Tax & Financial News for October 2004
NEW TAX HIGHLIGHTS:
Congress passed two new tax laws in the autumn of 2004: "The Working Families Tax Relief Act of 2004" (WFTRA)and "The American Jobs Creation Act of 2004" (AJCA). The new laws will have an impact on both your personal and business tax planning.
The Laws extend some of the popular tax benefits for families and reinstate several business tax provisions that had expired ore were due to expire soon. The laws also create new tax breaks for both individuals and businesses.
NOTE: You can click on the "PROVISIONS" link to see all applicable changes, or you can click on the invididual line item to see that specific item's details
Copyright © 1987 - 2006 A. Harold Davis, CPA
Itemized Deduction for Sales Taxes
For tax years beginning in 2004 and 2005, individuals may elect to claim an itemized deduction for state and local general sales and use taxes, instead of deduction state and local income taxes. this is especially beneficial to taxpayers in states that do not have an income tax.
Taxpayers making the election to deduct their sales tax may claim either (1) the actual sales and use taxes paid during the year, or (2) an amount taken from an IRS table. Taxpayers may add to the table amounts any actual amount of sales taxes paid on the purchase of motor vehicles, boats, and other items specified by the IRS.
The child tax credit, for each qualifying child under age 17, was due to decrease to $700 in the year 2005, from the present level of $1,000 for the year 2004. under the new law the tax credit will remain at $1,000 through the year 2010.
The new WFTRA has standardized the definition of a "child". Previously, the definition of a child was different for child tax credit, dependency exemption, earned income credit, dependent care credit, and head of household filing status. The definition has now been standardized
WFTRA repeals the scheduled reduction in the 10% tax bracket amounts for 2005 to 2007. The 10% tax bracket, for 2005 is estimated to apply to the first taxable income as follows:
$7,300 for single taxpayers and married couples filing separately,
$14,600 for joint filers, and
$10,450 for head of households filers.
Also, the threshold amounts are to be adjusted for inflation for the years 2006 through 2010.
Note: Almost all taxpayers gain some benefit from the higher 10% bracket amounts.
The marriage penalty is the quirk in the tax law that often has married filing joint filers paying more tax than two single people earning the same incomes. This was eliminated in the 2001 and 2003 tax law changes, and the standard deductions for joint tax payers was to be 200% of the single filer. However, this relief provision was to revert to a lower percentage in 2005 and slowly rise to the 200% level in the year 2009. WFTRA increases the standard deduction to the 200% for the years 2005 to 2008.
WFTRA repeals the scheduled 2005 reductions in the exemption amount, and keeps the exemption amount at $58,000. For more information on this and how this section of the tax law can impact you, please contact our office and we would be most happy to review your specific tax situation for the upcoming year.
In general, damages from legal settlements, for other than for personal injury or sickness, are included in income. However, the costs of pursuing these type of claims were deductible as a miscellaneous itemized deductions, subject to the 2% of Adjusted Gross Income(AGI), meaning that you had to itemize deductions and only those expenses over the 2% of AGI would be deductible. Under AJCA, the legal fees and court costs incurred in connection with an unlawful discrimination claim that are paid after the date of the law's enactment are deductible as an "above-the-line", before AGI, deduction. This means that these costs are deductible even if the taxpayer does not itemize deductions.
The IRS has long felt that donate property to charities are taking advantage of certain loopholes in the tax laws. Under the law, the deduction amount generally equals the fair market value of the property donated, such as a car. Under AJCA, the rules are tightened up for contributions made after 2004. The charitable contribution deduction are limited for donations of motor vehicles, boats and planes for which the value exceeds $500, based on the charity's use of the property, and requires more detailed documentation.
If the charity sells the donated property, without having used the property or materially improving it, the deduction is limited to the charity's gross proceeds from the sale of the property. This means that the charity must provide the donor, and the IRS, a contemporaneous written acknowledgment certifying that the property was sold and identify the amount of the sales proceeds.
If the charity retains the property, then the donation can be based on fair market value. However, the charity must certify the intended use of the property and the intended duration of the use.
The charity's use must be significant, which means the charity must actually use the property to substantially further the charity's regular activities. Also the use be more than incidental, based on frequency and duration of use.
The basic premise behind nonqualified arrangements is to allow executives to defer current income to later tax years. Congress, though, viewed some of these arrangements as going too far in giving executives access to deferred compensation. So, AJCA tightens up the rules regarding when income deferral will be allowed. The major change will make it much more difficult for a participant to take an early distribution from the plan without incurring interest and a penalty. It is essential that employers and participants review their nonqualified deferred compensation arrangements to ensure the new rules are met. For more details about these new rules and their effect on your plan, contact our office.
Elementary and Secondary school teachers, counselors, and principals are now eligible through the year 2005 to take up to $250 in out-of-pocket expenses for classroom materials as a deduction from gross income. This is an extension of the current tax provisions.
Copyright © 1987 - 2004 A. Harold Davis, CPA
AJCA provides a new tax deduction for a percentage of business income earned from manufacturing and certain other production activities occurring in the United States. The deduction is available to regular C corporations, S corporations, partnerships, sole proprietorships, cooperatives, and estates and trusts. The deductions equals a percentage (3% for 2005 and 2006) of the lesser of :
the deduction is also limited to 50% of the wages paid by the taxpayer during the calendar year that ends in the tax year. The deduction is not allowed for gross receipts from the sale of food or beverages at a retail establishment, or the transmission or distribution of electricity, natural gas, or potable water.
Obviously, this deduction is a very complex. For more details, and guidance about this new deduction and its effect on your business, contact our office.
Under Section 179 of the Internal Revenue Code (IRC), taxpayers may elect to deduct the cost of a limited amount of eligible property purchased for use in a trade or business, instead of writing off the property's cost over it depreciable life. In 2003, the annual dollar limit deductible under this section of the IRC was increased from $25,000 to $100,000, adjusted for inflation. For the year 2004, the limit is $102,000. For the year 2005, the limit is estimated to be $105,000. Also, the higher limits are extended through 2007.
However, with this extension, of the years for this additional expensing, comes the unfavorable reduction in the limit for the purchase of SUV to $25,000. Also, AJCA redefines an SUV for these purposes. Contact us regarding these new definitions for SUV's and the specific limitations.
AJCA provides a new statutory 15-year cost recovery period for qualified improvements made to leased property place in service after the date of enactment of the Act, and before 2006.
Under AJCA, a corporation can elect to deduct up to $5,000 of organizational expenditures (fees for legal and accounting services, state incorporation fees, etc.) incurred in setting up the company. The remainder of organizational expenditures can be deducted ratably over 15 years. The $5,000 limit is reduced dollar-for-dollar once the total organizational expenses exceed $50,000. a similar provision applies to start-up expenses (advertising, pre-operational salaries, etc.).
S Corporation Reforms - The major provision is the increase of eligible shareholders from 75 to 100.
Exclusion from Wages for Statutory Stock Options - AJCA now provides a specific exclusion from FICA and FUTA wages and from income tax withholding for statutory stock option income.
Extension of Various Tax Credits - WFTRA extends several business tax credits that either had expired, or were to expire: Research Credit, Work Opportunity Credit, Welfare to Work Credit, Credit for Qualified Electric Vehicles, and Credit for Producing Electricity from Renewable Resources.
For more details on any of these other provisions or applicable credits, contact our office.
Copyright © 1987 - 2010 A. Harold Davis, CPA