Michael Gray, CPA's Tax and Business Insight

October 7, 2005

© 2005 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

• Halloween and the end of the year take us by surprise.
• Final individual tax return deadline is October 17.
• Tax relief enacted for Katrina victims.
• Hurricane Rita disaster designation.
• Notice issued with details for Katrina victims.
• IRS loses estimated tax payment checks.
• Some documents still require an original signature by preparers.
• California passes some tax administration changes.
• Employers must notify employees about Medicare prescription changes.
• Questions and Answers
  • What is that basis of stock after a divorce?
  • Does undeveloped property count as my primary residence?
• Do you have employee stock options?
• Read our new article!
• PS Marché Aux Fleurs
• Subscribe to Michael Gray, CPA's Tax & Business Insight

Boo! Halloween and the end of the year take us by surprise again.

Thi and her husband, Allen, returned from their honeymoon in Maui on September 27. We seldom take a picture of everyone in our firm together, so visit our staff page to see a wedding photo with Dawn, Thi, Allen, myself and Janet.

Janet's birthday was October 4, which we initially celebrated at with a family gathering late in September.

My daughter, Holly, got a pumpkin costume for my grandson, Kyan. His expression when we put it on was "How could you do this to me? This looks awful!"

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Final individual tax return deadline is October 17.

October 17 is the final extended due date for non-corporate calendar year taxpayers, including individuals, estates, trusts and partnerships. If you haven't given the information to prepare your returns to your professional tax return preparer yet, do it now. (Katrina victims, see below about extension of time under emergency relief legislation. Rita victims, see below about Rita tax relief.)

The penalties for late filing are becoming more severe, especially in California, where penalties apply even when there is no balance of tax due. Real hassles can be avoided by simply filing your tax returns and paying your taxes on time.

Tax return preparers should be aware that they can be disbarred from practice before the IRS under Circular 230 if they fail to file their tax returns on time.

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Tax relief enacted for Katrina victims.

Congress has passed and President Bush signed the Katrina Emergency Tax Relief Act of 2005 on September 23. Among many other provisions, the Act establishes a special category of casualty losses for Katrina victims, enabling them to deduct 100% of their casualty losses, without regard to the $100 and 10% of adjusted gross income floors that usually apply.

The due date for tax returns and tax payments of Katrina victims has been extended to February 28, 2006, provided the due date (including extensions) had not expired before August 25, 2005.

Employment and excise taxes were added to the list of taxes that are postponed for those serving in a combat zone or contingency action, and which may be postponed by the IRS due to disasters or terrorist or military actions.

Katrina victims may also withdraw up to $100,000 from an IRA, 401(k) or similar savings plan without a penalty for early distributions, effective for distributions made on or after August 25, 2005 and before January 1, 2007. Qualifying victims must have had their principal residence in the Katrina disaster area on August 28, 2005 and must have sustained an economic loss. The $100,000 limit applies to the taxpayer, not to the account.

Taxpayers who withdrew funds from an IRA after February 28, 2005 and before August 29, 2005 for a first-time home purchase but could not complete their purchase because of Hurricane Katrina may put the funds back in their IRAs without penalty provided the deposit is made by February 28, 2006.

The limit for the amount that can be borrowed from a pension plan by Katrina victims has been increased from $50,000 to $100,000, effective for loans made on or after September 23, 2005 and before January 1, 2007.

The due dates for payments due on qualified retirement account loans outstanding on August 25, 2005 falling between August 25, 2005 and December 31, 2006 will be extended for one year. Subsequent repayment schedules will be adjusted for the five-year and level-payment requirements.

Taxpayers who use their principal residence to provide housing free of charge to evacuees displaced by Hurricane Katrina for at least 60 consecutive days may claim a $500 deduction from taxable income for each evacuee residing in the taxpayer's home, to a maximum of $2,000. Qualified evacuees do not include the spouse or dependent of the taxpayer providing shelter.

The 50% of adjusted gross income limitation will be suspended for certain charitable contributions made by individuals from August 28, 2005 through December 31, 2005. The donations are not required to relate to Hurricane Katrina to qualify.

The 10% of taxable income limitation will be suspended for certain cash charitable contributions relating to Hurricane Katrina made by C corporations from August 28, 2005 through December 31, 2005. The donations must relate to Katrina relief efforts and the corporation must elect to have this provision apply.

The standard mileage rate for charity work related to Hurricane Katrina has been increased from 14¢ per mile to 29¢ per mile for the period August 25 through August 31, 2005 and 34¢ for the period September 1 through December 31, 2005. The rate for 2006 will be 70% of the 2006 standard business mileage rate announced by the IRS.

See your tax return preparer for more information. Check your local IRS service center about help provided by volunteers who are tax professionals.

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Hurrican Rita disaster designation.

All counties and parishes in Texas and Louisiana have been designated as eligible for individual assistance and/or public assistance and declared to be federal disaster areas qualifying for tax relief. Affected taxpayers have until February 28, 2006 to file most tax returns or to make tax payments, including estimated tax payments that have either an original or extended due date falling after September 22, 2005 and before March 1, 2006.

The deadline isn't automatically extended for information returns like 1099s and W-2s, but the IRS can waive penalties based on a reasonable cause.

(IR 2005-110.)

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Notice issued with details for Katrina victims.

The IRS has issued a notice with comprehensive guidance about (1) who is entitled to filing and payment relief as a result of Hurricane Katrina; (2) what the relief period is; (3) what forms of relief are available; (4) which areas are treated as disaster areas; and (4) how to claim relief.

(Notice 2005-73, IR 2005-112.)

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Oops! IRS loses estimated tax payment checks.

A truck transporting estimated tax payment checks that had been mailed to the IRS lock box in San Francisco was in an accident on the San Mateo Bridge on September 11. About 30,000 pieces of mail were blown all around, including into San Francisco Bay. If you live in the Western Region and mailed your estimated tax payment to the IRS in San Francisco before September 11, you should call the IRS at 800-829-1040 to find out if your payment was lost. The IRS will waive penalties for underpayment of estimated tax based on a reasonable cause if you are in this situation.

The taxpayers in the following states make payments to San Francisco: California, Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Ohio, Oregon, Utah, Virginia, Washington and Wyoming.

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Some documents still require an original signature by preparers.

The IRS has published a reminder on its web site to tax return preparers that only documents that have a separate signature line for a paid tax preparer may be signed using an alternative means of signature. Documents with a single line, like second extension forms, must be manually signed when the preparer is signing for the taxpayer. The IRS says it will accept as timely any rejected incorrectly signed extension form when it is returned with an original manual signature.

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California passes some tax administration changes.

California has adopted a 20-year statute of limitation for collecting tax debts. The legislation also authorized the Franchise Tax Board to extinguish certain old tax debts, allows taxpayers to net refund years with balance-due years for amnesty-eligible years for purposes of the 50% penalty, and eliminates the requirement for amnesty participants to timely file their 2005 and 2006 tax returns to remain in compliance with their amnesty agreement.

(AB 911)

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Employers may need to notify more employees about Medicare prescription changes.

The new rules relating to Medicare Part D requires employers to make a notification to Medicare-eligible participants by November 15, 2005. The notification potentially applies to all employers offering prescription drug coverage, not just those offering retiree prescription drug coverage. Consult with your employee benefit specialist about these requirements.

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Questions and Answers

Dear readers:

Many of your questions relate to the sale of a principal residence. We have an article at our web site, "Could your residence be the ultimate tax shelter?", where you should be able to find the answers to most of these questions.

Question

In a divorce settlement, on pre-marital stock, do you use the price of the stock or the adjusted price to figure the gain or loss?

Answer

I'm not sure what you mean by the "adjusted price". In almost all cases, the tax basis for the stock and the acquisition date will be the same as if you sold the stock during the marriage. The reason for this is that no gain or loss is recognized when dividing property in most marital dissolutions, so the old tax basis simply carries over.

Question

Does raw land count as my primary residence? I live on it and my mail is delivered there. There is no structure and I will live in a tent until I build.

Answer

According to the IRS's regulations, vacant land won't qualify for the exclusion for the sale of a principal residence unless the land is adjacent to land containing the dwelling unit of the taxpayer's principal residence. (Reg. Section 1.121-1(b)(3).) You might be able to challenge this regulation with your facts, because the requirement isn't in the Internal Revenue Code.

The determination of principal residence is made based on facts and circumstances. Your "home" may be treated as your residence for purposes other than the sale of residence rules, such as for business traveling expenses.

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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 Michael Gray, CPA's Option Alert?

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• New Women's Dress for Success book review

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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 http://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 http://www.taxtrimmers.com/directions.shtml.

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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.