| In October the Working Families
Tax Relief Act of 2004 and the
American Jobs Creation Act of 2004
were signed into law. The new
legislation extended many favorable
tax provisions and enacted some new
ones. The following were most
notable among key provisions of these
acts:
Minimum
Tax Relief Extension for Individuals:
Minimum tax relief for
individuals, which was enacted for one
year under prior tax law, was extended
through 2005 by the new act. This
entails raising the alternative
minimum taxable income exemption
amount from $45,000 to $58,000 for
joint filers and from $33,750 to
$40,250 for single filers.
Marriage
Penalty Relief:
Under prior tax law marriage
penalty relief was scheduled to
gradually phase in over a period of
several years. Under the new tax
act marriage penalty relief will be
implemented in full in the year
2005. This relief is accomplished
by increasing the standard deduction
for married couples to double of that
of single individuals in 2005.
Child
Tax Credit Increase:
The Child tax credit, which had
been scheduled to drop down to $700 in
2005 and increase to $1,000 in 2010,
was increased to $1,000 per child for
the years 2005 through 2010 by the new
tax act.
Uniform
Definition of Qualifying Child:
Several different sections of the
tax code are impacted by the
definition of qualifying child, they
are as follow:
- Dependency exemption
- Head of household status
- Child tax credit
- Earned income credit
- Dependent care credit
Strange as it sounds, historically
the definition of a qualifying child
was different for each of these
items. The Working Families Tax
Relief Act of 2004 has created one
uniform definition of qualifying child
for all of these provisions of the tax
code effective for years beginning
after 12/31/2004. Under this
definition the child must meet five
tests to be considered a qualifying
child they are:
- Relationship test
- Support test
- Gross income test
- Citizenship test
- Return test
If you are interested in the
details of how these tests are
employed please contact our office.
Teachers
Expense Deduction:
The $250 above the line deduction
for un-reimbursed teachers expenses
which was scheduled to expire this
year has been extended through 2005.
Sales
Tax Deduction:
The new law allows individuals to
deduct either state sales taxes or
state and local income taxes if they
itemize. The sales tax deduction
can be determined either by using
tables provided by the IRS or by
calculating actual sales taxes paid
during the year. The sales tax
deduction is effective for tax years
2004 & 2005 only.
Donation
of Automobile:
Under the new tax act the value of
a vehicle donated for charity after
December 31, 2004 is dependent on how
the donee uses it. If the charity
sells the vehicle without using it in
any significant way the donation may
not exceed the gross proceeds from the
sale. If the charity keeps the
vehicle for it’s own use the
taxpayer must use the acknowledgement
of value provided by the charity to
determine the deduction.
Extension
of Research Credit:
The research credit was extended
to December 31, 2005. Qualified
research expenses paid or incurred
prior to that date are eligible for
the credit.
Small
Business Expensing and Depreciation:
Under prior tax law the threshold
of expensing provisions for qualifying
assets was raised from $25,000 to
$100,000. This was a temporary
provision set to expire in
2005. The new tax act extends
this provision to 2007 therefore,
beginning in 2004 up to $102,000 of
qualifying property placed in service
prior to 2008 can be expensed during
the year placed in service. The
$102,000 limitation is indexed for
inflation each year.
SUV Exception:
The SUV exception was addressed
by limiting the deduction for
vehicles weighing between 6,000 and
14,000 pounds to $25,000 effective
10/22/2004. If business use of
the vehicle falls below 51% in any
year after the deduction is taken it
may be subject to
recapture. Vehicles
placed in service between 10/22/04
and 12/31/04 are also eligible for
bonus depreciation as discussed
below.
Expiration of bonus
depreciation:
The 50% and 30% Bonus
depreciation provisions expire on
December 31, 2004; property placed
in service after that date will not
be eligible.
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