American Jobs Creation Act of 2004
On October 22, 2004, President Bush signed the American Jobs Creation Act of 2004. The effective dates of these provisions vary. Some provisions are retroactive, some become effective on the date the President signed the bill, some take effect next year, and still others are not implemented until 2006.
Listed below are some of the more significant provisions of the American Jobs Creation Act of 2004:
Itemized deduction for state and local sales taxes. For tax years 2004 and 2005, the Act allows taxpayers who itemize their deductions to deduct state and local sales taxes, instead of taking an itemized deduction for state and local income taxes. Taxpayers who make this election may either:
(a) deduct their actual sales taxes, or
(b) use the IRS-published tables and then add to the amount from those tables the actual amount of their sales tax for motor vehicles, boats and other items specified by IRS.
Congress has noted that, because IRS is in the process of finalizing tax forms for 2004, and developing the tables will require a significant amount of time and effort, it anticipates IRS will do the best it can to implement the new rules for the 2004 tax filing season.
Note: Although the Act is silent on the subject, one must assume that the new sales tax deduction (like the state and local income tax deduction) will have to be added back to adjusted gross income for purposes of the alternative minimum tax (AMT).
New rules for certain charitable donations. The Act generally limits the deduction for motor vehicles, boats and airplanes contributed to charity after 2004 for which the claimed value exceeds $500, by making it dependent upon the charity’s use of the vehicles and imposing higher substantiation requirements.
If the charity sells the vehicle without any intervening “significant use” or “material improvement”, the donor’s charitable deduction can’t exceed the gross proceeds from the sale.
A deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution by a written acknowledgement from the charitable organization. The charity is also required to file a copy of the acknowledgement with the IRS.
The written acknowledgement must be provided within 30 days of sale of a vehicle that is not significantly used or materially improved by the charitable organization, or, in all other cases, within 30 days of the contribution.
New rules for sale of a principal residence acquired in a like-kind-exchange. For sales or exchanges after October 22, 2004, if a taxpayer acquires a principal residence in a like-kind exchange, in which any gain was not recognized, the taxpayer must now own the property for five years (formerly two years) from the date the property was acquired, for the home sale exclusion rules to apply.
Above-the-line deduction for certain legal fees. For fees and costs paid after October 22, 2004, with respect to any judgment or settlement occurring after that date, the Act provides that attorney’s fees and court costs incurred in connection with an unlawful discrimination claim, certain claims against the federal government, or a private cause of action under the Medicare Secondary Payer statute, are deductible in arriving at adjusted gross income.
Enhanced expensing limits extended for two years. The Act extends for an additional two years the increased Section 179 deduction, and the election to revoke the election on a prior year’s return. The enhanced expensing rules were scheduled to expire at the end of 2005, which means they now continue to apply through 2007 tax years.
The maximum annual expensing for tax year 2004 is $102,000.
New limits on expensing SUVs. For property placed in service after October 22, 2004, the Act limits the ability of taxpayers to claim deductions under Code Section 179 for certain vehicles to $25,000 (formerly $100,000). The change applies to sport utility vehicles rated at 14,000 pounds gross vehicle weight or less.
Working Families Tax Relief Act of 2004
The Working Families Tax Relief Act of 2004, which grew out of an effort to defer scheduled reductions in tax breaks for individuals, turned into a vigorous extenders and simplification package.
Listed below are some of the more significant provisions of the Working Families Tax Relief Act of 2004.
Archer MSAs extended through 2005. Under prior law, no new contributions could be made to Archer Medical Savings Accounts (MSAs) after 2003, except by or on behalf of individuals who previously had Archer MSA contributions, and by employees who are employed by a participating employer. The Working Families Act extends Archer MSAs through 2005.
Above-the-line educators’ deduction extended. The IRS is advising teachers to save their receipts for purchases of books and classroom supplies. Such out-of-pocket expenses could lower their taxes. The deduction is available for eligible educators in both public and private schools.
To be eligible a person must work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide. Up to $250 in qualified expenses may be deducted, even if the educator does not itemize his or her deductions.
Last year (2003) was scheduled to be the last year for this deduction. The Working Families Act extended this deduction for tax years 2004 and 2005.
No rollback in 2005 AMT exemption. In recent years, Congress has provided a measure of relief from the Alternative Minimum Tax (AMT) by raising the AMT “exemption amounts,” thereby reducing the likelihood of an AMT liability. However, this partial relief was set to expire for tax years beginning after 2004, and the exemption amounts were scheduled to revert to the lower amounts allowed under prior law. The Act preserves this partial relief from the AMT by extending the higher exemption amounts through 2005.
Child Tax Credit stays at $1,000. The refundable child tax credit, which is $1,000 per child for 2004 but was scheduled to drop in 2005, will stay at $1,000 through 2010.
New for 2004: For purposes of the child tax credit, under the Working Families Act any amount excluded from gross income under Code section 112 (combat pay) is treated as earned income.
Election to treat combat pay as earned income. The Working Families Act allows taxpayers to elect to treat combat pay that is excluded from gross income under Code section 112, as earned for purposes of the earned income credit. This election is available for any tax year ending after October 4, 2004, and before January 1, 2006.
Health Savings Accounts (HSA)
New for 2004, a Health Savings Account (HSA) is a trust created or organized in the U.S. exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an “eligible individual” who is covered under a high-deductible health plan (and who is not covered under a nonhigh-deductible health insurance or medical reimbursement plan). Amounts remaining in the HSA at year-end are not forfeited but instead carry over to the next year.
Within limits, an above-the-line deduction is allowed for an individual’s contribution to an HSA. Employer contributions to an HSA on an employee’s behalf are neither included in the employee’s federal income, nor subject to employment taxes.
Caution: Some states do not follow the same tax treatment for health savings accounts as the treatment under federal law.
Any individual can establish an HSA with a qualified trustee (insurance company, bank or third party administrator), in much the same way that individuals establish individual retirement accounts with qualified IRA or Archer MSA trustees or custodians. No permission or authorization is required from the IRS to establish an HSA. In addition, an eligible individual who is an employee may establish an HSA with or without his/her employer’s involvement.
Year-end tax planning tips
Individuals may also want to postpone income until 2005 and accelerate deductions into 2004 to lower their tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2004 that are phased out over varying levels of adjusted gross income. These could affect eligibility for Roth-IRA contributions, eligibility for conversion of traditional IRAs to Roth-IRAs, child credits, higher education tax credits, and deductions for student loan interest.
Take advantage of a loss: Some investors who have realized a loss in their portfolio during the tax year, may benefit by carefully structuring capital gains against losses. But remember, to avoid the “wash sale” rule, you cannot buy substantially identical stock within the period that begins 30 days before and ends 30 days after the sale of the loss stock.
Understand the potential tax consequences of certain mutual fund purchases: If a fund’s investment portfolio has done well in a given year, the fund may make a large distribution near the end of the year because of gains that it has realized. These will be taxed to the investor as ordinary dividend to the extent of short-term gains, and capital gain distribution to the extent it represents long-term gains of the fund.
In general, investors should buy mutual fund shares after the record date for a shareholder distribution, particularly the large year-end capital gain distribution that many mutual funds make.
Bunching deductions: Some taxpayers who file Schedule A, Form 1040, may do well to “double up” on their itemized deductions. Essentially, individuals can either pre-pay or defer their deductible expenditures to generate almost twice the amount of itemized deductions every-other-year. For “opposite” tax years (when the taxpayer has relatively few itemized deductions), the taxpayer is still allowed to use the standard deduction.
Note: Taxpayers who are subject to the alternative minimum tax (AMT) may not find “double up” itemizing helpful since state income taxes, real estate taxes, and “miscellaneous deductions” are deductible for regular income tax purposes but not for AMT purposes.
Take advantage of bonus depreciation: Business owners may want to take advantage of the 50% bonus depreciation by putting new equipment in service before year-end. This year (2004) is the last year for the bonus allowance.
Use flexible spending accounts: Because a cafeteria plan may not allow participants to defer compensation from one year to the next, employees are reminded to submit claims to the employer for eligible expenses before the end of the year. This forfeiture rule is commonly referred to as the use-it-or-lose-it rule.
Make use of the annual $11,000 gift tax exclusion: Taxpayers can save gift and estate taxes by making sheltered gifts before the end of the year. For 2004, taxpayers can give $11,000 per year, per individual. Under the rules for gift splitting, consenting spouses can use their combined annual exclusions to transfer up to $22,000 per year to any one person.
Note: If the gift is made by ordinary check to take advantage of the annual exclusion amount, it is not considered a completed transfer until the check is cashed.
von Briesen & Roper Legal Update is a periodic publication of von Briesen & Roper, s.c. It is intended for general information purposes for the community and highlights recent changes and developments in the legal area. This publication does not constitute legal advice, and the reader should consult legal counsel to determine how this information applies to any specific situation.