During this past election season, you probably heard very little about recent tax legislation signed into law amidst the presidential debates, negative campaign ads, and the conflict in Iraq. On October 4, 2004, the Working Families Tax Relief Act of 2004 was signed into law. This Act essentially extended reductions in tax breaks for individuals. Without this new legislation, the “marriage penalty” would have crept back into the Tax Code; the child tax credit would have dropped back to $700; the 10-percent bracket would have been applied to less income, and the alternative minimum tax (AMT) would have affected more middle-income families. Highlights of this Act are as follows:

• The $1,000-per-child tax credit is now effective through 2010
• The expanded 10-percent tax bracket is now effective through 2010
• Marriage penalty relief in the 15-percent tax bracket is now effective through 2010
• Full marriage penalty relief in the standard deduction is now effective until 2010
• Extension of “above-the-line” educators’ deduction for 2004 and 2005

Other extensions

Without these extensions, withholding and estimated tax payments for most taxpayers starting in 2005 would have been noticeably higher. This Act contains no revenue offsets, which means that there are no tax increases for other individuals and/or business entities.

The American Jobs Creation Act of 2004 (AJCA) was passed by both Houses and signed into law by the President on October 22, 2004. As opposed to the Working Families Tax Relief Act, the AJCA contains a few provisions, which place new restrictions on certain deductions.

Approximately 87.5 percent of the tax cuts are aimed toward U.S.-based manufacturing activities and reforms in taxation of multi-national businesses. The balance of the cuts are contained in approximately four dozen targeted items of business tax relief and several fairly targeted individual tax cuts and excise tax reforms. Since the text of the AJCA is over 650 pages, this article will only highlight certain business tax relief and individual provisions of the AJCA.

Individual Deduction for Sales Tax Paid

Not since the Tax Reform Act of 1986 have individuals been able to deduct sales tax paid on schedule A of Form 1040. As a part of “tax simplification,” the sales tax deduction was repealed. This created inequity with other states that assess state income taxes in lieu of high sales taxes, as state income taxes remained deductible as an itemized deduction.

For tax years beginning in 2004, the AJCA allows taxpayers to deduct state and local general sales and use taxes as an itemized deduction, instead of taking an itemized deduction for state and local income taxes. Taxpayers who itemize deductions may deduct either their actual sales taxes paid, or use IRS-published tables, and then add to the amount from those tables the actual amount of their sales tax paid on motor vehicles, boats, and other items specified by the IRS. Look for these tables and additional details in yet-to-be-produced IRS Publication 600. Until then, no opinion can be rendered regarding the benefits of saving receipts for purchases subject to sales tax. For taxpayers who travel to Oregon to buy appliances and other “big ticket” items, the use tax paid on out-of-state purchases is also deductible in addition to sales tax paid.

Income Averaging Extended to Fishermen

For tax years beginning after 2003, the AJCA extends the option of income averaging to individuals engaged in the trade or business of fishing.

Depreciation provisions

The AJCA extends for an additional two years (through 2007) the $100,000 Code Sec. 179 deduction for qualified property (as adjusted for inflation) that would have expired at the end of 2005. In addition, there is a new temporary 15-year recovery period for qualified leasehold improvements and restaurant property. The additional 50 percent bonus depreciation deduction for certain qualified property is still set to expire at the end of this year, as it was not extended by either Tax Act passed this year.

SUV Depreciation Deductions Limited

It was only a matter of time. For certain SUV’s weighing less than 14,000lbs (GVWR) and placed in service after October 22, 2004, AJCA limits the ability of taxpayers to claim deductions under Code Section 179 to $25,000. However, the bonus first-year depreciation deduction is still available through the end of 2004. If you were ever thinking about buying a new SUV for use in your business, 2004 might be the year to do it.

Tightened Rules for Charitable Donations of Cars and Boats

For contributions made after 2004, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement from the charity. If the charity sells the vehicle without any “significant intervening use” or “material improvement,” the taxpayer’s charitable deduction cannot exceed the gross proceeds from the sale by the charitable organization.

No Homesale Exclusion for Principal Residence Acquired in a Like-Kind Exchange.

If you acquired your principal residence in a like-kind exchange and sell or exchange it within five years of acquiring it, there will be no deferral of gain. This provision addresses the issue of taxpayers who acquire rental (investment) property in a like-kind exchange (where any realized gain is deferred); later convert the property to a principal residence, and subsequently sell the residence under the “homesale exclusion” rules, where no gain is recognized for federal tax purposes. (The holding period for this type of transaction had not been addressed in previous legislation.)

Disclaimer

Information provided in this article is of a general nature only, and application of the provisions of the new tax laws may or may not apply to your situation. Taxpayers should consult their tax professional for further information.

(Editor’s note: Chris Mutchler is a Certified Public Accountant and associate member of the Certified Fraud Examiners. He is a team member with the Firm of Southard, Beckham, Atwater and Berry, CPA, PS. in Port Orchard and can be reached at (360) 876-4491, or cmutchler@sbabcpa.com).