Late Tax Laws Make Changes For 2004
Congress got busy just before the elections. Three new tax laws. Some items affect 2004 tax returns. You need new kinds of information if you want the largest tax savings.
Sales Tax Deduction. If you're over 40 you might recall when we could deduct sales tax. It's baaack - but with a twist.
If you itemize deductions you must choose. Deduct state income tax withheld or paid. Or deduct state sales taxes. Use whichever gives the larger deduction.
Sales taxes will come from IRS tables. They give an allowance depending on income and number of people in the household. Years ago we had such tables. A household of 2-3 people, in the $40,000-$70,000 range got from $300-$700 depending upon the state where you live. If you have records you may claim the sales tax you actually paid.
In Addition if you bought a car or boat (or other items to be named by IRS) you can add this sales tax to your total above.
Win. If you live where there is no state income tax, you'll be happy. That's Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.
Lose. If you live where there is no sales tax, you'll be sad. That's Alaska, Delaware, New Hampshire, Montana, and Oregon. Since Alaska and New Hampshire have neither tax, their residents don't care.
Make a Choice. Everywhere else you'll need to choose the deduction that is best for you.
Sales Tax Tables. Tables did not exist as this was written. The law asks IRS to "do the best they can to reasonably and accurately implement this statutory provision in order to effectuate the deduction for the 2005 filing season."
SUV Deduction Limits. An SUV placed in service October 23, 2004 or later has a new limit on first-year write-off.
Who is Affected? To "write off" a vehicle you must: (1) use it more than 50% for business, and (2) unless you are self-employed, there's also a "for convenience of employer" test. It says you must be able to show you could not have gotten the job unless you had a car.
The only question is whether you deduct the vehicle's cost "over time" or "up front''. If you deduct "up front" there are tough recapture rules unless you can pass both tests for the first six years you own the vehicle!
In A Nutshell. Vehicles with "gross vehicle weight" (GVW) over 6,000 pounds were exempt from normal limits on depreciation. They were simply treated as another piece of machinery. As such, you could take "up front" depreciation of up to $102,000 worth of such machinery in the first year. For vehicles placed in service after October 22 the first- year limit is scaled back to $25,000 unless the vehicle GVW exceeds 14,000 pounds. (Not even the Hummer is this large.)
Example: suppose a $70,000 vehicle is used 100% for business. Answers change depending upon when your business usage begins:
- Pre-October 23. It is possible to deduct the entire $70,000.
- October 23 - December 31. Combining "up front" write-off with current "bonus" depreciation gives up to $52,000 the first year.
- 2005 and later. First-year write- off cannot exceed $34,000.
Vehicle Donations. When you donate a car, boat, or RV to charity you may deduct the car's market value. This depends on the item's condition and comparable sales. Not so for 2005! Beginning January 1, this is only true if the charity uses the item within it's charitable function. If they sell it, you may claim no more than they received in the sale. In 2005 their receipt must give your name and social security number, as well as their statement of whether they used or sold the item, and if sold, they must give the gross sale price.
Example. Suppose you donate a used car to charity, and similar cars sell for $1,500. In 2004 you need only a receipt - proving the car's value is your responsibility. But, if you give the car in 2005, suppose the charity sells it to a wholesaler for $500. You need a more detailed receipt, but your deduction will be limited to $500. Give now!
Extenders. A September law extended several tax breaks set to expire or already expired. Some of the key provisions:
- Teachers continue to get a deduction for the first $250 worth of classroom supplies without having to itemize deductions. This had expired after 2003.
- 10% Tax Bracket was set to be smaller in 2005. Now the bracket will stay as wide.
- Marriage Penalty relief was set to be reduced in 2005. Now the helpful provisions will be in force through 2010.
- Child Credit was set to be reduced to $700 in 2005. The credit will remain $ 1,000 through 2010. Congress also made it easier to recover the credit for folks whose income is too low to benefit from the credit.
- Combat Pay is not taxable. Congress will allow this pay to be used in calculating the refundable Earned Income Credit for low-income families.
- Alternative Minimum Tax. Congress has not revised this complex tax, but they did extend the provisions to limit its impact on large numbers of Americans.
Are You Affected? I would think a few of these items got your attention. If you think you will be affected by any of these changes we both have more work to do in the coming filing season.
Your Preparation must be more careful. The sales tax issue may benefit several of you. We don't even know yet what items IRS may allow us to add to the amounts from the tables. Vehicles and boats were mentioned, but IRS was given an OK to name other items. Be prepared!
My Preparation will be more complex as well. I'll be learning more about the changes before filing time, and will need to ask more questions.
Working together we can keep your tax as low as possible. But we definitely need to help each other.
January - Time To Get Ready!
Preparing your tax information is simple if you spend a few minutes each week. Start collecting the records and keep them in a special place. Review weekly.
Many tax records show up in your January mail. Usually IRS gets a copy too. Don't miss any of these!
- W-2s. Read them carefully. Contact employer if there is a problem. If one is missing after January, contact employer. If you can't locate the employer, you'll need to collect your pay stubs.
- 1099s. There should be a 1099-INT or 1099-DIV for each account which pays interest or dividends. Even tax-exempt interest must be listed on your return.
- Other 1099s. A real estate sale means a 1099-S. Stock sales yield 1099-B. Pensions -1099-R. There are several others. Watch for the words "Important Tax Information Enclosed" on the envelope.
- Form 1098. That's your mortgage interest. Banks use this form. With a private loan, you need the payment book or a statement from lender to verify the amount.
- Other Income. Look for other reports of income. You may see forms for state tax refunds, unemployment income, prizes, gambling wins, or rents you collect. Read each of these carefully.
- Your Records. Check your own records carefully for both income and deductions. Review your calendar and your check register. Look back over the year in your mind. I'd prefer that you have receipts for all expenses, but if you recall paying a deductible expense it should be claimed.
Start compiling the information right away. Don't wait until the day before you give the information to me. Make careful lists of missing items. Write down any questions you might have for me.
Take a few minutes each week to review your information. Short reviews help you remember items you might miss. Your subconscious mind will dig up things you forgot. It's your money at stake here - protect it!
Need To Send 1099s?
You may need to send Form 1099 to someone else. There are two cases:
- Business/Rental. You must report payments for services.
- "Nominee" amounts. If you are named as receiving income, but part or all of the income really belongs to someone else, you are a nominee.
You must issue Form 1099 to the other party by January 31. IRS wants a copy by February 28. There are penalties for not sending them!
Business/Rental. If you paid $600 or more to anyone during 2004 you may need to issue the form. Look at "business" expenses only. Expenses in your personal life are not reported. Nor are payments to a corporation.
Some bills show both labor and materials. If any part of the payment was for services, report the total amount on Form 1099. Paying for merchandise alone doesn't count. Rent you pay to an agent instead of to a landlord is excepted. Look for repairs, painters, consultants, builders and the like.
You need name, address, and Tax l.D. Number for these people. Call them or send Form W-9 to request the information. If someone uses their own name, they should give you their Social Security Number (like 555-55-5555). If they give a business name, you should see an Employer l.D. Number (like 55-5555555).
Nominees. Limits are lower. If you pay $10 or more to another, you must file the form. You file the same type of 1099 as you received, but you are filing as a "middle man".
Getting the Forms. I can help, or you can get forms from IRS. If you need my help, please call early! My tax season is hectic and the deadline comes quickly. You can get forms from IRS at 1-800-829-3676. Or you can download them at www.irs.gov. You need Form 1099-MISC and Form 1096 as a cover sheet.
Read our winter, summer or spring 2004 newsletters.