Jobs Creation Act of 2004
As the
end of the year approaches, it is a good time for you to engage in tax
planning. You know your tax picture
from earlier in the year and you have a pretty good idea of what it will be for
the rest of the year. With that
knowledge in hand, you are now in a position to take various actions that may
save taxes for this year, next year, or both years.
- A recent flurry of tax
legislation may have an impact on your year-end tax planning for
2004. The American Jobs Creation
Act of 2004 allows taxpayers who itemize their deductions to deduct state
and local general sales and use taxes in 2004 and 2005, instead of
deducting state and local income taxes.
This option can benefit taxpayers living in or moving to states with
no income tax and others, depending on their particular situations. If you live in a state without an
income tax, and 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.
- The Jobs Act also
creates tougher deduction and substantiation rules for post-2004
charitable contributions of autos, thereby giving taxpayers an incentive
to donate autos in this year rather than the next. If the charitable organization
immediately sells the auto (for example, to a wholesaler) without making
material improvements to it, your charitable deduction generally can’t
exceed the charity’s gross proceeds from the sale. By contrast, under the pre-2005 rules,
the charitable contribution deduction for a noncash contribution
(including auto) generally equals the fair market value of the contributed
property. Thus, if you are
thinking of donating an auto (or boat or plane), you’ll probably wind up
with a bigger deduction if you make the gift this year rather than next
year.
- 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. A special deduction for
educators who incur teaching-related expenses has been extended, too
(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.
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 can take once we meet with you to tailor a particular plan. 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.
- 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.
- You may be able to take
steps to convert investment income taxable at regular rates into
qualifying dividend income taxes at a top rate of 15%.
- 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 in service before year-end to get a 50%
bonus first-year depreciation allowance, plus regular depreciation
deductions on the remaining adjusted basis. 2004 is the last year for the bonus.
- Business clients also
should 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.
- Those facing a penalty
for underpayment of estimated tax may be able to eliminate or reduce it by
increasing their withholding.
- 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 who are
contemplating marriage or divorce need to watch out for how marriage
penalties could affect them.
- Those receiving Social
Security benefits should consider taking a number of steps to reduce or
eliminate tax on their benefits.
- 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.
These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.
