Writing Off Your SUV, Truck, or Van
IRS published new information on a controversial topic in June. If you use a vehicle for business you are entitled to deductions. You want the largest deductions allowed.
Two methods of deduction exist. (1) A "cents-per-mile" method for operating costs and depreciation. (2) You may track operating costs and deduct them, plus depreciation. For years the mileage method gave generous deductions for most cars. As car prices rose, the depreciation in Method 2 became more attractive. Matters were complicated in 1984. Congress attacked "luxury cars'" and placed sharp limits on depreciation. All vehicles costing more than about $16,000 are treated identically.
Here's an example:
$30,000 Vehicle. Here are the first 3 years of depreciation allowed for a $30,000 business vehicle:
|drops to $3,060 in 2005
If the vehicle is not deemed to be a "passenger car" the limits don't apply. It's "business equipment" and as much as the entire $30,000 can be written off in the first year! (The law allows up to $102,000 worth of equipment to be written off yearly.) Notice the words "up to" - we may choose to write off any part of the $30,000, then depreciate the rest.
What's a Passenger Car? Any 4- wheeled vehicle 6,000 pounds or less. Special-use vehicles like taxis and hearses were excepted. Until new IRS regulations the only way around the limits was the 6,000- pound rule. Now IRS has identified "qualified nonpersonal use trucks and vans" as another exception.
Exception 1 - 6,000 lb. GVW. This is an engineering standard, not the vehicle's weight. The figure is printed on edge of the driver's door of any vehicle. I found more than 40 production vehicles over the limit at www.edmunds.com. Over half the SUVs on the road fall into this class. This is what sparked the controversy: A $40,000 sports car has limited depreciation. A $40,000 SUV over 6,000 pounds GVW in not limited. Congress talked for more than a year of limiting the writeoff on SUVs. So far no law changes have been passed.
Exception 2 - Qualified Non- personal Use Vehicle. IRS says they are vehicles which, by reason of their design, are not likely to be used for more than minimal amounts of personal use. For example, a truck or van specially modified to include only a front bench for seating, or with permanent shelving or racks to carry tools or supplies might qualify. Warning: IRS mentions painting a vehicle to display the company name or advertising - this does not mean you avoid limits simply by painting a business name on the vehicle! In the actual context painting is mentioned in addition to the other special modifications above.
Retroactive Treatment. This new exception applies to vehicles first placed in service July 6, 2003 or later. If we limited depreciation on such a vehicle on your 2003 return we should consider whether an amended return is worth the effort.
No Free Lunch. Please remember, there are other consequences when you depreciate a vehicle. We must track the vehicle for 6 tax years! If business use falls to 50% or less we may be forced to recapture some of your deductions. Disposing of the vehicle within those 6 tax years can bring up recapture as well.
Can You Guess Your 2004 Tax Bill
2004 is winding down. By now you should have a reasonable idea of how your tax return will look. If you don't maybe we need to talk.
At year-end both you and I should have a good idea of your refund or how much you owe. If either of us is surprised when we do your return, one of us was asleep at the wheel!
I can help you anticipate your taxes if I know about recent changes in your life. We're a team. Help me. Let me know what's going on.
Big changes in deductions or income can knock your plans for a loop. If you buy or sell a property, let me know now - not in February. A new baby can save over $2,000 in taxes. When an older child moves out, you can lose almost as much! Refinancing your home can cause large swings in interest deductions.
I want to help keep your income tax as low as possible. There may be steps you can take to minimize the tax impact of a change.
Q & A
Here are some of the common tax questions that keep popping up.
Q. IRA Contribution I don't work, but my spouse does. Can I contribute $3,000 to an IRA?
A. Probably. Assuming you file a joint return you may contribute $3,000 to an IRA as long as there is at least $3,000 of earned income between you and spouse. But I suspect you are really asking if you may deduct the contribution. This depends upon whether spouse has a pension plan at work. If there is no pension, then each of you may deduct an IRA contribution. If there is a pension, there's a different rule for each of you. Spouse is an "active participant" in a pension and the ability to deduct an IRA is phased out over an income range of $65,000 to $75.000. You are not an active participant and your deduction begins to phase out when the joint income reaches $150,000.
Q. Home Sale. We sold a home we've owned for years, but it's been a rental the past two years. May we still claim a $500,000 exclusion?
A. Almost Certainly. I hear questions similar to this on a regular basis.
But I must point out there is no $500,000 exclusion - on a joint return each of you may qualify for the $250,000 exclusion allowed by the law. The total is $500.000 but there are two exclusions claimed.
The rules involve 3 tests:
(1) In the 5 years prior to the sale you must own the property for at least 2 years. You pass.
(2) In the 5 years prior to the sale this must have been your principal residence for at least 2 years. Since you only rented it 2 years you pass.
(3) In the 2 years prior to the sale you may not have claimed an exclusion on another property. You probably pass this one.
If you pass these tests you may exclude the first $250,000 of gain. Same for your spouse. The same 3 tests are used for any home sale.
One small problem - depreciation you claimed while your property was rented can't be excluded. Your gain is split into two parts. Gain from the property's appreciation qualifies for exclusion. Gain from depreciation is recaptured and taxed, but the tax rate cannot exceed 25%.
Q. Sold a Collectible. Dad passed away a few months ago. I found 6 old movie posters in his attic. A friend helped sell them for $1,500 through an online auction site. Is this taxable?
A. Probably Not. You sold an inherited property. The law says your "cost" for the items is their value on the date of your father's death. It is unlikely their value changed in a few months. (Such things can happen - Arnold Schwarzenegger collectibles took a big jump after California elected Arnold as Governor!)
Were these posters you bought years ago at a low price the situation changes. Now you have a long-term capital gain equal to your sale price reduced by sale costs and listing fees at the auction site, and less your original cost for the posters.
Q. Withholding Form W-4. It was suggested that I mark my W-4 as if I am married and have 2 children. I'm single and have no children. Can I do this??
A. You Can Do It. The Form W-4 is a statement to your employer, not to the IRS. It asks how you want withholding computed. If we projected that your tax bill will be similar to that of a married couple with 2 children, that's the ideal way to calculate your own withholding. Marking the W-4 in this way simply directs employer to use the table which gives the desired result. Go ahead and do it.
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