October, 2004 Tax Newsletter

A Look at the Two October, 2004 Tax Laws

For the fourth and fifth times in four years the President has signed into law some big tax cuts.  On October 4th_th he signed the Working Families Tax Relief Act of 2004, and on October 22nd he signed the American Jobs Creation Act of 2004.  How much you'll save in taxes depends on your filing status, family circumstances and business situation - and how you maximize benefits through careful planning. This newsletter is intended to help you identify which parts of the new tax cut packages can benefit you. It also explains how timely tax planning can enhance these benefits. Especially now, as we enter the year-end tax planning season, the new tax law comes at an ideal time to cut your tax bill. 

Working Families Tax Relief Act of 2004

Overview  

The new law extends two sets of expiring provisions: one for individuals and one for businesses. Without these extensions, individual taxpayers would be paying a lot more in taxes in 2005 and subsequent years than in 2004.  Business taxpayers receive even more immediate tax relief.  The business tax breaks, which have been extended into 2005 by the new law, had already expired for the most part at the end of 2003.  This law, which makes over 175 changes to the Tax Code, began as a tax bill to extend just one tax provision.  We come to expect this from Congress.

Tax relief for individuals: Here are the big changes for most individual taxpayers: 

·         Parents of children under 17 can continue to claim a $1,000 child tax credit - for every child - through 2010. Without the new law, the child credit would have dropped to $700 per child in 2005.

·         Married taxpayers filing jointly will continue to benefit from full marriage penalty relief. Through 2010, joint filers pay tax at double the single rate for the 15 percent rate and for the standard deduction. For 2005, this means the high end of the 15 percent tax bracket will be $59,400 (rather than $53,450 if Congress hadn't passed the new law). The change in the new law in the standard deduction for married couples filing jointly is equally as dramatic -- $10,000 in 2005 instead of $8,700.

·         The 10 percent tax bracket's upper limit for married taxpayers filing jointly stays at $14,000 ($14,600 inflation indexed) for 2005 rather than dropping to $12,000. For single taxpayers, it stays at $7,000 rather than dropping to $6,000.

·         The alternative minimum tax (AMT) exemption amount remains at $42,250 for single individuals and $58,000 for married couples for one more year. Taxpayers can also use the personal nonrefundable credits against AMT liability for one more year.

Tax relief for businesses:   The new law extends over 20 tax breaks for business taxpayers back to January 1, 2004 and forward to December 31, 2005. These tax breaks benefit almost every business. 

Some of the more popular extensions apply to the research credit; work opportunity tax credit; welfare-to-work tax credit; charitable contributions of computer technology and equipment used for educational purposes; classroom expenses of school teachers; suspension of the 100-percent-of-net-income limitation of percentage depletion; credit for qualified electric vehicles; deduction for qualified clean-fuel vehicle property; and Archer medical savings accounts. 

Consequences  

The tax planning implications of the new law for individuals are as broad as the scope of the law itself. For example, individuals going through a divorce know that the right to claim the child tax credit is very valuable. For married couples who both work, and whose incomes are about equal, marriage penalty relief in the new law comes as a welcome perk for 2005.  However, year-end strategies for accelerating or deferring income and doing the opposite for deductions remain critical for many couples since the marriage penalty is not eliminated in any of the tax brackets above the 15 percent bracket. 

Finally, on the individual tax planning side, the tax breaks in the new law require most people to take a very close look at the AMT. This is especially critical before the end of the year so that steps can be taken to reduce your AMT liability. You may be liable for AMT because the new law could reduce your regular tax liability and at the same time increases your liability for AMT. 

Businesses have an easier time reacting to the new law. For each of the extended credits or deductions, businesses should evaluate if they qualify for any of the extended credits or deductions, such as the work opportunity credit, and then take steps to make sure they qualify in 2004, 2005 or in both years. These steps include not only evaluation of income and expenses, but also whether proper substantiation procedures are in place. 

American Jobs Creation Act of 2004

Overview

As was the case with the new law just discussed, this bill began as a debate in Congress on how to proceed with legislation to repeal a certain provision in the law and ended up with 274 changes to the Tax Code.  These went well beyond addressing the original issue and creates billions of dollars of tax breaks for individuals and businesses.  It is a tax neutral bill, which means the tax breaks are offset by revenue generating provisions. 

More Significant Provisions

·         Limits the amount of the cost of an SUV that may be expensed in a single year to $25,000 for property placed in service after October 22, 2004.

·         Treats qualified leasehold improvements and restaurant property placed in service after October 22, 2004 and before 2006 as 15-year recovery property depreciated on a straight line basis.

·         For 2004 and 2005, allows taxpayers to deduct state and local sales taxes instead of state income taxes.  Taxpayers may deduct their actual sales taxes or use IRS-published tables.

·         For options exercised after October 22, 2004, excludes certain stock options and stock purchase plans from employee wages for payroll and income tax withholding purposes.         

·          For tax years beginning after 2004, provides a 9% deduction (equal to a 3% tax rate cut) on all manufacturing and certain other domestic production activity undertaken in the U.S., whether it is exported or not.  The deduction is available to C corporations, S corporations, partnerships, sole proprietorships, estates, and trusts and, subject to an adjustment, is allowed for alternative minimum tax (“AMT”) purposes.  The deduction is phased in over five years: 3% in 2005-2006, 6% in 2007-2009, and 9% after 2009.

·         For a judgment or settlement occurring after October 22, 2004, allows an above-the-line deduction (don’t have to itemize) for attorney’s fees and court costs incurred in connection with an unlawful discrimination claim.

Whatever your circumstances, you'll likely benefit from taking time to do some tax planning as the result of the new laws. You should start planning now before the year ends when you can no longer change your taxable income, deductions and credits for 2004.  Please feel free to call me for more details about the new laws and how they may effect your personal or business tax situation.