather three years ago to take care of him. My wife and her sister decided she should share in the inheritance, so they gave my daughter 1/3 share. Then my wife decided to give my daughter her share. My daughter received 2/3 and my wife's sister 1/3. My wife wants to know if she will have to pay any taxes.
Answer
Your family needs to see an attorney who specializes in administering estates and trusts. If your daughter is the only heir for you and your wife, you and your wife might be able to make a disclaimer to avoid tax on the transfer of her share. Her sister probably has made a taxable gift to your daughter. The tax effect depends on the value of the inheritance. Move quickly because the disclaimer has to be made within 9 months after your father-in-law's death.
Question
Do you have any idea how Ken Jennings will be taxed on his winnings on Jeopardy? Will there be a 1099? Will taxes be withheld? What is the procedure?
Answer
Ken Jennings is a resident of Utah. The Jeopardy show is taped in California. The prize will be reported on Form 1099-Misc. There is no provision for federal tax withholding for game show winnings. California will tax the winnings as California-source income. Ken Jennings can claim a state tax credit for the California tax to eliminate his Utah tax. California will withhold 7% of the winnings when they are paid, unless the Franchise Tax Board consents to a lower rate or no withholding in writing after a request by the payor or payee. I estimate that if Ken Jennings prepays his California tax, the net tax rate on the winnings will be about 43.5%.
Question
My employment has been relocated to Dallas, Texas. We need to sell our residence after living here just over a year. Is the gain taxable?
Answer
There is a hardship exception when you move because of a change of employment. The exclusion is reduced. The reduced exclusion is computed by multiplying the maximum allowable exclusion ($250,000 or $500,000) by a fraction. The numerator of the fraction is the shortest of (a) the period of time the individual owned the property as a principal residence during the five-year period ending on the date of the sale or exchange; (b) the period of time the individual used the property as a principal residence during the five-year period; or (c) the period between the date of the most recent prior sale or exchange to which the exclusion applied and the date of the current sale or exchange. The numerator may be expressed as days or months. The denominator of the fraction is 730 days or 24 months (to correlate with the numerator.)
Question
What tax is due when a parent quit claimed a California rental property worth $500,000 to a son in 2003?
Answer
This is a taxable gift. The tax depends on how much of the lifetime exemption equivalent was used before the gift. The lifetime gift tax exemption is $1 million. The transaction is reported on Form 709.
Remember to claim the exemption from reassessment for a change of ownership for a transfer from a parent to a child. Call the county assessor's office in the county where the property is located for the form and instructions.
Question
What is the percentage of the taxes you have to pay on the money you get from selling your own home if you are a single male widower?
Answer
It depends on the details of your situation. The residence should receive a basis adjustment as of the date of death of your wife, which could eliminate all gain at that point. You should qualify for the $250,000 exclusion for the sale of a principal residence if you have lived in the home during at least two years of the last five years before the date of sale. I'm hoping there will be no tax. If you have a taxable gain, the maximum federal tax rate (assuming no business use of the home or depreciation previously claimed) for long term capital gains is now 15%.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.
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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.
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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.
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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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