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Michael Gray, CPA's Tax and Business Insight
March 6, 2006
© 2006 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
- 42 days to April 17. Have you made your tax appointment yet?
- Congratulations, Thi!
- We'll miss Todd Johnston.
- First calendar corporation filing deadline is March 15.
- Michael Gray quoted in "new" Think and Grow Rich.
- Tax protester sentenced (again).
- Veteran can't exclude disability benefits.
- Electricity production credit not reduced by state or local tax credits.
- IRS Chief Counsel says California registered domestic partners can't split wages.
- Business valuation firm isn't a qualified PSC.
- 2006 Toyota Prius certified for clean fuel deduction.
- Questions and Answers
- Do you have employee stock options?
- Do you have real estate tax issues?
- Read our new article!
- PS Marché Aux Fleurs
- Subscribe/Unsubscribe from Michael Gray, CPA's Tax & Business Insight
42 days to April 17 Have you made your tax appointment yet?
Tax season is in full swing.
If you would like us to prepare your income tax returns and avoid an extension, we should have most of your information by March 15. If you haven't received partnership information or a couple of 1099 forms, send us the information you have to get in the system. When we receive tax information after that date, there is a good chance an extension of time will be required.
To make an appointment, call Dawn on weekday afternoons at 408-918-3162.
Congratulations, Thi!
Thi Nguyen has been approved to receive her CPA license, and we have submitted her paperwork. We are very proud of the accomplishment for Thi. Thi also recently received her real estate sales license, so she can now take mortgage applications.
We'll miss Todd Johnston.
My family was shocked to learn my nephew, Todd Johnston, suddenly passed away at age 33. We believe he died on Sunday, February 26. An autopsy revealed he died from a bacterial meningitis infection that caused his brain to swell. Todd was a big "teddy bear" of a guy who loved to entertain his family with jokes and funny sayings, a gentle soul. He was also very artistic. For a while he was in the business of creating traveling haunted houses, including one in Japan, and most recently was working on traveling exhibitions for the Pacific Science Center in Seattle.
Dawn and I will be in Seattle on March 25 and 26 for his celebration of life. I think Todd's parents would say, "Give your loved ones an extra hug and kiss, and tell them you love them and you are proud of them. You don't know how much longer they will be with you."
First calendar corporation filing deadline is March 15.
The initial due date for corporations that have a December 31 year end is March 15. File Federal Form 7004 to apply for an automatic six-month extension of time to file. Remember, the deadline to pay the income taxes is not extended. If you expect an overpayment for your corporation, you can request a "quick refund" of estimated tax using Form 4466. Many corporations decide to file for extension of time to file simply to extend the due date for making deductible payments to their qualified retirement plans. See your tax advisor for details.
Michael Gray quoted in "new" Think and Grow Rich.
The MindPower Institute and Aventine Press have issued a "new" edition of Napoleon Hill's Think and Grow Rich. Material that Hill edited out of the book during the 1960's has been restored, and annotations and supplemental material have been added. I am honored that they included a quotation from my web book review in the back of the book as a testimonial. If you are a Napoleon Hill fan or if you have never read Think and Grow Rich, I recommend that you get a copy of this "new" edition.
Tax protester sentenced (again).
Irwin Schiff is a tax protester who has served four years of jail time before for failing to file income tax returns. Now he has received another 12-year jail sentence - 151 months for tax fraud plus another year for contempt of court - and ordered to pay $4.2 million in restitution. His Freedom Books business sold more than $4.2 million of books and tapes encouraging readers not to pay income taxes.
Veteran can't exclude disability benefits.
William Reimels developed lung cancer and was unable to continue working. The lung cancer might have developed because of exposure to Agent Orange while in the armed services in Vietnam. The VA determined that William was eligible for service-connected disability benefits. He was also awarded Social Security disability benefits.
The Second Circuit Court of Appeals affirmed the Tax Court and the IRS, holding that William's Social Security disability benefits were includable in gross income. The court said the Social Security disability benefits were wage-replacement benefits awarded because William could no longer work. The exclusion for compensation received for personal injuries or sickness at Internal Revenue Code Section 104(a)(4) does not clearly exempt Social Security benefits from taxation. (Reimels v. Commissioner, 2d Cir. 1/31/06.)
Electricity production credit not reduced by state or local tax credits.
The IRS has ruled that the federal electricity production credit is not reduced by state or local tax credits. The credit is reduced by federal subsidies, including governmental grants, proceeds from tax-exempt state or local government bonds used to finance the project, directly and indirectly provided subsidized energy financing under a federal, state or local program, or any other (federal) credit allowable with respect to any property that is part of the project. (Rev Rul 2006-9.)
IRS Chief Counsel says California registered domestic partners can't split wages.
The IRS Chief Counsel has issued a private Chief Counsel Action ruling that wages of California registered domestic partners should be reported on the income tax returns of the partner who earned the wages, and should not be split between the partners. According to the Chief Counsel, the Federal government does not recognize community property for wages for unmarried persons.
This is a controversial position because it disregards state property rights, which are usually a starting point in applying federal tax laws. We still don't know how the IRS will say that items other than wages should be taxed under California's new community property laws for registered domestic partners, which became effective on January 1, 2005. We hope to see more rulings soon. (CCA 200608038.)
Business valuation firm isn't a qualified personal service corporation.
The IRS has issued a private ruling that a full-service business valuation firm wasn't a qualified personal service corporation (PSC). This means the corporation isn't subject to onerous rules for filing fiscal-year tax returns and isn't subject to the flat 35% federal income tax rate that applies to PSCs. On the other hand, non-PSCs can't use the cash basis of accounting when average gross receipts exceed $5 million. (LTR 200606020.)
2006 Toyota Prius certified for clean fuel deduction
The IRS has certified the 2006 Toyota Prius Hybrid as eligible for the $2,000 clean-burning fuel deduction for 2005. Other 2006 model vehicles that have been certified include the Ford Escape Hybrid, Mercury Mariner Hybrid, Lexus RX 400h, and the Toyota Highlander Hybrid. 2005 model vehicles that have been certified include the Honda Insight, Honda Civic Hybrid, Honda Accord Hybrid, Ford Escape Hybrid and the Toyota Prius.
The deduction has been repealed for 2006 and replaced with a tax credit.
(IR 2006-26, 2/8/2006.)
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?" (www.realestateinvestingtax.com/residence.shtml) where you should be able to find the answers to most of these questions.
Question
I have an irrevocable trust with a tax identification number.
My parents each have a revocable trust, but they don't have tax identification numbers for the trusts. Are tax identification numbers required for a revocable trust?
Answer
Generally, no. When the individual who created the revocable trust is also the trustee, no tax identification number is required for the trust. The trust is a substitute for a will, and the income and deductions of the trust are reported on the income tax returns of the grantor/creator of the trust.
After the grantor's death, the trust becomes irrevocable and the successor trustee usually should apply for a tax identification number at that time.
Question
My wife's mother passed away in May, 2005. My wife was the only beneficiary of her revocable living trust. My wife and I are setting up our own revocable living trust and transferring out assets to it.
We received a 1099 for my mother-in-law's brokerage account, under her social security number, for 2005. When we file income tax returns for 2005, do we report the income on her form 1040, even though part of the income was received after she passed away?
What about income received during 2006 and reported on Forms 1099 under her social security number?
We are thinking about moving to Canada. Can you help with tax planning for this move?
Answer
Usually I suggest that people get help from a tax return preparer when reporting information relating to a decedent.
Since your wife is presumably the trustee and sole beneficiary of the trust after her mother's death, any income and deductions relating to her mother after death will be reported on your wife's (presumably joint with you) income tax returns.
To leave a trail for the IRS you can issue "nominee" Forms 1099 from your mother-in-law to your wife.
The distribution of property from her mother's trust to your wife is not taxable income. If your mother-in-law had more than $1.5 million of assets, a Form 706 (Federal estate tax return) should be filed.
Even if Form 706 isn't filed, your mother-in-law's assets should be listed and valued to establish tax basis when they are sold in the future.
Question
Do you have a citation that says fees received by a non-professional fiduciary aren't subject to self-employment tax?
Answer
Revenue Ruling 58-5. If the trustee is actively involved in operating a business for the trust, the fees can be self-employment income. In most cases, they aren't.
Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.
If you have employee stock options, have you subscribed to Michael Gray, CPA's Option Alert?
To subscribe or review past issues, go to www.stockoptionadvisors.com/subscribe.shtml.
We are starting a newsletter devoted to real estate tax issues.
We are starting a newsletter devoted to real estate tax issues. Like this newsletter, we will talk about new developments, have reports on special tax concerns, and answer questions and answers. The subscription rate is $19.95 per month. For a sample issue, visit www.realestatetaxletter.com.
Visit our new article!
- Selling to the Affluent 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 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.
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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