LATE TAX LAWS MAKE CHANGES FOR 2004:

Congress got busy just before the elections. Three new tax laws. Some items affect 2004 tax returns. You need new kinds of information if you want the largest tax savings.

Sales Tax Deduction.  If you’re over 40 you might recall when we could deduct sales tax. It’s baaack-but with a twist. If you itemize deductions you must choose. Deduct state income tax withheld or paid. Or deduct state sales taxes. Use whichever gives the larger deduction. Sales taxes will come from IRS tables. They give an allowance depending on income and number of people in the household. Years ago we had such tables. A household of 2-3 people, in the $40,000-$70,000 range got from $300-$700 depending upon the state where you live. If you have records you may claim the sales tax you actually paid.

In addition if you bought a car or boat (or other items to be named by IRS) you can add this sales tax to your total above.

Win.  If you live where there is no state income tax, you’ll be happy. That’s Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.

Lose.  If you live where there is no sales tax, you’ll be sad. That’s Alaska, Delaware, New Hampshire, Montana, and Oregon. Since Alaska and New Hampshire have neither tax, their residents don’t care.

Make a choice.  Everywhere else you’ll need to choose the deduction that is best for you.

Sales Tax Tables.  The law asks IRS to "do the best they can to reasonably and accurately implement this statutory provision in order to effectuate the deduction for the 2005 filing season."

SUV Deduction Limits.  An SUV placed in service October 23, 2004 or later has a new limit on first-year write-off.

Who is affected? To "write off" a vehicle you must:

1. use it more than 50% for business, and
2. unless you are self-employed, there’s also a "for convenience of employer" test. It says you must be able to show you could not have gotten the job unless you had a car.

The only question is whether you deduct the vehicle’s cost "over time" or "up front". If you deduct "up front" there are tough recapture rules unless you can pass both tests for the first six years you own the vehicle.

In a nutshell.  Vehicles with "gross vehicle weight" (GVW) over 6,000 pounds were exempt from normal limits on depreciation. They were simply treated as another piece of machinery. As such, you could take "up front" depreciation of up to $102,000 worth of such machinery in the first year. For vehicles placed in service after October 22 the first-year limit is scaled back to $25,000 unless the vehicle’s GVW exceeds 14,000 pounds. (Not even the Hummer is this large).

For example, suppose a $70,000 vehicle is used 100% for business. Answers change depending upon when your business usage begins:

1. Pre-October 23. It is possible to deduct the entire $70,000.
2. October 23-December 31. Combining "up front" write-off with current "bonus" depreciation gives up to $52,000 the first year.
3. 2005 and later. First-year write-off cannot exceed $34,000.

Vehicle Donations. When you donate a car, boat, or RV to charity you may deduct the car’s market value. This depends on he item’s condition and comparable sales. Not so for 2005! Beginning January 1, this is only true if the charity uses the item ithin its charitable function. If they sell it, you may claim no more than they received in the sale. In 2005 their receipt must give your name and social security number, as well as their statement of whether they used or sold the item, and if sold, they must give the gross sale price.

Example, suppose you donate a used car to charity, and similar cars sell for $1,500. In 2004 you need only a receipt-proving the car’s value is your responsibility. But, if you give the car in 2005, suppose the charity sells it wholesale for $500. You need a more detailed receipt, but your deduction will be limited to $500.

Extenders. A September law extended several tax breaks set to expire or already expired. Some of the key provision:

1. Teachers continue to get a deduction for the first $250 worth of classroom supplies without having to itemize deductions. This had expired after 2003.
2. 10% tax bracket was set to be smaller in 2005. Now the bracket will stay as wide.
3. Marriage penalty relief was set to be reduced in 2005. Now the helpful provisions will be in force through 2010.
4. Child credit was set to be reduced to $700 in 2005. The credit will remain $1,000 through 2010. Congress also made it easier to recover the credit for folks whose income is too low to benefit from the credit.

There are also a few miscellaneous provisions.

• Combat pay is not taxable.
  Congress will allow this pay to be used in calculating the refundable Earned Income Credit for low-income families.
• Alternative minimum tax.
  Congress has not revised the alternative minimum tax, but they did extend the provision to limit its impact on large numbers of Americans.

Are you affected?  I would think a few of these items got your attention. If you think you will be affected by any of these changes we both have more work to do in the coming filing season.

Your preparation must be more careful. The sales tax issue may benefit several of you. We don’t even know yet what items IRS may allow us to add to the amounts from the tables. Vehicles and boats were mentioned, but IRS was given an ok to name other items. Be prepared!

My preparation will be more complex as well. I’ll be learning more about the changes before filing time, and will need to ask more questions.

Working together we can keep your tax as low as possible. But we definitely need to help each other.

Copyright 2004
Tax News & Tips, San Diego, CA
www.taxnewsandtips.com