There have been two new federal tax bills passed at the end of 2004 which affect the 2004 tax year, as well as many California bills passed at the end of the year. Some of the new laws are retroactive to the beginning of 2004. Canyon Tax & Bookkeeping Service is ready, willing, and able to help you determine which ones will affect your own tax return. Here is a partial list of the changes:
First year depreciation deduction changed -- The first-year deduction for a new SUV driven for business purposes has been cut from $102,000 to $25,000; however the $102,000 federal deduction remains the same for other business assets. California's depreciation rules are completely different.
Sales tax deduction -- You now have a choice between taking a sales tax deduction or a state income deduction. This will only be effective for 2004 and 2005 tax years, and unless you have kept all your receipts for purchases you've made since the beginning of the year, there is a table you can use to determine your sales tax paid. You may add to that any large purchases, such as vehicles or boats. This decision may require some analysis, but keep in mind that when a deduction for state income (and SDI) tax helps produce a refund, that refund becomes taxable income on the federal return next year.
Standard Deduction -- The standard deduction increased to $4,850 for Single and Married Filing Separately, $9,700 for Married Filing Joint, and $7,150 for Head of Household.
Personal Exemption -- The personal exemption increased to $3,100, with AGI phase-out thresholds also increased to $142,700 for Single and $214,050 Married Filing Joint.
Teacher credit and classroom expense deduction -- California suspended the big teacher credit, but on the federal return teachers may still take the $250 deduction for school supplies and expenses against income.
California NOL Deduction -- Taxpayers can once again deduct prior-year suspended NOLs, and all NOLs generated in 2004 will be allowed a 100% carryover for 10 years.
Donating vehicles -- An acknowledgement from the donee organization stating the gross proceeds from the sale of the vehicle must accompany the tax return, and the deduction may not exceed that amount.
California Proforma Filing Project -- In February, 2005 the California Franchise Tax Board will select approximately 10,000 taxpayers to offer a pre-prepared tax return which they can accept, modify, or ignore. This test group will all be single, have no dependents, and be employed by one employer for 2004.
Exchanging rentals and selling residences -- If you are working on a strategy to exchange rental property for residential property that you may subsequently live in, the rules have changed. You must now wait at least five years to sell any property you obtained in an exchange.
Divorced parents and child's exemption credit -- The IRS has changed the rules for claiming a child as a dependent. Beginning in 2005, the divorce decree controls who gets the exemption. No matter who has custody of the child, as long as the parents together provide more than one-half the support, the non-custodial parent claims the child if the divorce decree so provides. If the divorce decree is silent, the custodial parent may give the exemption to the other parent.
S Corporations -- Beginning in 2004, all family members, up to six generations, will be treated as a single shareholder for purposes of determining the maximum number of members allowable when determining eligibility for S corporation status. The number of shareholders allowed is also increased from 75 to 100 shareholders.
Paid Family Leave is taxable -- Paid Family Leave payments are taxable on the federal return, but not on the California return.
California Tax Amnesty -- Individuals and businesses who missed filing income, franchise, sales or use tax returns, or who underreported tax liability or didn't pay on time, can apply between February 1 and March 31, 2005 to get unpaid penalties and fees waived for tax years 2003 and 2004 by filing application for this program. Tax and interest would have to be paid by May 31, 2005 under the rules for this Amnesty program.
Child's income -- Parents of children under 14 may include child's income between $800 and $8,000. Exemption from "kiddie tax" increases to $1,600 for 2004.
Alternative Minimum Tax -- More taxpayers each year will be subjected to AMT (estimated 92% of all taxpayers with next ten years). For 2004, AMT is calculated at 26% on the first $175,000 of AMTI. AMT relief for personal credits have been extended through 2005.
Child Tax Credit -- Child Tax Credit remains at $1,000 per child (AGI phase out at $75,000 single, $110,000 Married Filing Joint), but the refundable portion has increased from 10% to 15% for 2004.
Mileage Rates -- 2004 Mileage rates are 37.5 cents/mile for business miles, 14 cents/mile for medical, moving and charity.
Qualified Clean-Fuel Vehicles -- An above-the-line deduction of $2,000 may be taken for purchasing a qualified vehicle.
Tuition and Fees Deduction -- For 2004 the maximum tuition and fees deduction is $4,000 when modified AGI is not more than $65,000 ($130,000 MFJ). New this year is a new maximum of $2,000 when AGI is between $65,000 and $80,000 ($130,000-$160,000 MFJ).
IRAs and other Qualified Plans -- For 2004, IRAs and Roth IRAs maximum contributions remain $3,000 if you are under 50, $3,500 for age 50 and over; SEP contributions remain 25% of wages up to $40,000 (20% if self-employed); SIMPLE elective deferrals under age 50 increased to $9,000 and $10,500 for age 50 and over; Defined Contribution Plan, Money Purchase and Profit-Sharing contributions increased to $41,000 with a compensation limit of $205,000; 401(k) and 403(b) contributions increased to $13,000 for under 50, $16,000 for age 50 and over.
Selling your principal residence -- If you sell your house after living in it at least two years, you don't have to pay capital gains tax on the first $250,000 ($500,000 for married couples). New IRS rules allow for a "partial" exclusion for unforeseen circumstances, which have been revised to be "an event that the taxpayer could not have reasonably have anticipated". Some examples of this would be death, divorce, job loss, employment change, damage to home, multiple births from same pregnancy.
