January 7, 2005

2004 Tax Law Updates

Educators Deduction : Although this deduction expired at the end of 2003, it was restored for two more years. So teachers and other educators should save their receipts for books and other classroom supplies. They will be able to deduct up to $250 of such expenses again this year, following recently-enacted legislation.

Expenses incurred any time in 2004 may qualify for the deduction, not just those since the Act was signed on October 4. The deduction is available to eligible educators in public or private elementary or secondary schools. To be eligible for the deduction, a person must work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide. An educator may subtract up to $250 of qualified out-of-pocket expenses when figuring adjusted gross income. The IRS recommends that educators keep records of qualifying expenses in a folder or envelope with a label such as "Educator Expense Deduction," noting the date, amount and purpose of each purchase. This will keep you organized and prevent missed deductions.

Clean Fuel Vehicle Deduction : This deduction was scheduled to drop this year but has been retained at the $2,000 deduction level through 2005. The certification means taxpayers who purchase this vehicle new may claim a tax deduction of $2,000 on Form 1040 and do not have to itemize deductions on their tax returns to claim it.

Federal tax law allows individuals to claim a deduction for the incremental cost of buying a motor vehicle that is propelled by a clean-burning fuel. These hybrid vehicles obtain greater fuel efficiency and produce fewer emissions than similar vehicles powered solely by conventional gasoline-powered engines.

The clean-burning fuel deduction is up to $2,000 for certified vehicles first put into service in 2004 and 2005. The deduction is limited to $500 for vehicles placed in service in 2006 and no deduction will be allowed after that year.

The IRS previously certified the Toyota Prius for model years 2001 through 2004. The IRS also previously certified the Honda Insight for model years 2000 through 2004 and the Honda Civic Hybrid for model years 2003 and 2004.

For 2005, the Toyota Prius is eligible for the clean-burning fuel deduction.

Child Tax Credit : Taxpayers with a credit amount greater than their tax could get a refund of the difference, up to 10% of the amount by which their 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.

Sale of a Principal Residence: Taxpayers may not exclude the gain on the sale of a principal residence if they sold the property after October 22, 2004 and had acquired it in a like-exchange during the 5 year period ending on the date of the sale.

Combat Pay : Some military personnel receiving combat pay get larger tax credits because of two law changes. The new law will count excludable combat pay as income when figuring the Child Tax Credit and will give the taxpayer the option of utilizing or ignoring combat pay as income when figuring the Earned Income Tax Credit. Utilizing combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.

Sales Tax Deduction : Taxpayers who itemize deductions will have a choice of claiming a state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns. The IRS will provide optional tables for use in determining the deduction amount, relieving taxpayers of the need to save receipts throughout the year. Optional tables are available for determining the deduction amount in Publication 600. Sales taxes paid on motor vehicles and boats may be added to the table amount. Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for sales or income taxes.

Expense Limit for SUVs : As reported in previous newsletters, businesses should be aware of the change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after October 22, 2004. Businesses cannot take a first-year deduction of more than $25,000 for a qualified SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before October 23 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.

Non-Cash Charitable Contributions : For contributions made after June 3, 2004, and greater than $5,000, taxpayers must obtain a qualified appraisal and attach Form 8283 to take the deduction. For deductions more than $500,000 ($20,000 for art), you must attach a copy of the appraisal and Form 8283 to your return.

For 2004, contributions of automobiles will be allowed at fair market value. See 2005 Tax Updates below for 2005 deduction information.

Other IRS Tidbits

The IRS is taking several steps to help taxpayers. Many of the improvements come in the form of online help and can be found on www.irs.gov, including:

"Where's My Refund." The popular "Where's My Refund?" function on IRS.gov allows taxpayers to answer the most frequent question they pose during the tax year. All taxpayers need is their Social Security number, filing status and exact amount of their anticipated refund. Last year, it was used 20 million times.

Tsunami Relief: Be aware there is pending bill that would allow a deduction for any charitable donations made prior to January 31, 2005. We will email our newsletter subscribers with an update when available.

Simpler forms for more taxpayers: The income limits for using the Form 1040EZ and Form 1040A will increase from less than $50,000 to less than $100,000. Last year, approximately 18 million taxpayers filed a Form 1040EZ and another 24 million filed a Form 1040A. The change in the threshold will mean 1.6 million more taxpayers are eligible to file the 1040EZ or 1040A.

Simpler forms for the self-employed: The limit on business expenses for self-employed individuals using Schedule C-EZ also will increase to $5,000 from $2,500. This change will mean 500,000 more small business owners and self-employed taxpayers can use the simpler version of the expense form. The change will mean a savings of 5 million hours of paperwork burden for small business taxpayers.

$73 Million in Refund Checks Go Undelivered : The Internal Revenue Service is looking for 87,485 taxpayers whose income tax refund checks could not be delivered. Checks totaling more than $73 million can be reissued as soon as taxpayers correct or update their addresses with the IRS. For more information, please reference: Link

Publication 15 / Circular E : The Employers Tax Guide is available this week online at Link

2005 Tax Law Changes

Indexed Amounts for Health Savings Accounts (HSA's) :
The Treasury Department and IRS issued new guidance on the maximum contribution levels for Health Savings Accounts (HSAs) and out-of-pocket spending limits for High Deductible Health Plans (HDHPs) that are used in conjunction with HSAs. These amounts have been indexed for a cost-of-living adjustment for 2005. For more about Health Savings Accounts and the other related guidance see: Link

IRS Sets Standard Mileage Rated for 2005:
The Internal Revenue Service today released the optional standard mileage rates to use for 2005 in computing the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes. For businesses, the rate increases a record 3 cents bringing it to 40.5 cents per mile. For calculations relating to moving or medical reimbursements, it rose to 14 cents per mile.

2005 Retirement Plan Limits:

401(k) Limit = $14,000
403(b) Limit = $14,000
457 Plans Limit = $14,000
For persons age 50 and older, the catch-up contribution limit is an additional $4,000 for 401(k), 403(b) and 457 Plan participants.

SIMPLE Limit = $10,000

2005 IRA Deductions
$4,000, plus a $500 catch-up for people 50 years and older

Social Security & Medicare Limits:

Social Security
Wage Base: $90,000
ER / EE Deduction is 6.2%

Medicare
Wage Base: No Limit
ER / EE Deduction: 1.45%
Self-Employment tax: 2.9%

Contributions of Automobiles:
For 2005, charitable contributions of automobiles will be limited to the dollar amount received by the charity selling the vehicle. Whether the charity keeps or sells the vehicle, the amount you may deduct will be documented and provided to you in a letter.

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