IRS Announces Interest Rate for Calendar Quarters Beginning April 1, 2008

The IRS has announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning April 1, 2008 will decrease to 6% (from 7%).

IRS Announces Interest Rate for Calendar Quarters Beginning January 1, 2008

The IRS has announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning January 1, 2008 will decrease to 7% (from 8%).

 IRS Announces 2007 Auto Mileage Rates

Beginning January 1, 2007, the standard mileage rates for the use of a car will be:

• 48.5 cents per mile for business travel

• 20 cents per mile for medical or moving purposes

• 14 cents per mile for charitable purposes

IRS Announces Interest Rate for Calendar Quarters Beginning July 1, 2007

The IRS has announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning July 1, 2007, will remain at  8%.

IRS Announces Interest Rate for Calendar Quarters Beginning March 1, 2007

The IRS has announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning March 1, 2007, will remain at  8%.

IRS Announces Pension Plan Limitations for 2007

The defined contribution plan limit (profit-sharing plans, SEP-IRA) will increase to $45,000 with the annual compensation limit increasing to $225,000.  Please see our updated Helpful Tables for more information.

 Social Security Announces 3.3 % Benefit Increase for 2007

Monthly benefits for social security recipients will increase 3.3% in 2007.  Based on that increase, the maximum amount of earnings subject to the social security tax will increase to $97,500.  Please see our Helpful Tables section of this website.

IRS Sales Tax Calculator

Calculate your sales tax deduction here at the new IRS website.  A tax bill extending the sales tax deduction for those who choose to deduct it in lieu of state income tax was signed in late December.

IRS Announces Interest Rate for Calendar Quarters Beginning October 1, 2006

The IRS has announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning October 1, 2006, will remain at  8%.

2006 IRS Mileage Rates

The IRS announced the following standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes in 2006:

• 44.5 cents per mile for business miles

• 18 cents per mile for medical or moving purposes

• 14 cents per mile for charitable purposes (other than activities related to Hurricane Katrina)

Social Security Announces 4.1 % Benefit Increase for 2006

Monthly benefits for social security recipients will increase 4.1% in 2006.  Based on that increase, the maximum amount of earnings subject to the social security tax will increase to $94,200.  Please see our Helpful Tables section of this website.

IRS Announces Interest Rate for Calendar Quarters Beginning July 1, 2006, FTB Announces Interest Rate for Calendar Quarters Beginning July 1, 2006 

The IRS has announced that the interest rates for tax overpayments and underpayments for the calendar quarter beginning July 1, 2006, will be 8% (formerly 7%).

The California Franchise Tax Board has increased its rate to 7% (from 6%).

IRS Announces Pension Plan Limitations for 2006

The defined contribution plan limit (profit-sharing plans, SEP-IRA) will increase to $44,000 with the annual compensation limit increasing to $220,000.  Please see our updated Helpful Tables for more information.

Tax Reconciliation

The tax reconciliation conference for Senate Bill 2020 and House Bill 4297 is still a work in progress at this time.  Congress is currently in recess, with the Senate returning on January 18 and the House returning on January 31.  

House Passes the Tax Relief Extension Reconciliation Bill of 2005

HR 4297 passed the House on December 8 by a vote of 234-197.  The $56.5 billion tax measure must now be reconciled with the Senate's Tax Relief Bill of 2005 (Sen 2020) which was passed November 17.  Due to the few number of days available before the break, we do not expect the reconciliation to occur in 2005.

Expiring Tax Provisions

Unless Congress acts, a number of tax provisions will expire at the end of 2005 (or, in some cases, some future year).  Tax reconciliation bills have been passed by both the House (HR 4297) and the Senate (S 2020) which give a number of the expiring tax provisions another life.  The Senate passed package is estimated to cost $57.76 billion between 2006-2010.  Here is a brief summary:

Extenders in both the House and Senate version:

• Section 179 expensing provision - increase in amount from $25,000 to $100,000,  increase in phase-out threshold amount from $200,000 to $400,000, inclusion of software is to be extended for 2 more years (ie they would expire for tax years beginning after 2009 instead of 2007)

• 1 year extension (ie through 2006) for:

  • option to deduct state and local sales taxes instead of income tax

  • research credit

  • allowance of personal credits to offset the alternative minimum tax

  • up to $250 above-the-line deduction for educator expenses

  • tax incentives for business activities on Indian reservations

  • enhanced charitable deduction for qualified computer contributions

  • tax incentives for investment in the District of Columbia

  • qualified zone academy bonds

• 1 year extension (ie for property placed in service through 2006) of 15-year straight line write-offs for qualified leasehold improvements and qualified restaurant improvements

• work opportunity tax credit and welfare to work credit extension for 1 year (ie through 2006)

Extenders with differing periods of time:

• the credit for elective deferrals and IRA contributions sunsets after 2006.  The Senate bill would extend this through 2009, while the House version extends it through 2008

• the above-the-line deduction for qualified tuition and related expenses sunsets after 2005.  The Senate would extend the deduction through 2009, while the House extends it only through 2006

Extenders only in the Senate:

• retention of the current alternative minimum tax exemption amounts through 2006

• extension of the new markets tax credit for 1 year (through 2008)

Extenders only in the House:

• the lower tax rates for capital gains and qualified dividends currently have a 2008 expiration date; the House would extend this through 2010

• the suspension of the 100% of net income limitation on percentage depletion for oil and gas from marginal wells would be extended through 2006

• possessions tax credit for American Samoa would be extended through 2006

• parity in the application of certain limits to mental health benefits through 2006

• exceptions under subpart F for active financing income and look-through treatment of payments between related CFS's under foreign personal holding company rules would be extended through 2008 

The House reconvenes during the week of December 5 with the Senate beginning the week after.

California Conformity Bill Signed

On Friday, October 7, 2005, Governor Schwarzenegger signed into law many of the 2004 Federal changes (effective January 1, 2005 for California unless specified):

• Definition of qualified child, meaning filing status and dependency exemptions will be the same for Federal and California.
• S corporation changes in the American Jobs Creation Act of 2004 (P.L. 108-357).
• Liberalized student-loan-interest deduction (for taxable years beginning on or after January 1, 2006).
• Up to $25,000 IRC §179 for corporations to match what California allows under the Personal Income Tax Law

Note that there remains significant areas of nonconformity, including Health Savings Accounts, IRC §179 amount differences, and no special passive loss treatment for real estate professionals.

IRS Reports Some Tax Payments From 13 States Lost

The Internal Revenue Service is alerting taxpayers in 13 states that approximately 30,000 estimated tax payments sent to a San Francisco post office box in early September have been lost in the aftermath of a traffic accident.

Taxpayers who may be affected include:

• Residents of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Ohio, Oregon, Utah, Virginia, Washington and Wyoming and

• Anyone who mailed an IRS tax payment to the IRS San Francisco post office box between Sept. 1 and Sept. 11. 

The accident occurred on the San Mateo Bridge near San Francisco in the early morning hours of Sept. 11, as a contract courier was delivering mail from the post office to a check-processing facility in Hayward, Calif. The IRS estimates that approximately 30,000 of the estimated 45,000 tax payments on board the vehicle –– mostly Form 1040-ES quarterly estimated tax payments –– were ejected into the San Francisco Bay and are not recoverable.

There is a dedicated IRS address to send the replacement check to, which should be in the letter from the IRS.  No penalties will be assessed, but be sure to send the check to the specified address and mark your check "Replacement of 1040ES 3rd quarter".

  Permanent Repeal of the Estate Tax

The House voted on April 13 to permanently repeal estate taxes beginning in the year 2011, when the current law that gradually phases out and ends estate taxes over the next 5 years expires.  Senate Democrats have been resisting full repeal, but they report  that they have made significant progress on a compromise bill which may eventually pass in the Senate during this current session. (As of August 1, 2005, the Senate has said that they will not resolve this issue until they return from recess in September.)

Automobile Donations

On June 3, the IRS issued Notice 2005-44 on charitable deductions for donated vehicles in light of the limitation imposed by the American Jobs Creation Act of 2004 (AJCA). Deductions claimed in excess of $500 for donations of vehicles must now meet more stringent requirements.  In general, vehicle donations are deductible only to the extent of the actual amount received by the charity from the sale of the vehicle. The notice also outlines some exceptions to this rule, for example, (1) where the charity has a "significant intervening use" before selling the vehicle, such as delivering meals on wheels; or (2)  where the charity makes "material improvements"; or (3) where the vehicle is sold to a needy person at a bargain price or given to a needy person (this nonstatutory exception applies only if supplying a vehicle to a needy individual is in direct furtherance of the charitable purpose of the charity of relieving the poor and distressed or the underprivileged who are in need of a means of transportation).   An example of "significant intervening use" is the use of a vehicle for more than 10,000 miles in a year to deliver meals to the needy or elderly.  "Material improvement" includes a major repair or improvement that improves the vehicle's condition in a way that significantly increases its value. Cleaning, minor repairs, and routine maintenance aren't enough, nor are: painting, rustproofing or waxing; removal of dents and scratches; cleaning or repair of upholstery; or installation of theft deterrent devices.  The taxpayer must substantiate the contribution in excess of $500 by a contemporaneous written acknowledgement from the charity. The acknowledgement must be obtained within 30 days of the contribution or the date the charity disposes of the vehicle, and must contain the name and taxpayer identification number (TIN) of the donor and the vehicle identification number (or similar number) of the vehicle.  If there is significant intervening use or material improvement of the vehicle, or if it is given (or sold at a low price) to a needy individual under the rules explained above, the donor's contribution cannot exceed the vehicle's fair market value (FMV).  The FMV of a vehicle may be determined by using an established used vehicle pricing guide (i.e., a "blue-book" type reference), but only if it lists a sales price for a vehicle that is the same make, model, and year, sold in the same area, in the same condition, with the same or substantially similar options or accessories, and with the same or substantially similar warranties or guarantees, as the vehicle in question. Dealer retail value cannot be used. The IRS says that to-be-issued regulations effective for post-June 3, 2005 contributions will clarify that, for this purpose, an acceptable measure of FMV for contributions made after June 3, 2005, and before the date regulations become effective, is an amount that doesn't exceed the price listed in a used vehicle pricing guide for a private party sale of a similar vehicle. IRS says it will consider whether other values, such as the dealer trade-in value, are appropriate measures of FMV.

Corporation Compliance Recorder Mailings

Many corporate clients have been receiving an official-looking form headed "Disclosure Statement - Annual Minutes Shareholders and Directors (Domestic Stock Corporation"), form CCR-32D from the Corporation Compliance Recorder in Los Angeles, California.  The notice asks for a fee of $125.  Please be aware that this is not a government agency and you are not required to file the form nor pay the $125.

Health Savings Accounts

Many of you have expressed interest in the new HSA accounts, but not many products are available yet to set up these accounts.  The IRS has finally released draft documents that can be used as trust or custodial agreements, Form 5305-C (Health Savings Custodial Account) and Form 5305-B (Health Savings Trust Account).  Many companies may wait for these forms to be finalized before they offer their HSA products to the public.  Please see our discussion of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 below for more information on HSA accounts.

Note:  California has not conformed to this Federal law.  This means that contributions to HSA's will not be deductible for California purposes, and if a taxpayer rolls over an old MSA into an HSA, the rollover will be treated as a nonqualifying MSA distribution subject to tax plus a 10% penalty, and earnings in an HSA will be taxable.

  IRS Announces Automobile Mileage Rates for 2005

The business mileage rate has been increased to 40.5 cents per mile.  The charitable mileage rate remains at 14 cents per mile while the medical and moving mileage rate increased to 15 cents per mile.  Please see our Helpful Tables for the current rates.

IRS Launches Study of S Corporation Reporting Compliance

Internal Revenue Service officials announced on July 25, 2005 the launch of a study to assess the reporting compliance of S corporations. The study, carried out under the National Research Program (NRP), will examine 5,000 randomly selected S corporation returns from tax years 2003 and 2004.   

         June 30, 2005 Due Date for Reporting Foreign Bank Accounts

Foreign Bank Account Reports (TDF 90-22.1) must be filed annually by June 30.  These forms may not be extended; June 30, 2005, is the filing deadline regardless of whether the taxpayer's income tax return is extended.  U.S. citizens and residents must file a report with the United States Treasury if the person had an interest in or signature authority over financial account(s) in a foreign country with an aggregate value exceeding $10,000 at any time during the calendar year.  Residents must comply with this law by noting that they have a foreign account(s) on their income tax return and filing TDF 90-22.1.

Civil and Criminal Penalties

As a result of the American Jobs Creation Act of 2004 (AJCA), the civil penalties associated with failing to comply with these requirements include both a new penalty for non-willful violations and increased penalties for willful violations. Non-willful reporting violations are subject to penalties not to exceed $10,000. Willful violations are subject to a penalty which equals the greater of either: (a) 50 percent of the account balance at the time of the violation; or (b) $100,000, but not less than $25,000.  The criminal penalties can, under certain circumstances, amount to a fine of up to $500,000 and imprisonment for up to ten years.

Enforcement

The IRS and other US government agencies continue to develop sophisticated mechanisms for obtaining account information from offshore tax havens. Clients who were required to, but have not filed timely TDF 90-22.1's, should consider filing back forms immediately to minimize the risk of civil and/or criminal penalties. They should also consider amending past returns that were incorrectly filed. 

Verification of Employment Documents

Effective December 1, 2004, all US employers can voluntarily sign up for a free federal SAVE (Systematic Alien Verification for Entitlement) program to check certain I-9 documents (Employment Eligibility Verification Form) to confirm that new employees have the right to work in the US.  Previously, employers in certain states were able to do this via modem, but now the program has been expanded to all 50 states via the Internet.  Employers who wish to use this program must use the program for ALL new hires, not just selectively.  The program uses the database from the Social Security Administration and the Department of Homeland Security.  Interested employers should go to the web site of the US Citizenship and Immigration Service and read through the information before deciding to use this service.

Free Credit Report

Effective December 1, 2004, consumers in the Western states will be able to get their own credit reports for free. A recent amendment to the federal Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies to provide you with a free copy of your credit report, at your request, once every 12 months. The FCRA promotes the accuracy and privacy of information in the files of the nation’s consumer reporting companies. The Federal Trade Commission (FTC), the nation’s consumer protection agency, enforces the FCRA with respect to consumer reporting companies.

Credit reports contain information on where you live, how you pay your bills, and whether you’ve been sued, arrested, or filed for bankruptcy. Nationwide consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that use it to evaluate your applications for credit, insurance, employment, or renting a home. Currently there are three nationwide consumer reporting companies — Equifax, Experian, and Trans Union.

To order your report, click on www.annualcreditreport.com, call 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can also print the form from www.ftc.gov/credit.

Tsunami Donation Legislation

HR141 was passed by Congress on January 6, 2005 and was signed by the President on January 7.  The law provides for an accelerated deduction for cash donations made to qualified charities for the December 26, 2004 Indian Ocean Tsunami effort.  Taxpayers making such donations through January 31, 2005 may take the deduction on their 2004 tax returns instead of having to wait for their 2005 tax returns.  Taxpayers should make a note on the memo line of their checks that the check is for the Tsunami effort.  California has now conformed to this new provision, retroactively to 2004 returns.

American Jobs Creation Act of 2004

President Bush signed HR 4520 on October 22, 2004.  This $145 billion corporate tax cut extends provisions which were not extended by the Working Families Tax Relief Act of 2004 (see below) and also tightens SUV (automobile) write-offs.  Below are some important provisions affecting many taxpayers.

Itemized deduction for sales tax

For 2004 and 2005, AJCA allows taxpayers to elect to claim an itemized deduction for state and local sales and use tax in lieu of deducting state and local income taxes.  Taxpayers who elect to take the sales tax deduction may either claim the actual sales and use taxes paid during the year or use the IRS table.  If the IRS table is used, sales tax paid on the purchase of motor vehicles is an addition.  Taxpayers using the actual method must be able to provide proof of the amount claimed by way of sales receipts, etc.

Expensing of SUVs

AJCA limits §179 expensing of SUV’s (ie automobiles weighing more than 6,000 pounds) to $25,000.  The new limit is effective for automobiles placed in service after October 22, 2004.  In order to qualify for the full $102,000 §179 amount, automobiles must now have a gross vehicle weight rating of more than 14,000 pounds. 

Depreciation of certain leasehold improvements

AJCA reduced the recovery period for qualifying leasehold improvements placed in service after October 22, 2004 and before  January 1, 2006 to 15 years, straight line.  The definition of a qualified leasehold improvement remains the same as under current law; any improvement to the interior of a nonresidential real property placed in service more than three years after the date the building was first placed in service.  Enlargement of a building, elevators, escalators, any structural component benefiting a common area, or the internal structural framework of the building do not qualify.  The improvement must also be made under or pursuant to a lease either by the lessee (or sublessee), or by the lessor, of that portion of the building to be occupied exclusively by the lessor (or sublessee).  The lease must not be between related persons. 

Sale of principal residence acquired in a like-kind exchange

AJCA increased the holding period requirement for taxpayers taking advantage of the $250,000 ($500,000 on a joint return) exclusion on the sale of a personal residence if the principal residence was originally acquired in a like-kind exchange.  The taxpayer must now own such property for at least five years in order to exclude up to $250,000/$500,000 of gain.  Effective for sales after October 22, 2004.

The Working Families Tax Relief Act of 2004

President Bush signed HR 1308 on October 4, 2004.  This $146 billion tax cut for both individuals and businesses mainly extended many of the earlier tax cuts that were set to expire on December 31, 2003 or 2004.  The $1,000 child tax credit will remain through 2010 as well as the expanded 10% tax bracket, and the marriage penalty relief in the 15% bracket.  The higher alternative minimum tax exemption has been extended through 2005.  Many more expiring provisions, such as the the $100,000 section 179 business expensing need to be addressed since they did not make this version of the tax change.

Year-End Car Donations

One of the provisions in the American Jobs Creations Act of 2004 (see below) that will take effect in 2005 is the tightening of the deduction for donations of cars, boats, and airplanes.  If the claimed value is over $500 and the vehicle is sold by the charity, the deduction is limited to the gross proceeds from the sale.  The charity is required to provide the donor with an acknowledgement stating the amount of the gross proceeds within 30 days of the sale.  Also, within 30 days of the contribution, the charity must provide an acknowledgement if they will significantly use or materially improve the vehicle.  In the later case, the donor generally may deduct the fair market value of the vehicle.  

Year end planning opportunity:  taxpayer who will be donating a vehicle to charity by December 31, 2004 will be able to deduct the fair market value of the vehicle under the old rules.  Taxpayers can go to IRS Publications 526 and 561 for further guidance ("Charitable Deductions" and "Determining the Value of Donated Property") 

California NOL

The legislature suspended the use of California net operating losses ("NOL") for tax years 2002 and 2003.  The latest budget battle spared further suspension, so taxpayers may offset 2004 (and subsequent years) income with prior year loss carryforwards.

Check 21

The check Clearing for the 21st Century Act ("Check 21"), was enacted in October of 2003 with an effective date of October 28, 2004.  The Act allows banks to dispense with original paper checks.  Electronic images of the check will be used to clear the checks.  If a consumer requests a copy of a check, the Act allows use of a substitute check.  This means that consumers will no longer get their original checks back with their bank statements.  The Federal Reserve and the banking industry anticipates cost savings and more efficiency in processing checks, but to the consumer, the major disadvantages would be (1) the increased difficulty in spotting and proving forgeries and check alterations and (2) decrease in the "float" that enables consumers to keep their money in their account for a number of days until the check clears.  It is too early to tell how banks will respond to this Act, but from the accounting and tax standpoint, it certainly poses some potential problems.  For instance, currently audits (both financial and tax) often require original checks, and even if the new "substitute checks" can be provided by the banks upon request, there will most likely be a time delay in obtaining the checks.  The Act requires banks to provide a notice to their customers regarding this Act.    

California Legislation

A.B. 1815, introduced on January 15, 2004 increases the maximum personal income tax rate by adding 10% and 11% brackets (currently 9.3% maximum).  The new rates would apply to tax years beginning after 2004 and before 2010.  It is intended that the 10% rate would apply to taxable incomes exceeding $130,000 for single taxpayers and $260,000 for joint taxpayers.  The 11% would apply to taxable incomes exceeding $260,000 for single taxpayers and $520,000 for joint taxpayers.  These amounts would be adjusted annually for inflation.  The bill is currently in inactive status.

California--Personal Income Tax: State Launches NetFile Program

California taxpayers are reminded that, beginning January 16, 2004, they may electronically file their California personal income tax returns using the state's NetFile program. The service is free to taxpayers and can be accessed on the California Franchise Tax Board's website, www.ftb.ca.gov. Taxpayers who file Forms 540 2EZ, 540A, and to a limited degree the 540 long form, can use NetFile. NetFile accepts income of up to $270,000, itemized deductions, and some tax credits.

2004 Social Security Increase

The social security increase for 2004 is 2.1%.  The combined rate will remain at 7.65% but the maximum taxable earnings will rise from $87,000 to $87,900.  Please see our Helpful Tables at our Resources page for the new 2004 limits for payroll tax purposes.

House passes Child Credit Preservation and Expansion Act (H.R. 4359)

The House by a vote of 271-139 passed H.R. 4359 on May 20 to extend and expand the $1,000-per-child tax credit (currently expires after 2004) permanently. The House GOP backed bill significantly increases the credit phase out level from $75,000 (single)/$110,000 (joint) to $125,000/$250,000.  It is uncertain what the Senate will do with this bill.

 Medicare Prescription Drug, Improvement, and Modernization Act of 2003

This tax legislation, known as “The Medicare Bill” was signed into law on December 8, 2003.  The bill contained a number of tax provisions, most notably the creation of a Health Savings Account (HSA) effective for tax years beginning after 2003.  Similar to the Archer Medical Savings Account (MSA), which is a vehicle for small businesses, the HSA is a new tax-exempt account to which tax deductible contributions can be made to pay qualified medical expenses.  Earnings on the contributions are not taxed currently and distributions are tax free to the extent that they are used for qualifying medical expenses.  A taxpayer is eligible to make contributions to an HSA  if the taxpayer is covered under a high deductible plan and is not covered under any non-high-deductible health plan that provides coverage for any benefit covered under the high deductible health plan.    A high deductible plan for a self-only coverage is defined as a plan with an annual deductible of at least $1,000 and that limits annual expenses (annual deductible plus other annual out-of-pocket expenses) required to be paid under the plan, other than for premiums, to $5,000.  For family coverage, both the annual deductible and expenses are double that of the self-only.  Eligibility is determined on a month basis, and the monthly contribution limit for 2004 is 1/12 of:  (A) for self-only coverage, the lesser of the annual deductible or $2,600; or (B)  for family coverage, the lesser of the annual deductible for family coverage or $5,150.  Additional contributions are allowed for taxpayers who have attained age 55 before the close of the tax year.  For 2004, the additional amount is $500, increasing by $100 increments for succeeding years until the additional amount is $1,000 for 2009 and thereafter.  For any month that an individual is entitled to Medicare benefits, the individual’s monthly limitation is zero.  The deduction is an above-the-line deduction, so a taxpayer does not have to itemize in order to take this deduction.  Employers will be able to offer HSA’s as part of their cafeteria plan.

 Federal Legislative Activity

The HR 7 bill provides $11.7 billion in tax incentives as well as other measures. The most costly provision of HR 7 is the provision for a deduction for certain charitable donations by individuals who do not itemize their taxes. The provision, which would apply to non-itemizers with contributions in excess of $250 in the case of individual taxpayers and in excess of $500 for those filing joint returns, at a cost of $2.8 billion between fiscal years 2004-2013. The provision would be effective between FY 2004-2006. Another proposal would allow tax-free distributions from individual retirement accounts for charitable purposes at a cost of $2.7 billion. This provision would affect taxpayers age 70 1/2 and older and would affect distributions made after Dec. 31, 2003, and returns for taxable years beginning after Dec. 31, 2003. A third provision, with an estimated cost of $2.3 billion, would reform certain excise taxes related to private foundations and would be effective for taxable years beginning after Dec. 31, 2003.  

California Budget Bill 2003-2004

On July 29 the Assembly passed AB 1765, the $100 billion budget bill which was signed by the governor on Saturday, August 2.  The republicans are taking credit for no new taxes in the bill.  Taxpayers with DMV automobile registrations due after October 1, 2003 will see a large increase in their bills due to the fact that the VLF offset of 67.5% will no longer apply; the government points out that this is not a "new" tax or an increase in tax.  The teachers credit will be suspended for another year.  The passing of the bill did nothing to the recent downgrade by Standard & Poors of California bonds from A- to BBB, the lowest in the nation.  

 Advance Child Tax Credit Payments Begin July 25th

The IRS mailed out the third and final mailing of the total $14 billion checks provided under the recent tax law changes (see JGTRRA below).  The initial checks went out to those who filed early enough for their returns to be processed by early July.  The mailing date of the checks depended on the last two digits of the taxpayer's social security number as follows:

• 00 - 33 = July 25 mailing

• 34 - 66 = August 1 mailing

• 67 - 99 = August 8 mailing

Taxpayers who are on extension will receive their advance payments after their 2002 returns are processed.  Taxpayers can go to the IRS website at http://www.irs.gov and click on "Where's My Advance Child Tax Credit" to check on the status of their advance payment.  The status check will also tell if a payment may be reduced because of taxes owed or an outstanding non-tax federal debt, or why the taxpayer with a child does not qualify for the payment.  

 New Tax Scam Targeting Potential Recipients of Advance Tax Credit

The IRS issued a consumer alert on June 18, 2003 warning taxpayers about the latest scam involving the highly publicized advance child credit checks to be mailed out beginning July.  The scam works like this:  a taxpayer receives a telephone call promising to speed up the payment for a $39.99 credit card charge.  If you receive such a call, report it to the IRS tax fraud hotline at 1-800-829-0433.

  JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003

The JGTRRA was approved by both the House and the Senate on May 23rd and was  signed by President Bush on May 28.  The Senate passed the bill by a narrow margin of 51-50, the tie having been broken by vice president Cheney.  The bill cuts taxes by $330 billion through 2013 and contains a complicated set of retroactive, temporary, and phase-in and phase-out provisions.  Experts say that the true cost of the bill can be more than $850 billion if the temporary tax relief provisions are extended into the future by another Congress.  The following are the highlights of the legislation:

• The reduction of Individual income tax rates which were scheduled for 2008 were accelerated to take effect in 2003.  The top bracket (currently 38.6%) will now be 35%, followed by 33%, 28%, 25%, 15%, and 10%.

• Reduction of the capital gains tax rate to 5 and 15 percent from the current 10 and 20 percent.  The lower rates will apply for both regular and alternative minimum tax purposes and apply to assets held for more than one year.  The provision applies to sales and exchanges on or after May 6, 2003 and before January 1, 2009.  For taxpayers in the 10 or 15 percent tax bracket, the capital gains rate for 2008 will be zero.

• Dividends received from domestic corporations by individual taxpayers will also be taxed at the lower capital gains rates discussed above.  This provision is effective for tax years beginning after 2002 and before 2009.

• The alternative minimum tax exemption amounts have been increased for tax years 2003 and 2004 as follows:  joint filers $58,000 and single filers $40,250.

• The section 179 expensing provision (currently $24,000) is increased to $100,000 for  tax years 2003 through 2005 and includes off-the-shelf computer software as qualifying property.  The current $200,000 investment limitation is raised to $400,000 for the tax years 2003 through 2005. For tax years 2003 through 2005, taxpayers will be permitted to make or revoke the expensing elections on amended returns without the Commissioner's consent.

• The special additional first-year depreciation deduction of 30% as enacted by the Job Creation and Workers Assistance Act of 2002 has been increased to 50% for property acquired after May 5, 2003 and before January 1, 2005.

• The child tax credit was increased to $1,000 from the current $600 for tax years 2003 and 2004.  For 2003, the $400 reduction will be paid in advance based on the taxpayer's 2002 information.  Checks will be mailed out to 25 million taxpayers who claimed the credit in 2002 for an expected total of $14 billion.  Like the $40 billion rebate in 2001, the checks will be mailed out based on the last two digits of the taxpayer's social security number as follows:  July 25 (# 00-33), August 1 (#34-66) and August 8 (#67-99).  Taxpayers will receive explanation letters beginning July 23rd. (See note regarding tax scam above).  

• The marriage penalty relief provision has been accelerated to take effect beginning 2003.  The basic standard deduction amount for married taxpayers filing a joint return will be twice the basic standard deduction for single taxpayers for 2003 and 2004.  

    The IRS website at http://www.irs.gov/newsroom/article/0,,id=109817,00.html has the new withholding rates which employers should use.  The IRS will be mailing out Publication 15-T around the third week of June.  

NEW TAX SCAMS

The IRS reports that two new schemes are targeting families of those serving in the Armed Forces and e-mail users.  Taxpayers should beware of  telephone callers identifying themselves as IRS employees and telling taxpayers that they are entitled to a $4,000 refund because a relative is in the Armed Forces.  They then request a credit card number to cover a $42 postage fee.  Unauthorized purchases are then made on the credit card.  The e-mail scheme links to a non-IRS website that asks for personal and financial information.  Taxpayers who have encountered one of these scams should call the Treasury Inspector General for Tax Administration at 1-800-366-4484.

WHERE ARE WE ON THE REPEAL OF THE ESTATE TAX?

As you may recall, the estate tax is repealed for deaths occurring in 2010.  After that, unless the law is changed, we go back to the old $1 million applicable exclusion amount.  The leaders of the U.S. Senate have stated that the permanent repeal of the estate tax is one of their top 10 legislative priorities.  So what is the likelihood of the tax being permanently repealed?  The problem is that the estate tax only applies to about 2% of Americans who in 2002, paid almost $30 billion dollars.  This means that although the tax is paid by a very small minority of the population, it has a large effect on the tax revenue.  Since the country is facing a budget deficit of more than $300 billion a year, repealing the estate tax does not appear to be a prudent move by the government.  The estate tax was passed back in 1916 after a recognition that too much concentrated wealth was putting democracy at risk.  Some 1,400 wealthy Americans have founded an organization called "Responsible Wealth" and are calling to preserve the estate tax for the good of the country.  Such Americans include Warren Buffett, Ted Turner, David Rockefeller, and Bill Gates.  The Senate needs 60 votes to make the repeal of the tax permanent, and they have reached as high as 57 in favor, but several senators have changed their votes recently.  We will keep you posted on any late-breaking news regarding this subject.

Current update:  the House passed by a 264-163 vote on June 18, 2003 HR 8, also known as the "Death Tax Repeal Permanency Act of 2003".  The bill makes the estate tax repeal permanent.

IRS ANNOUNCES FREE FILE AND E-FILE AVAILABLE THROUGH OCTOBER 15

More than 2.7 million taxpayers used Free File (see Archive for story on Free File) during the regular filing season.  A projected 8.5 million taxpayers were expected to request an automatic extension to file through August 15.  

California Tax Related Budget Provisions

California’s 2002-03 budget impasse ended with a number of tax increases, including a suspension of the net operating loss (NOL) for the 2002 and 2003 taxable years. In return, business taxpayers get a 100-percent instead of 65-percent  NOL deduction for taxable years beginning on or after Jan. 1, 2004; and the Legislature extended by one year the carryover period for losses incurred on or after Jan. 1, 2002, and by two years for losses incurred prior to Jan. 1, 2002.  The Teacher Retention Credit has also been suspended for one year.

California Real Estate Withholding

Effective January 1, 2003, California requires buyers of California real estate to withhold 3 1/3 % of the total sales price for sales which exceed $100,000.  All sellers, whether residents for nonresidents, are now subject to the withholding, which is submitted to the Franchise Tax Board.  The only exceptions are for sale of a principal residence, property which is part of a section 1031 tax deferred exchange, or property subject to the involuntary conversion rules under section 1033 of the Internal Revenue code.  If the buyer fails to withhold, the penalty is the greater of $500 or 10% of the amount required to be withheld.

  California Legislative Activity

The California Legislature adjourned at 4 a.m. September 13th (Saturday morning) without repealing the Teacher Retention Credit or increasing the 2003 tax rates.  Although it is possible that the governor could reconvene the Legislature, it is not likely.  Teachers will be eligible to take the Teacher Retention Credit for the 2003 taxable year before it sunsets at the end of this year. The no-new-taxes means no new general conformity. The Legislature is still completely uninterested in conformity, as California has yet to conform to most of the 2001, 2002, or 2003 federal tax acts.

2003 Social Security Increase

The social security increase for 2003 is 1.4%.  The combined rate will remain at 7.65% but the maximum taxable earnings will rise from $84,900 to $87,000.  Please see our Helpful Tables at our Resources page for the new 2003 limits for payroll tax purposes.

California Paid Family Leave

California recently became the first state in the nation to adopt a paid family leave bill for workers.  Previous to this new law, the law allowed for employees to take up to 12 weeks of unpaid leave if they worked for an employer with 50 or more employees.  The new law expands the family leave program to cover ALL businesses, regardless of size.  This new law is an expansion of the state disability program and will be funded by an increase in payroll tax withholdings from the employees (estimated to be an average of about $27 to $70 a year depending on the earnings).  The bill signed into law deleted the proposed tax on employers, but employers will bear the additional cost they will have to incur in overtime and replacement worker training and recruitment.  Eligible employees will be eligible to receive 55% of their wages during their absence, up to a maximum of $728 a week.  "Family leave" is defined to be for reasons of birth of a child, care for a parent, spouse, or domestic partner who has a serious health condition.  A doctor's certification is required and no more than 6 weeks of family temporary disability insurance benefits will be paid within any 12-month period.  Businesses with fewer than 50 employees are not required to hold a job for a worker who goes on paid family leave.  The new law becomes operative on January 1, 2004, but the benefits will be payable for leaves commencing on or after July 1, 2004.

IRS announces 2003 optional standard mileage rates

The 2003 rates for business use will be decreased to 36 cents per mile (from 36.5 cents).  The charitable mileage rate remains at 14 cents.  The rate for medical care mileage and moving will decrease to 12 cents per mile (from 13 cents).

HR 3090 - Job Creation and Worker Assistance Act of 2002 

On March 9, 2002, President Bush signed into law a new law containing many retroactive tax relief.  Briefly:

• additional first-year depreciation allowance of 30% for certain property acquired after September 10, 2001 and before September 11, 2004 (must be new property)

• a 5-year carryback period for certain net operating losses 

• an additional 13 weeks of unemployment benefits

• technical correction that a deemed-sale election will not free up passive losses

• miscellaneous other provisions

Warning:  Scheme to Steal Identity and Financial Data

The IRS has received reports of the scam surfacing from coast to coast whereby letters claiming to be from the taxpayer's bank states that the bank is updating its records.  Phony forms sent to taxpayers include W-9095, W-8888 and W-8BEN.  There is a legitimate IRS Form W-8BEN, but the one sent by the scam promoters have been altered.  

California Sales Tax Increase

Effective January 1, 2002, the statewide sales tax rate increased by .25%.  Thus, the minimum combined state, county, and local sales tax will be 7.25%.  Monterey County's sales tax rate will be 7.25% since it does not have any special tax districts.  

Social Security Increase for 2002

The Social Security Administration has announced that the cost of living increase (COLA) for 2002 will be 2.6%.  Please see our Helpful Tables at our Resources page for the new 2002 limits for payroll tax purposes.

California Franchise Tax Board News

Revised California LLC Fees

AB 898 revised the previously announced LLC fees for 2001.  Please go to our Helpful Tables.

Disaster Relief for Taxpayers Affected by the September 11, 2001 Terrorist Attack

Both the IRS and the California Franchise Tax Board have announced that certain relief will be provided for terrorist attack victims.  The President declared on September 11, 2001 that five New York Counties (Bronx, Kings, New York - boroughs of Brooklyn and Manhattan, Queens, and Richmond) are federal disaster areas.  On September 13, 2001, Arlington County, Virginia (home of the Pentagon) was added to the list.  In Notice 2001-61, the IRS announced that extended filing and payment deadlines and suspension for 6 months of levies, seizures, and summons will be available for taxpayers who were directly affected by the terrorist attacks, regardless of where they live.  For those taxpayers not in the disaster area but have difficulty in making timely federal tax deposits, the failure to make timely deposits will be waived for deposits required to be made from September 11, 2001 through October 31, 2001 if the deposit is made on or before November 15, 2001.  Taxpayers who have difficulty in meeting their federal tax obligations due to disruption the transportation and delivery of documents by mail or private delivery services resulting from the attack will have until November 15, 2001 to file returns.  Any taxpayer who believe they are entitled to relief under this notice should mark in red ink on top of their return or other documents "September 11, 2001 Terrorist Attack".  The Franchise Tax Board will suspend the mailing of bills and notices to victims of the attack and will allow them additional time to file their tax returns.

In a subsequent Notice 2001-63, the IRS announced that taxpayers who, regardless of their location are continuing to experience difficulties in meeting their filing and tax payment requirements due to the terrorist attack, have until September 24, 2001 to meet their federal tax obligations falling between September 10, 2001 and September 24, 2001.   This postponement only applies to the filing of returns, payment of tax and making elections, not to the deposits of federal tax (which are covered under Notice 2001-61 above).

Form 5500 (retirement plans) filing deadlines have also been postponed for entities located in federal disaster areas and those who cannot obtain information for filing from companies whose operations are directly affected by the attack.  Such entities with filing deadlines between September 11 and November 30, 2001 will get an extra six months plus 120 days.  Extensions expiring between those dates will be postponed an additional 120 days.  Entities that do not qualify will have until November 15, 2001to file, but only if they have difficulty meeting the filing deadline because of attack-related disruptions to transportation or the delivery of documents by mail or private delivery service.  

On September 20th, the IRS activated an e-mail mailbox to provide assistance to business taxpayers affected by the September 11 terrorist attacks.  This address was established to respond to questions that business owners may have that were not addressed in either Notice 2001-61 or 2001-63 above.  The address is mailto:corp.disaster.relief@irs.gov .

The IRS has now announced the establishment of a special toll-free number for taxpayers affected by the September 11 attacks.  The number is 1-866-562-5227.  The number is available Monday through Friday 7am to 10pm.  

Publication 3921 (9-2001) "Help from the Internal Revenue Service for Those Affected by the Terrorist Attacks on America" is now available from the IRS.  This publication explains some of the tax relief measures that are available for victims of the terrorist attack.  Go to the "Forms & Pub" section of the IRS website at http://www.irs.gov or call 1-800-829-3676.

Privacy Protection 

Under the 1999 Gramm-Leach-Bliley Act, CPAs, like all providers of personal financial services, are now required by law to inform their clients of their policies regarding privacy of client information. CPAs have been and continue to be bound by professional standards of confidentiality that are even more stringent than those required by law.  Therefore, we have always protected your right to privacy, but we must now follow set procedures before we can disclose any information to any third parties.  We now ask that you complete and mail or fax us our Authorization to Disclose Financial Information form before we will disclose any private information.  We will be happy to mail or fax you our form upon request, or if you prefer, you can fill out the form provided here and print it out and fax it to us. If you need any help filling out the form, please call us or click here for instructions to the form.

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