Tax Season look it: It's nearly that time of year again - Tips & Resources

California CPA, Dec, 2001

You know, the time of year when everyone else breathes a sigh of relief that the holidays are over and starts the slow physical, financial and emotional recovery that the sluggish months of January and February afford.

But not you, oh tax-minded CPA. The holiday season is merely your warm-up to that marathon known as tax season. You may be holed up in your office for the rest of winter, and part of spring, but you certainly wont be hibernating. You'll be in high gear meeting with clients, researching what's new in the tax codes, updating your software, and providing the very best client service you can.

Here's a roundup of helpful tips and resources gathered from CalCPA members to ease you into yet another tax season.

2001 Tax Chances

As we go to press, Congress still is mulling over several laws that could affect 2001 tax codes, including a comprehensive economic stimulus package. With this in mind, here are a few general tax tips for the 2002 filing season:

* To ensure that you have the very latest tax information, it might be wise to wait until mid- or late December, or even the first part of January, to take individual and business tax update courses.

* In general, if the gradually declining top tax rates are not changed or accelerated, the strategy unique to year 2001 is to shift taxable income to future years when the top rates are lower. Negotiate deferred compensation, consider installment sales to defer gain, accelerate deductible expenses where possible, but keep an eye on AMT to make sure accelerated deductions really reduce your tax liability.

* If practical, gift appreciated property to children so income such as dividends and interest (when the child reaches 14) will be taxed in the new 10 percent ordinary rate bracket, and capital gain will be eligible for the 8 percent or 10 percent rate, rather than the parent's 18 percent or 20 percent rate.

California Tax Tips

FTB TAX PRACTITIONER HOTLINE

The FTB has changed its tax practitioner hotline hours for the 2002 filing season:

Monday-Friday: 8 a.m.-5 p.m.

Saturdays: 8 a.m.-4:30 p.m. (March 2-April 13)

The tax practitioner hotline, (916) 845-7057, will not be open on state holidays or Sunday, April 14, 2002.

COURT PROHIBITS USE OF HISSERICH DECISION

A recent court action prohibits the FTB from applying the Hisserich decision in determining head of household filing status. In Hisserich, a taxpayer claimed her registered domestic partner's child as the individual who qualified her for the head of household filing status. Due to a recent cause of action challenging the Board of Equalization's decision in Hisserich, in October, the Sacramento Superior Court issued a writ of mandate ordering the FTB not to follow Hisserich for purposes of determining head of household filing status.

TEACHER RETENTION TAX CREDIT

AB 110 will provide immunity from the negligence penalty to individuals whom the FTB finds to have mistakenly, but not fraudulently, claimed a teacher retention tax credit in the 2000 tax year. However, those individuals will be required to repay the full amount of the credit. The FTB has clarified the intent of the law, for more information. visit www.ftb.ca.gov/other/Teacher/TRC.html.

AB 1115: SOURCING ALMOST MADE SIMPLE

Recently enacted AB 1115 sets forth rules for sourcing all types of income, expense, losses (including NOLs, passive activity losses and capital losses) on the California return using a source-based approach. Professor and CPA Kathleen Wright has written an article describing the ins and outs of AB 1115. It can be accessed at www.calcpa.org/californiacpa/articles/2001/11.20.html.

PENSION PLAN CHANGES

Federal Tax Tips

The 2001 Tax Act made significant changes to contribution, compensation, deferral and other limits for IRAs, qualified retirement plans and other pension plans. For an overview, visit www.calcpa.org/members/knowledge.

REDUCED CAPITAL GAIN TAX RATES

Except for taxpayers in the 15-percent bracket, the top rate for gains on assets purchased after 2000 and held for more than five years will be 18 percent, instead of 20 percent. This applies to the long-term capital gain tax rate imposed on noncorporate taxpayers for regular and alternative minimum tax purposes after 2000.

However, to preserve the 18-percent capital gain, a taxpayer holding a capital asset or an asset used in the taxpayer's trade or business on Jan. 1, 2001, may irrevocably elect to treat the asset as sold for its fair market value and re-acquired for the same amount. If this election is made, any deemed gain must be recognized but any deemed loss is disallowed.

It appears that gain from an elective deemed sale of a principal residence may not be excludible under IRC Sec. 121.

To learn more, go to www.calcpa.org/members/knowledge.

RATE REDUCTION CREDIT

The 2001 Rate Reduction Credit requires that taxpayers reconcile their actual credit with the check they received in October by completing a worksheet to compute the credit based on their 2001 return, and then subtracting this credit from the check amount.