MORE RECENT TAX LAW CHANGES

by Andrew D. Schwartz, CPA

A few weeks after signing the Working Families Tax Relief Act of 2004 into law (discussed in our November, 2004 newsletter), President Bush signed the American Job Creations Act of 2004 on October 22^nd.  Here are some of the provisions from that Tax Act that might affect you:

• New Rules For Donating an Auto:  Effective January 1, 2005, the amount you can deduct when donating a vehicle is limited to what the charitable organization sells it for, and not its “Blue Book” value.  The charity is required to provide you with this information. If donating a car is in your plans for 2005, consider doing so before December 31, 2004.  (See below to find out more about this new rule.)

• Sales Tax Deduction:  It hasn’t been since the 1986 Tax Act that you could deduct your sales taxes paid.  For 2004 and 2005, you can choose between deducting either your state and local income taxes or your sales taxes paid during the year.  You’ll base this new deduction on actual receipts or on IRS tables.

• Reduced Hummer Deduction:  For purchases of SUVs with gross loaded weight in excess of 6,000 pounds made after October 22^nd, the maximum write-off you can claim is limited to $25,000 multiplied by the vehicle's business use percentage.

• 179 Extension:  You now have through 2007 to write-off up to $100,000 of equipment purchases made during the year.  Previously, the 179 deduction was scheduled to decrease to $25,000 in 2006.

With President Bush winning the November 2^nd election, and a Republican Congress in place, expect to see lots more changes to our tax code during the next four years.

New Rules for Deducting Vehicle Donations

As part of this Tax Act, Congress has provided the IRS with another means of ensuring that taxpayers don't exaggerate their deductions.

In the past, people who donated a vehicle worth less than $5,000 were allowed to determine the fair value of the donated car themselves, and usually based the deduction on the vehicle's "Blue Book" value.  Only those taxpayers who wanted to deduct more than $5,000 were required to obtain a written appraisal to attach to their tax return.

Effective January 1, 2005, basing the value of your donated vehicle on the Blue Book value is no longer allowed.  Instead, the deduction you can claim is limited to what the organization sells the vehicle for.  The charity has 30 days from the date of sale to report that information to you.

Are there any exceptions?  Of course.  If the charity intends to use the vehicle for its own use, or refurbish the vehicle before selling it, the old rules apply.  That means that you can once again determine the auto's fair market value.  The only catch is that the charity must provide you with certification of its intentions.   And don't forget that you need to obtain a written appraisal if you want to claim a deduction in excess of $5,000.

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8 STEPS TO CUT YOUR 2004 TAX BILL  

by Andrew D. Schwartz, CPA

It's not too late to cut your 2004 tax bill.  Prior to December 31^st:

1. Increase your 401(k) and 403(b) contributions if you haven't been contributing at the maximum rate all year.  This year you can put away up to $13,000 ($16,000 if 50 or older) into your 401(k) or 403(b) plan.  If you’re self-employed, consider setting up a Solo 401(k) by 12/31.

2. Take a look at your withholding and instruct your employer to withhold additional taxes if you haven’t had enough taxes withheld during the year to avoid getting hit with an underpayment penalty.

3. Consider selling your non-retirement investments that have decreased in value since your capital losses can offset other capital gains realized during the year (including from your mutual funds), and then can be used to offset up to $3,000 of wages and other income.

4. Send in your January, 2005 mortgage payment early enough so it will be processed prior to 12/31/04.  By sending in your payment a few weeks early, you can deduct the interest portion of that payment a full year earlier.

5. Clean out your closets and donate your clothing and household items to a charitable organization since "non-cash" contributions are deductible if you itemize.  Don’t forget to get a receipt.  For gifts of money, making your donation by credit card before December 31st allows you to deduct the donation on this year's return, even if you don't pay your credit card bill until 2005.

6. Pre-pay your projected state tax shortfall if you'll be itemizing your deductions and won't be subject to the alternative minimum tax.

7. Pay off your medical bills if your total medical expenses exceed 7.5% of your income and you itemize.

8. Evaluate whether you'll save any taxes by postponing 2004 income or deductions into 2005 or by accelerating 2005 income or deductions into 2004.

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TAX AND FINANCIAL PLANNING CALENDAR FOR DECEMBER, 2004

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2004 & 2005 TAX FACTS

• For 2004 the standard deduction for a single individual is $4,850 and for a married couple is $9,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses. Our March, 1998 newsletter addressed the issue of itemizing your deductions.
• For 2004, the personal exemption is $3,100. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  
• The maximum earnings subject to social security taxes will be $90,000 for 2005 up from $87,900 in 2004.
  
• The standard mileage rate is $.375 per mile for 2004, and will increase to $.405 per mile for 2005. Deducting automobile expenses was addressed in our March, 1996 newsletter .
  
• The maximum annual contribution to a 401(k) plan or a 403(b) plan is $13,000 for 2004.  And if you'll be 50 or older by December 31, 2004, you can contribute an extra $3,000 into your 401(k) or 403(b) account this year.  For 2005, you can contribute $14,000 ($18,000 if 50 or older) into your 401(k) or 403(b) account at work.
• The maximum annual contribution to your IRA is $3,000 for 2004.  And once you turn 50, you can contribute an extra $500 into your IRA this year.  For 2005, you can contribute up to $4,000 ($4,500 if 50 or older) into your IRA.

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copyright - 2004 - The MDTAXES Network

Tax and financial planning calendar for December, 2004


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