As the end of the year approaches, it is a good time for you to engage in tax planning. The following should help the process of taking various actions that may save taxes for this year, next year, or both years.
On October 22, 2004, the President signed into law the American Jobs Creation Act of 2004. Following are highlights of some of the provisions therein.
New itemized deduction for state and local general sales taxes allows taxpayers who itemize their deductions to deduct either state and local income taxes or state sales taxes in 2004 and 2005. Individuals who take the sales tax option may deduct their actual sales taxes or use IRS-published tables. This change will primarily benefit taxpayers living in states with sales tax but with no or limited individual income taxes.
Even individuals who live in states that impose both income taxes and sales taxes may be affected. For example, residents of states with an income tax and sales taxes should determine whether their sales taxes for a particular year will exceed their income taxes for that year. If you plan to make a major non-business purchase such as a new auto toward the end of 2004, you should consider whether you would benefit more from delaying the purchase until 2005. In some cases, you may want to bunch major purchases into the same year so that sales and use taxes for that year will exceed the income taxes paid for that year. By doing this, you can deduct the sales and use taxes in one year and income taxes in another year.
You should also determine if you will benefit from taking the standard deduction in one year and itemizing deductions in the other year. If so you should make the purchase in the year you would itemize to get the full benefit of the deduction for sales and use taxes.
Tougher rules will apply to charitable deduction for autos for post-2004 contributions. Thus, if you are thinking of donating an auto, you will probably wind up with a bigger deduction if you make the gift this year rather than next year.
Special rules allow faster write-offs of certain restaurant property improvements made after 10/22/04 and before 1/1/06.
The Working Families Tax Relief Act of 2004 extends certain credits through 2005, keeps the child tax credit at $1,000 through 2009, and extends marriage penalty relief. The special deduction for educators who incur teaching-related expenses has been extended through 2005. On the other hand, "bonus" first-year depreciation was not extended by recent tax legislation. Thus, it generally won't be available for assets bought and placed in service after 2004.
ACTIONS TO CONSIDER:
We have compiled a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply to everyone, but many clients will benefit from numerous items. We can narrow down the specific actions that you should take once we meet with you to tailor a particular plan to your situation. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:
- Increase the amount you set aside for next year in your employer's health flexible spending account so that you can get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
- You may be able to take steps to convert investment income taxable at regular rates (e.g., interest income) into qualifying dividend income taxed at a top rate of 15%.
- If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale, it may be advisable for us to meet to discuss how you can best coordinate timing your gains and losses to minimize tax on your gains and maximize the tax benefit from your losses.
- It may be advantageous to try to arrange with your employer to defer your bonus until 2005.
- If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
- Consider using a credit card to prepay expenses that can generate deductions for this year.
- You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
- Business clients should consider putting new equipment into service before year-end to get a 50% bonus first-year depreciation allowance, plus regular depreciation deductions on the remaining adjusted basis. Remember 2004 is the last year for the bonus depreciation.
- Business clients should also consider making expenditures that qualify for the $102,000 business property expensing option.
- You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
- You may be able to save taxes this year and next year by applying a bunching strategy to "miscellaneous" itemized deductions, medical expenses and other itemized deductions.
- Self-employed individuals should consider setting up a self-employed retirement plan.
- You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $11,000 each year to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.
- Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing their withholding.
- Those who are contemplating marriage or divorce need to watch out for how marriage penalties could affect them. Marriage penalty relief has been extended for the 15% tax bracket and the standard deduction, but other marriage penalties remain.
- Those receiving Social Security benefits should consider taking a number of steps to reduce or eliminate tax on their benefits. Workers may want to ask their employers to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won't cause an AMT problem).
- Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2004 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
- Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2005, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.
- The 2003 Tax Act increased the 30% bonus depreciation on new assets (equipment) to 50%, only through December 31, 2004. Also available to both landlords and tenants (except when the lease is between related parties), leasehold improvements made before December 31, 2004 qualify for immediate 50% write-off. The improvements must be to the interior of the building, cannot involve an expansion and the building must be at least three years old.
- New - SPORT UTILITY VEHICLE (SUV) EXPENSING DEDUCTION REDUCED Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (weighing over 6,000 pounds) placed in service after October 22, 2004. The American Jobs Creation Act of 2004 places a $25,000 limit on the Section 179 deduction for each SUV. The business would depreciate the remaining cost which may be eligible for the 50% bonus depreciation that ends this year, 2004.
If you would like to schedule a planning meeting or have questions please contact us.