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2004 TAX PLANNING & TIPS
The tax laws continue to provide opportunities for the wise and traps for the unwary. Often, tax savings can be achieved by taking action before the year end. The information and strategies discussed herein may or may not be appropriate for your situation. Remember to consult with your tax professional before implementing them. Click on the following links for information on selected topics.
AMERICAN JOBS CREATION ACT OF 2004
On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004. The effective dates of these provisions vary. Some provisions are retroactive, some become effective on the date the President signed the bill, some take effect next year, and still others are not implemented until 2006.
Listed below are some of the more significant provisions of the American Jobs Creation Act of 2004:
New rules for sale of a principal residence acquired in a like-kind-exchange. For sales or exchanges after October 22, 2004, if a taxpayer acquires a principal residence in a like-kind exchange, in which any gain was not recognized, the taxpayer must now own the property for five years (formerly two years) from the date the property was acquired, for the home sale exclusion rules to apply.
Enhanced expensing limits extended for two years. The Act extends for an additional two years the increased Section 179 deduction, and the election to revoke the election on a prior years return. The enhanced expensing rules were scheduled to expire at the end of 2005, which means they now continue to apply through 2007 tax years.
The maximum annual expensing for tax years that begin in 2004 is $102,000.
New limits on expensing SUVs. For property placed in service after October 22, 2004, the American Jobs Creation Act of 2004 limits the ability of taxpayers to claim deductions under Code Section 179 for certain vehicles to $25,000. The change applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less.
Above-the-line deduction for certain legal fees. For fees and costs paid after October 22, 2004, with respect to any judgment or settlement occurring after that date, the Act provides that attorney's fees and court costs incurred in connection with an unlawful discrimination claim, certain claims against the federal government, or a private cause of action under the Medicare Secondary Payer statute, are deductible in arriving at adjusted gross income.
New rules for certain charitable donations. The Act generally limits the deduction for motor vehicles, boats and airplanes contributed to charity after 2004 for which the claimed value exceeds $500 by making it dependent upon the charity's use of the vehicles and imposing higher substantiation requirements.
If the charity sells the vehicle without any 'significant use' or 'material improvement', the donor's charitable deduction can not exceed the gross proceeds from the sale.
New substantiation requirements. A deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution by a written acknowledgement from the charitable organization.
The written acknowledgement must be provided within 30 days of sale of a vehicle that is not significantly used or materially improved by the charitable organization, or, in all other cases, within 30 days of the contribution.
Penalties apply if the charitable entity knowingly furnishes a false or fraudulent acknowledgement, or knowingly fails to furnish the required information.
Itemized deduction for state and local sales taxes. The Act allows taxpayers who itemize their deductions to deduct state and local sales taxes, instead of taking an itemized deduction for state and local income taxes. Taxpayers who make this election may either:
- deduct their actual sales taxes, or
- use the IRS-published tables and then add to the amount from those tables the actual amount of their sales tax for motor vehicles, boats and other items specified by IRS.
Note: Congress has noted that, because IRS is in the process of finalizing tax forms for 2004, and developing the tables will require a significant amount of time and effort, it anticipates IRS will do the best they can to implement the new rules for the 2004 tax filing season.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
WORKING FAMILIES TAX RELIEF ACT OF 2004
The Working Families Tax Relief Act of 2004, which grew out of an effort to defer scheduled reductions in tax breaks for individuals, turned into a vigorous extenders and simplification package.
Listed below are some of the more significant provisions of the Working Families Tax Relief Act of 2004.
Child Tax Credit stays at $1,000. The child tax credit, which is $1,000 per child for 2004 but was scheduled to drop to $700 for 2005 through 2008 and to rise to $800 for 2009, will stay at $1,000 through 2010.
New for 2004. For purposes of the refundable child tax credit, under the Working Families Act, any amount excluded from gross income under Code section 112 is treated as earned income for purposes of computing the refundable portion of the child tax credit.
Election to treat combat pay as earned income for purposes of the earned income credit. The 2004 Working Families Act allows taxpayers to elect to treat combat pay that is excluded from gross income under Code section 112, as earned for purposes of the earned income credit. This election is available for any tax year ending after October 4, 2004, and before January 1, 2006.
Archer MSAs extended through 2005. Under pre-2004 Working Families Act law, no new contributions could be made to Archer MSAs after 2003, except by or on behalf of individuals who previously had Archer MSA contributions, and employees who are employed by a participating employer.
The 2004 Working Families Act extends Archer MSAs through 2005 by extending the cut-off year to 2005.
No rollback in 2005 AMT exemption. In recent years, Congress has provided a measure of relief from the AMT by raising the AMT exemption amounts, thereby reducing the likelihood of an AMT liability. However, this partial relief was set to expire for tax years beginning after 2004, and the exemption amounts were scheduled to revert to the lower amounts allowed under prior law. The Act preserves this partial relief from the AMT by extending the higher exemption amounts to 2005.
Note: For tax years beginning after 2005, the AMT exemption amounts will revert to their pre-2001 Economic Growth and Tax Relief Reconciliation Act levels.
Above-the-line educators? deduction extended. The IRS is advising teachers to save their receipts for purchases of books and classroom supplies. Such out-of-pocket expenses could lower their taxes. The deduction is available for eligible educators in both public and private schools.
To be eligible a person must work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide.
Up to $250 in qualified expenses may be deducted, even if the educator does not itemize his or her deductions.
Note: Last year (2003) was scheduled to be the last year for this deduction. The Working Families Tax Relief Act of 2004 extended this deduction for tax years beginning in 2004 and 2005.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
HEALTH SAVINGS ACCOUNTS (HSA)
New for 2004, a Health Savings Account (HSA) is a trust created or organized in the U.S. exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high deductible health plan.
Within limits, an above-the-line deduction is allowed for an individual's contribution to an HSA. Employer contributions to an HSA on employee's behalf are neither included in the employee's federal income, nor subject to employment taxes.
Caution: Some states do not follow the same tax treatment under federal law for health savings accounts.
Any individual can establish a HSA with a qualified trustee (Insurance Company, Bank or Third Party Administrator), in much the same way that individuals establish individual retirement accounts with qualified IRA or Archer MSA trustees or custodians. No permission or authorization is required from IRS to establish an HSA. In addition, an eligible individual who is an employee may establish an HSA with or without his/her employer's involvement.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
STANDARD MILEAGE RATE
New for 2004, taxpayers may now use the standard mileage rate in computing the deductible costs of operating up to four automobiles that are used simultaneously for business purposes.
Taxpayers can use the standard mileage rate of 37.5� per mile, in computing the deductible costs of operating automobiles owned or leased by them (including vans, pickups or panel trucks) for business purposes.
An employee may deduct an amount computed using the standard mileage rate only as an itemized deduction, subject to the 2% floor on miscellaneous itemized deductions.
Self-employed individuals may deduct an amount computed using the standard mileage rate in determining their net earnings for self-employment.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
YEAR-END TAX PLANNING TIPS
Individuals may also want to postpone income until 2005 and accelerate deductions into 2004 to lower their tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2004 that are phased out over varying levels of adjusted gross income. These could effect Roth-IRA contributions, conversions of traditional IRAs
to Roth-IRAs, child credits, higher education tax credits, and deductions for student loan interest.Take advantage of bonus depreciation: Business owners may want to take advantage of the 50% bonus depreciation by putting new equipment in service before year-end. This year (2004) is the last year for the bonus allowance.
Make use of the annual $11,000 gift tax exclusion: Taxpayers can save gift and estate taxes by making sheltered gifts before the end of the year. For 2004, taxpayers can give $11,000 per year, per individual.
If elected, under the rules for gift splitting, consenting spouses can use their annual exclusions to transfer up to $22,000 per year to any one person.
Note: If the gift is made by check to take advantage of the annual exclusion amount, it is not considered a completed transfer, until the check is cashed.
Bunching deductions: Some taxpayers, who file Schedule A, Form 1040, may do well to 'double itemize'. Essentially, individuals can pre-pay their deductible expenditures to generate almost twice the amount of itemized deductions every-other-year. For 'opposite' tax years (when the taxpayer has virtually no itemized deductions) the taxpayer is still allowed to use the standard deduction.
Note: Taxpayers who are subject to the alternative minimum tax (AMT) may not find 'double itemizing' helpful since state income taxes and real estate taxes are deductible for regular income tax purposes but not for AMT purposes.
Use flexible spending accounts: Because a cafeteria plan cannot allow participants to defer compensation from one year to the next, employees are reminded to submit claims to the employer for eligible expenses before the end of the year.
Remember, participants must forfeit any amount remaining in their flexible spending accounts at the end of the plan year. This forfeiture rule is commonly referred to as the use-it-or-lose-it rule.
Understand the potential tax consequences of certain mutual fund purchases: If a fund's investment portfolio has done well in a given year, the fund may make a large distribution near the end of the year because of gains that it has realized. These will be taxed to the investor as ordinary dividend to the extent of short-term gains, and capital gain distribution to the extent it represents long-term gains of the fund.
In general, investors should buy mutual fund shares after the record date for a shareholder distribution, particularly the large year-end capital gain distribution that many mutual funds make.
Take advantage of a loss: Some investors who may have realized a loss in their portfolio during the tax year, may actually benefit by carefully structuring capital gains against losses.
Note: To avoid the 'wash sale' rules you cannot buy substantially identical stock within the period that begins 30 days before and ends 30 days after the sale of the loss stock.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
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