Michael Gray, CPA's Tax and Business Insight

February 2, 2024

© 2024 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!

Route to _______   _______   _______   _______   _______

(If you find this information valuable, please pass it on to a friend!)

Table of Contents

Janet and Mike at the Beach House Restaurant with Gail and Lane Johnston
Janet, her sister, Gail Johnston, our brother-in-law, Lane Johnston, and myself at the Beach House Restaurant in Pacific Grove, California

Valentine's Day!

Remember to show your love and appreciation for your loved ones on Wednesday, February 14. Book your reservation at your favorite restaurant now.

Return to Table of Contents

Finally, a "normal" tax season?

After years of due date extensions because of COVID and wildfire and flooding disasters, most California should experience "normal" (fingers crossed!) filing dates this year. Please get your documents to your tax return preparer as soon as possible to avoid an April 15 "crunch." Also, plan on making balance due and estimated tax payments on the "normal" dates this year.

Return to Table of Contents

February celebrations.

My grandson, Clive Baker, and Thi Nguyen, CPA, who is now serving my former clients, are celebrating birthdays this month. Happy birthday Clive and Thi! My wife's sister, Gail Johnston, and her husband, Lane, are celebrating their wedding anniversary this month. Congratulations!

Return to Table of Contents

Tax season is here!

The IRS has announced it began accepting and processing (including efiling) 2022 individual income tax returns on January 29, 2024. Note that the final versions of some tax forms haven't been released yet and there are other reasons to delay filing 2023 individual income tax returns, including waiting to received Schedules K-1 for partnerships and S corporations. Consult with your tax return preparer.

Return to Table of Contents

Make your tax return preparation interview appointment now.

Most personal interview appointments for preparing 2023 individual income tax returns will be scheduled in February. Many clients send their information without having an interview, but if you need that personal attention, you should schedule your interview appointment now. Contact Ms. Thi Nguyen, CPA at thi@atl-cpa.com.

Return to Table of Contents

Remember federal income tax returns for calendar-year S corporations and partnerships are due March 15.

(Federal income tax returns for calendar-year C corporations are due April 15.)

Return to Table of Contents

The election to be an S corporation for calendar-year corporations is also due March 15.

Have you received your tax preparation materials?

If you haven't received a tax data organizer or instructions to submit information online and want tax return preparation service by my successor, Ms. Thi Nguyen, CPA, please contact her at thi@atl-cpa.com.

Return to Table of Contents

File your tax return early, if you can.

Identity theft has become a rampant problem. Scammers are filing bogus income tax returns and claiming refunds for withholding and estimated tax payments of innocent taxpayers. It can take months to straighten out a duplicate filing situation. Your easiest defense is to be the first one to file an income tax return under your social security number. Individuals who have suffered from identity theft in the past can get a special identification number for electronic filing from the IRS. Meanwhile, many taxpayers must wait to receive documents like Schedule K-1 as late as September, and have to file for extension of time to file their tax returns.

Return to Table of Contents

California wages could be wrong on Form W-2.

Since many people who work for California employers are working remotely, some of them have chosen to move out of state. If the move is permanent, they are no longer residents of California and the wages earned after moving probably aren't California wages. If they haven't notified their employer, the employer would have continued reporting the wages as California wages and done so on Form W-2.

There are exceptions for employment taxes like California unemployment insurance, employment training tax and state disability insurance when most of the services are performed in California, when some services are performed in California and the individual's base of operations is in California, or if some services are performed in California and the place from which the employer exercises general direction and control over the employee's services is in California.

The liability for personal income tax withholding is based on where the work is done.

Ideally, the employee should notify the employer of any error in sourcing wages and a corrected Form W-2 should be issued.

If the employer refuses, the employee should report the corrected information on his or her California income tax return with an explanation. This is one situation when the tax return should be paper filed, not efiled.

There could be a conflict because some employers have said they would reduce the pay scale for employees who move out of California.

Any taxpayer who hires a professional tax return preparer should tell them when remote work for a California employer is performed remotely out of the state.

(Spidell's California Taxletter, February 2022, p. 9, "Employee not working in California but California tax withheld.")

Return to Table of Contents

Consider updating your Forms W-4 and DE-4 for 2024.

The IRS has issued updated Form W-4 for 2024. Now is a good time to review yours to consider updating it. It isn't required to be updated each year, but is required to be submitted for a new job. California has its own withholding form, Form DE-4. Since California still has personal exemption credits, a separate Form DE-4 form should probably be submitted.

Here are links for the forms: https://www.irs.gov/pub/irs-pdf/fw4.pdf https://www.edd.ca.gov/pdf_pub_ctr/de4.pdf

Return to Table of Contents

Changing jobs could result in an excess 401(k) contribution.

A common error when changing jobs is not to notify the employer about 401(k) contributions made for the taxable year at your previous employment. Since the maximum voluntary 401(k) contribution for 2023 was $22,500 for plus $7,500 "catch up" contribution for individuals age 50 or older, having contributions with two employers can result in an excess contribution. If the excess contribution is returned to the employee by April 15 of the following year, the 10% penalty doesn't apply and the returned amount is included in taxable wages for the year of the contribution. If excess contributions aren't timely returned to the employee, they are subject to a 10% excess contribution penalty, they aren't tax deductible and will be taxed a second time. There is also a risk the employer's plan could be disqualified because of this issue.

Return to Table of Contents

Backdoor Roths.

SECURE Act 2.0 did NOT include any provisions eliminating "backdoor Roth" contributions. These are generally funded by making a nondeductible IRA contribution that is immediately rolled over to a Roth IRA.

Another type of backdoor Roth is the mega backdoor Roth. These are set up via employer 401(k) plans with Roth accounts. Some permit voluntary employee contributions. For 2024, up to $69,000 can be contributed to these accounts.

Find out if your employer permits mega backdoor Roth contributions.

Return to Table of Contents

Roth conversion reminder.

Taxable Roth conversions of IRA accounts are still allowed. With higher federal income tax rates scheduled to return after 2025, making a taxable Roth conversion during 2024 might be a wise tax planning move.

Return to Table of Contents

Distribution election for estates and complex trusts.

The maximum 37% federal income tax rate and the 3.8% tax on net investment income hit estates and trusts especially hard. For 2023, they apply when the undistributed estate or trust income exceeds $43,450. Distributions by the estate or complex trust shifts the taxation of income to the beneficiaries. An election is available to treat distributions made during the first 65 days of the following year (for example, January 31, 2024) as distributed for a taxable year (for example 2023).

In most cases, capital gains don't qualify for the distribution deduction. See your tax advisor.

The beneficiaries should be involved in this decision and be informed about the additional income to be reported on their income tax returns (in writing) to avoid unpleasant surprises.

Return to Table of Contents

EV credit transfer to auto dealers kicks in.

Effective January 1, 2024, customers who purchase an electric vehicle who qualify for a tax credit may elect to have the auto dealer apply the credit to the purchase price of the vehicle. If the customer otherwise doesn't qualify for the credit, such as having too much income, the credit will be repaid with the customer's federal income tax return. Note that only eight 2024 EV models currently qualify for the credit.

Return to Table of Contents

New federal independent contractor regulations released.

The Department of Labor is issued final regulations for determining whether a worker classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). The FLSA governs minimum wage and overtime requirements that apply to employees but not independent contractors. The new regulations are effective March 11, 2024 and replace regulations previously issued in 2021.

The new regulations weigh six factors for making the determination whether a worker is an employee. The six factors are the worker's opportunity for profit or loss, investments by the parties, the work relationship's permanency, the nature and degree of control over the work, whether the work is an integral part of the potential employer's business, and worker skill and initiative. The outcome ultimately depends on whether the worker is economically dependent on the employer for work or is in business for himself or herself.

See your labor attorney about how this affects your business.

(Checkpoint News Stand, Thomson Reuters, January 10, 2024, "DOL Rescinds and Replaces FLSA Independent Contractor Regulations.")

Return to Table of Contents

Proposed tax legislation introduced.

The House Ways and Means Committee introduced proposed tax legislation on January 16, 2024. Since this is an election year and it's so difficult to get anything done in Congress, it's questionable whether it will pass or when it will pass. There are provisions with retroactive effect for tax years before 2023. This is one reason to file for an extension of time to file 2023 income tax returns.

Here are a few highlights:

Here is a link to the text of the proposed legislation: https://www.congress.gov/bill/118th-congress/house-bill/7024/text

(H.R. 7024, The Tax Relief for American Families and Workers Act of 2024.)

Return to Table of Contents

IRS offers voluntary settlement for questionable Employee Retention Credit claims.

The IRS has announced a voluntary settlement program for taxpayers who claimed the Employee Retention Credit and might not be entitled to the credit. In order to qualify for the settlement, the taxpayer must not be under criminal investigation by the IRS, must not have an audit in process, and must not have received a notice and demand for repayment of all or part of the claimed ERC.

The offer by the IRS is for the taxpayer to repay 80% of the ERC received from the IRS. The taxpayer need not amend its income tax returns to reduce the wages deduction for the 20% ERC it's allowed to keep.

The IRS will waive civil penalties and interest relating to the ERC that was erroneously claimed, provided the 80% repayment is made promptly.

The procedure for accepting participation in the Voluntary Disclosure Program is described in the IRS announcement.

I think this is an extraordinarily generous offer. Any business that claimed an erroneous ERC should seriously consider accepting it. Please consult with your tax counsel before going ahead.

(Announcement 2024-3)

Return to Table of Contents

Roth requirement postponed for catch-up contributions.

The SECURE 2.0 Act enacted December 2022 requires that, effective 2024, catch-up contributions for certain high-income participants of 401(k) and similar retirement plans should be designated as Roth contributions. Plan administrators said they needed more time to implement this change.

The IRS has provided an administrative transition period, effectively postponing this requirement until tax years beginning after December 31, 2025.

(Notice 2023-62.)

Return to Table of Contents

Don't report taxable income twice!

A common error for employees who exercise employee stock options is to report their income twice. Ordinary income from exercising a non-qualified stock option or from the disqualified disposition of stock received from exercising an incentive stock option should be reported by the employer on Form W-2. The ordinary income amount is added to the tax basis (cost for computing gain and loss on your income tax return), reducing or eliminating the gain reported for the sale of the stock. Brokerage companies can also miss this adjustment on the information return for the sale. This is especially a common error for employees who skip the "interview mode" when preparing their own income tax returns using software like TurboTax.

Return to Table of Contents

Remember to report the sale of option stock.

Employees who exercise their stock options and immediately sell the stock sometimes omit reporting the sale of the stock. They figure the income is already reported on their W-2 form. They are essentially right, but the IRS "matches" the income reported on income tax returns with information returns for the sale of securities issued by brokerage companies. See the above information, "Don't report taxable income twice!" If you add the option price to the ordinary income reported for the nonqualified stock option exercise or disqualified disposition of ISO stock resulting from an exercise and immediate sale, the cost should be equal to or slightly more (because of selling expenses) than the sales price of the stock.

Return to Table of Contents

Watch reporting qualified sales of ISO stock.

A common error for employees who make a qualified disposition of ISO stock is to add the AMT income reported for the year of exercise to the cost of the stock. (A qualified sale is made more than two years after the grant of the ISO and more than one year after the exercise of the ISO.) Employees rationalize they have already paid income taxes for that income. The tax they paid was on the alternative minimum tax schedule, not the regular tax schedule, so there is no regular tax basis adjustment for the exercise. This is an error. The tax basis of the shares for regular tax reporting is generally the option price paid for the shares. (Note special rules apply when the option price is paid using other shares of employer stock. Those rules are beyond the scope of this explanation.)

The mechanism for recouping some of the AMT paid when the ISO was exercised is the minimum tax credit, reported on Form 8801. A second AMT Schedule D is prepared for the year of sale with the basis adjustment for the AMT income reported relating to the exercise of the ISO added to the tax basis on the AMT Schedule D for the sale of the ISO stock.

Does this make your head spin? Maybe you should hire someone who understands this to prepare your income tax returns. Contact Thi Nguyen, CPA at thi@atl-cpa.com to make an appointment.

Return to Table of Contents

Do you sell products, services or software to CPAs?

Maybe I can help with writing promotional material and marketing ideas. Call me, Michael Gray, at 408-918-3161 or email mgray@taxtrimmers.com.

Return to Table of Contents

Attention CPAs-would you like help with marketing your services?

Maybe I can help with writing promotional material and marketing ideas, including encouraging referrals from your current clients. Call me, Michael Gray, at 408-918-3161 or email mgray@profitadvisors.com.

Return to Table of Contents

Attention CPAs-do you need support for tax issues?

Michael Gray, CPA can help you with research and guidance on complex tax planning and tax return reporting issues. mgray@taxtrimmers.com.

Return to Table of Contents

Attention Accountants! Speed up processing your 2019 business closings!

Do you still have 2019 business income tax returns on extension that need to be done? Check out this trial balance software, EZ Trial Balance, that's super-easy to set up and use. There is a desktop version and an online version. The online version includes consolidations and ratio analysis for analytical review. http://www.eztrialbalance.com

Return to Table of Contents

Please share your good experiences with Michael Gray, CPA.

As you know, more and more people are going to the internet to find information about service providers. We hope you will share some good words about experiences that you have had with our firm<. Some of the sites where you can share your experiences include yelp.com and siliconvalley.citysearch.com.

We use Angie's List to assess whether we're doing a good job keeping valued customers like you happy. Please visit AngiesList.com/Review/4258970 in order to grade our quality of work and customer service.

Return to Table of Contents

Financial Insider Weekly past episodes

After eight years of production, I have discontinued producing new interviews for Financial Insider Weekly. Doing the show has been a rewarding experience and I consider back episodes to be my legacy of financial literacy education to our community. Back episodes available at https://www.youtube.com/user/financialinsiderweek.

Return to Table of Contents

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

For your questions about dependent exemptions, see IRS Publication 501 at www.irs.gov.

Return to Table of Contents

Visit our new article!

Return to Table of Contents

Follow me on Social Media!

Want to see new episodes of Financial Insider Weekly as soon as they're posted on Youtube? Want to see Michael Gray's blog posts as soon as they're live? We post them (and more) on social media!

If you enjoy Twitter, please follow me at www.twitter.com/michaelgraycpa. I would especially appreciate retweets of our messages announcing episodes of Financial Insider Weekly.

I'm also on Facebook, and LinkedIn.

you can also follow me on other social media sites, Facebook and LinkedIn.

Return to Table of Contents

Check out my blog.

I have also started a blog at www.michaelgraycpa.com. Check it out!

Return to Table of Contents

Home    Newsletter Archive    Introducing Michael Gray, CPA    Articles    Tax FAQ   Need Help?    Other Links

Michael Gray, CPA
2482 Wooding Ct.
San Jose, CA 95128
(408) 918-3162
FAX: (408) 938-0610
Hours: 8am - 5pm PDT Monday - Friday

Find us on Facebook
Follow me on Twitter
Connect on LinkedIn
Our Blog

Subscribe to Michael Gray, CPA's
Tax & Business Insight

We respect your email privacy