Enrolled to practice before the IRS and the U.S. Tax Court

Licensed Real Estate/Mortgage Broker

1) STOCK DIVIDEND INCOME FOR INDIVIDUALS WILL BE TAXED AT THE LOWER CAPITAL GAINS TAX RATES [IRC §1(h)]

Under the prior law, dividend income was considered ordinary income taxable at rates up to 38.6% of your dividend income. As of 01/01/03, dividend income will be taxed at the capital gains rate by applying the 15% tax bracket. Tax on dividends will now be calculated on Schedule D. However, dividend income will not be allowed to offset capital loss transactions. The lower capital gains tax rates will not subject income to an Alternative Minimum Tax (AMT) adjustment. Hopefully the stockbrokers will do the recordkeeping and tell the taxpayer which dividends qualify for the new tax treatment. Watch for a new Form 1099-Div for year 2003.

Non-Qualifying Dividend Income Examples: Day traders, real estate investment trusts (REITs), royalty trusts, money market dividends, credit union, insurance company dividends. In addition, S corporation dividends do not qualify, because it is not double-taxed income.

Qualified dividend income is excluded from the "investment income" for the investment interest expense. There is an election to allocate some of the dividend income for treatment as investment income to allow the use of investment expenses.

5) STATE ELECTRONIC TAX FILING REQUIRED STARTING WITH 2003 TAX RETURNS [R&TC §18621.9]

Starting with the 2004 tax-filing season, tax preparers must e-file all individual tax returns or pay a penalty of $50 per return for each return that they should have e-filed. This new requirement applies to all tax preparers who prepared more than 100 California personal tax returns during 2003 and who use tax preparation software in 2004. It appears that the state is passing the cost of tax processing out to the consumer because e-filed returns have many more processing steps that must be absorbed by consumers. The state claims the benefits of less governmental processing costs and faster refunds to taxpayers. A taxpayer (but not the tax preparer) can opt out of the new e-file requirement by preparing Form FTB 8454 each year.

6) NEW METHOD FOR PAYING SALES & "USE" TAXES ON STATE INCOME TAX RETURNS [SB 1009,Ch. 03-718)

Starting with 2003, every state tax return will have a line where non-professional retail sellers can pay their Sales & "Use" Tax. Who does this apply to? Basically everyone. If an item that you purchased would have been subject to sales tax if you purchased the item in California, then it is subject to "Use" tax if purchased from an out-of-state retailer. Some out-of-state retailers do charge sales tax to California customers, so the consumer will not take any additional steps. However, if the out-of-state retailer did not charge sales tax on the purchase, then the purchaser is responsible for reporting and paying the "Use" tax to the state.

Sales & Use Tax are synonymous terms for the same concept. They are both calculated at the same tax rates. A retailer collects sales tax. The user pays "Use" tax. If you bought items for "use" in California, then there is a responsibility to pay the "Use Tax" to the state. It does not matter if the items were purchased by mail order, phone order or over the Internet.

The state is now making it easier to pay the tax, which has always been due, when you file your personal or business tax returns. This procedure does not change the requirement that a retail business operating in the state must register with the State Board of Equalization and obtain a resale permit. It appears that the new procedure will bring the issue to the awareness of many consumers who may have mistakenly believed you could avoid paying sales tax if you buy a product from out-of-state.

2001 Gift Tax Exclusion (per giver) $10,000

2002 Gift Tax Exclusion (per giver) $11,000

2003 Gift Tax Exclusion (per giver) $11,000

Gifts above the specified levels would require filing a Gift Tax Return, Form 709. There may or may not be any current tax due on the gift transfer. Gift giving to your family and heirs is not a tax deduction.

10) ITEMIZED DEDUCTIONS start to be phased out at an AGI that exceeds $139,500 for 2003. FICA withholding on wages maximum for year 2003 is $87K.

11) FICA MAXIMUM. For year 2004 the FICA wage-withholding maximum will be $87,500. There is a Social Security Income (SSI) benefit calculator located at: http://www.ssa.gov. There is a breakeven calculator for clients that want to determine if it is better to start the SSI income at age 62 or at age 65. A person can do his or her own online calculations.

12) AVOID UNDERESTIMATION OF ESTIMATED TAX PENALTIES. No Estimate tax is required until the federal tax due exceeds $1,000 for the year.

13) ALTERNATIVE MINIMUM TAX GRADUALLY INCREASES TO EFFECT MORE TAXPAYERS. The AMT exemption amount was increased from $35,750 in 2001 & 2002 to the higher $40,250 for 2003 and 2004. This assumes that the exemption is not phased out because of a person’s high income. By the year 2010, it is projected that one out of four taxpayers will be required to file AMT on their annual income tax returns. You need a computer to compute AMT tax liabilities because of its complexity. For example, if a person doubles up paying two years of real estate tax at one time, this extra tax deduction may create the imposition of the Alternative Minimum Tax (AMT) among other adverse effects and phase-outs. The author considers this situation as the "Yin and the Yang" of tax benefits planning. If there is a tax benefit; there may be a negative AMT tax impact. For complexity reasons, it is not possible to do mental projections of AMT tax consequences anymore.

14) TAX CREDITS FOR DEPENDENT CARE. The Dependent Care credit is now 35% on the first $3,000/$6,000 of employment related expenses. The phase out for dependent care benefits start at $15,000 of AGI. The result it is still limited to a credit of 20% credit for higher income taxpayer’s. It is better to claim an cafeteria plan from your employer and exclude the benefits, for the higher income clients.

15) CHILD TAX CREDIT. The 2003 & 2004, the Child Tax Credit is $1,000. This is up from the 2001 & 2002 amount of $600. The IRS has been sending advance child credit checks to some taxpayers. If the taxpayer did not get the $400 rebate then the person should claim the full $1,000 on the 2003 tax returns.

Taxpayers can look up on http://www.IRS.GOV to see if advance payment of $400 was 2003. If one spouse claimed the child and got the rebate check, then the other parent claims the full $1,000 on this year’s tax return. The IRS’s unofficial answer is that the 2002 claiming parent will not have to repay the extra funds to the IRS or to the other spouse claiming the child for 2003. The author considers this area is ripe for controversy between the IRS and taxpayers.

16) EARNED INCOME CREDIT FRAUD. Low-income individuals with a dependent may qualify for the Earned Income Credit. This is a tax credit than can be refunded to the taxpayer, even if they had no tax withholding during the year. The IRS feels that there is fraud in 1/3 of all Earned Income Credit claims. Thus IRS will start sending notices to get verification. The IRS will require a Form 8836 and prove a birth certificate, and proof that the child lived with you for at least six months. The proof that the child lived with you can come from schools, church, and RLC thinks that the other spouse may be able to sign off.

17) ALIMONY DEDUCTION OR INCOME. Qualifying alimony is a deduction from gross income from the spouse that makes the payment and is considered income to the receiving spouse. Voluntary Alimony is not deductible. It can be a written agreement between the spouses to qualify for deduction. Indirect alimony (i.e. making the house payment) that is shown in the divorce decree will qualify, as long as the payments stop at death or remarriage. If the payments do not terminate at death, then the payment will be considered a property settlement and not be deductible by the payer.

18) CLAIMING A TAX DEDUCTION FOR DEPENDENTS. A tax deduction is available for dependents if the custodial parent, as long as parent pays over half of the support of the dependent. A custodial parent is defined as the person named in the divorce decree to be the primary care giver of the child. Even if the court order says otherwise, the custodial parent can use the release Form 8332 to transfer the dependency tax benefit to the non-custodial parent. Then the non-custodial parent would attach the IRS Form 8332 to their tax return in support of the dependency deduction. A multiple support agreement (Form 2120) can be used if several persons are paying for the care of one person. The agreement allows one of the persons to claim the dependency exemption.

19) SELF-EMPLOYED HEALTH INSURANCE PREMIUMS. The Self-Employed Health Insurance deduction is now 100% deductible above the line in 2003. It is claimed on page one of the Form 1040 and is not reduced by 7.5% of Adjusted Gross Income like other medical expenses on Schedule A of Form 1040. The Self-Employed Health Insurance deduction includes the long-term Medicare B insurance payments.

20) MEDICAL EXPENSE DEDUCTIONS. Breast surgery is deductible. Lasik eye surgery is deductible. Teeth whiting costs are not deductible as medical expenses. Nonprescription drugs are not deductible. Cosmetic Surgery is not deductible. Egg donor expenses qualify for medical expenses, including the legal expenses for the egg donor program.

21) EDUCATION TAX CREDITS. The lifetime Learning credit is now 20% of $10,000 in qualified education expenses. This amount is up from $5,000 in 2002. The phase out is still the same, and set too low, so most taxpayers do not get the credit. The student can use the credit if the parent cannot claim the credit. The parent can claim the child exemption and the child can claim the Lifetime Learning Credit, assuming that parent paid over half of the child’s support during the year.

22) HIGHER EDUCATION TUITION DEDUCTION. The Higher Education Tuition Deduction is limited to $3,000 and is treated as an above the line deduction. After the adjusted gross income reaches $65,000 for the Single Filing Status or $130,000 on a married filing joint tax return, there is no credit left to claim. If the Tuition Deduction is claimed, then the taxpayer cannot claim the Hope or Lifetime Learning Credit.

23) BONUS DEPRECIATION DEDUCTIONS. This relates to personal property used in a trade of business. The "Qualifying Property" deduction is increased to 50% for 2003 tax returns (IRC 168k). This tax benefit is available after the taxpayer has claimed regular depreciation expenses. This deduction was only 30% for the 2002 tax year. The qualifying property must be personal property, purchased computer software or certain leasehold improvements. Real estate does not qualify for the additional first year depreciation.

24) BUSINESS AUTO DEPRECIATION LIMITS. The first year a luxury auto is placed in business use, the depreciation deduction was increased from $4,600 in 2002 to $7,650 for 2003. Used cars do not qualify for the additional Bonus Depreciation under IRC Sec. 168k. If the taxpayer purchased a business vehicle in year 2003 that weigh more than 6,000 pounds when empty, then the depreciation limits do not apply. This means that the full business use percentage cost of the vehicle is deductible in the year of purchase. If more information on which vehicles weigh more than 6000 pounds, there is more information available at www.intellichoice.com. At this location you can look up vehicle weight on a car-by-car basis. Do not assume that the Gross Vehicle Weight (GVW) published by car manufacturers is the weight to use in determining the 6,000 limit. The Gross Vehicle Weight is the maximum weight the vehicle can carry when loaded and not when it is empty. The empty weight is used for tax purposes. (IRS Reg. §1.274 5T(k)

The Auto depreciation including the Sec 179, plus Bonus Depreciation (Sec. 168k), plus the additional year 1 rate of 20%. So, if the car is over 6,000 pounds, a business owner can write off of the first $100,000 for a 100% business use asset or vehicle.

25) LEASED BUSINESS VEHICLES. When a leased vehicle is used in a trade of business, the business expense is the cost of the lease less a factor for the non-deductible portion of the lease cost that is obtained from IRS Lease Inclusion Tables. The Lease Inclusion Tables start when a vehicle is valued at over $18,000 instead of the $15,200 number that is applied to "luxury" car depreciation limitations.

There is a recapture provision for prior deprecation provision for vehicles used in a business for a short term of less than five years. This creates a tax problem when the vehicle is sold. The solution to this problem may well be to exchange rather than sell particular assets.

26) AUTO MILEAGE EXPENSE DEDUCTIONS. For tax year 2003, the deductible auto expense is 36 Cents per business mile. This expense is a business expense but includes a factor for Gas, Oil, Repairs and Maintenance. Therefore, only claim expenses for the business mileage or the actual business expense, but not both. The mileage deduction is fixed at 12 cents per mile for medical expenses and 12 cents per mile moving expenses. The auto deduction is limited to 14 cents per mile for charitable travel by vehicle for 2004.

For 2004, the business mileage rate is 37.5 cents per mile.

27) DISABLED ACCESS CREDIT FOR BUSINESS EXPENSES TO HELP DISABLED PERSONS. The IRS Form 8826 is used to claim the credit for real property improvements to help disabled persons gain access to commercial buildings. The credit is 50% of expenditures for "eligible le Small Businesses" on eligible Disabled Access Expenditures" between $250 - $10,250. The credit is limited to a $5,000 per year. The credit can be used to offset other income taxes due. General-purpose medical equipment type of building improvements will qualify for the credit. In addition, American's With Disabilities Act (ADA) building improvements will also qualify for the Disabled Access Credit.

28) TAX FREE EMPLOYER FRINGE BENEFITS. An employer that pays up to $190 in free employee parking per year will not include the amount in the employee’s income. Mass Transit tickets purchased for employees will be a tax-free fringe benefit for the first $100 per year.

29) CRACK DOWN ON TAX SHELTERS. Both the IRS and the State Franchise Tax Board are stepping up enforcement actions against tax shelters and Sham Transactions. The IRS website shows a list of several common tax scams. The IRS website is http://www.irs.gov. There is a list of the Dirty Dozen tax Scams commonly encountered by IRS auditors. The list of tax scams includes several transactions were taxpayers use multiple business entities or trusts and then misclassify the nature of the transactions on the tax returns. Both the IRS and California have recently enacted a new strict penalty structure for offending taxpayers, shelter promoters and income tax preparers.

30) IRS STARTS CHARGING A FEE TO TAXPAYERS ATTEMPTING TO OFFER THE IRS LESS TAX THAN IS DUE, AS PAYMENT IN FULL. The federal Offer In Compromise form (also known as OIC) will now have a filing fee, whereas it has always been available to taxpayers, free of charge. The IRS started charging a $150 application fee for OIC’s filed after 11/11/03.

31) PAYING INCOME TAX OVER THE INTERNET. Both the IRS and the State Franchise Tax Board are allowing credit card payment of income taxes via the Internet. The user should be aware that the credit card transaction fee [normally paid by the merchant in a retail transaction] would be required to be paid by the taxpayer when paying taxes over the Internet. So, you might qualify for frequent flyer miles when paying your taxes with a credit card but it will be subject to this "user fee" expense.

32) CALIFORNIA’S NEW LONG TERM CAREGIVER CREDIT. There is a Long-Term Care Credit Is a $500 credit for a person who is a caregiver that meets certain tests for providing care to someone in their household. The credit is for the caregiver not the person needing the care. The person needing care must not be able to do three activities of daily living, considered a loss or lack of functional capacity. A doctor’s certification and the caregiver cannot have an Adjusted Gross Income of $100,000 or more. The new Form FTB 3504, Long-Term Care Credit should be used by the caregiver to claim the tax credit.

MORE NEW TAX LAW INFORMATION. More new tax law news and information is available by contacting the author Rex L. Crandell at 800 464-6595 or 925 934-6320 or at www.rexcrandell.com.

Thank you for your time and attention to this general overview of new tax law changes. You should be cautioned against relying solely on this general information for your own tax decisions without first checking with a competent tax professional to see if there are additional and relevant tax rules in the area and how they apply to your particular factual situation. It is expressly understood that no client relationship is created by this outline or its presentation to a group or to specific individuals. If a client relationship is desired, please contact our office for our written client tax engagement letter.