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ProAdvisor On Staff
As seen in
Los Angeles Certified Health Business Development Consultant
Tuesday February 07, 2017
TAX HIGHLIGHTS FOR 2004
On October 4, 2004, Congress
passed The Working Families Tax Relief Act of 2004. The Act prevented a tax
increase of $146 billion by virtue of extending that amount of tax cuts that
were scheduled to expire in 2004.
Other than a new sales tax deduction option, the expiration of the 50% bonus
depreciation at 12-31-04, and major change in deduction for cars donated to
charity after 12-31-04, 2004 was reasonably quiet for tax changes. The only
thing that will ‘stick it to you’ is the Alternative Minimum Tax. Income tax
changes in recent years continued to reduce regular tax, but haven’t
affected the AMT tax much. We can expect that more and more taxpayers will
be paying an AMT tax and wonder where their share of all the tax deductions
Don’t count out the abolishment of the estate tax in 2005. Right now you get
taxed when you earn, again when you save, and again when you get dividends.
And if you’re stupid enough to die, they tax you again.
My assessment of the cost of keeping the “peace” in Iraq and Afghanistan, a
major political fight over the Social Security gorilla, the increasing
humungous trade deficit with China, is that President Bush may be forced to
increase income tax rates by the third quarter of 2005 or by 2006. In the
near future we must consider that foreign creditors who are letting us
borrow $600 billion a year may decide that it’s not a wise portfolio choice
on their part. Couple this with the fact that as a nation we are saving less
than 2% of our national income (the lowest since 1934), and you might
conclude some major fiscal juggling is in order.
Individual tax rates have been cut every year in the last 4 years.
They will be the same in 2004 and 2005 as they were in 2003. The spread
between the lowest and highest rates (excluding the low income 10% bracket)
is the narrowest in memory.
Parents should consider shifting income to their 14 and older
children to take advantage of the 10% bracket. You can give appreciated
stock to the children which they can sell and pay a 5% capital gains tax
if they are in the 10% bracket. Examples: The child who is
a dependent of his parent can take capital gains of about $16,000 and
pay no tax, saving the parent in the 28% or 35% bracket from $4,400 to
$5,500 in taxes. If the child is not a dependent he can take capital
gains of about $30,000 and save the parent between $8,500 to $10,500 in
Long-term care insurance.
There are 77 million baby boomers and they represent a third of the U.S.
population. The Congressional Budget Office predicts that long-term care
costs will rise from $123 billion to $207 billion by 2020. It is cost
effective to purchase long-term care insurance before retirement when it is
affordable, and before inflation makes it more difficult. Some pointers for
choosing a long-term care policy are:
resources. If you qualify for Medicaid, you don’t have enough
money for premiums.
Purchase at the
appropriate age to save on premiums.
Buy a tax qualified
plan. Nearly 90% of plans sold are tax qualified.
State and local general
sales tax deduction (new)
In October of this year, Congress passed another tax Act which included the
following: At the election of the taxpayer, an itemized deduction may
be taken for State and local general sales taxes in lieu of the itemized
deduction for state and local income taxes. Taxpayers have 2 options to
determine the sales tax amount: 1) Accumulate receipts that show the
general sales tax paid, or 2) Use IRS tables, plus general sales tax
paid for the purchase of motor vehicles, boats, aircraft, home, or home
building materials. [IRS tables can be found at
www.irs.gov/pub/irs-pdf/p600.pdf] (NOTE: the general
sales tax rate in California is 6.0%. Do not include the local sales
tax. i.e. Total sales tax in Los Angeles is 8.25% and in Anaheim is 7.75%,
but you can only deduct at the general sales tax rate of 6.0 %.)
You would then compare the highest of 1) or 2) with your State and Local
income taxes to determine which gives you the best deduction.
NOTE: The sales tax
deduction in lieu of state and local income taxes is most favorable to
low income taxpayers and taxpayers in zero income tax states like
Nevada, who itemize deductions. It is also a hassle to deal with. The
IRS table amount for a family of 2 with adjusted gross income of $75,000
would be $836, excluding autos, etc.
Auto contributions to
charity – LAST CHANCE FOR 2004 – rules change in 2005
Under rules in effect for 2004, taxpayers can deduct the fair market value
of autos donated to charity. They should take the following steps:
Check that the
organization is qualified
Itemize your deductions in
order to receive the benefit
Calculate the fair market
Deduct only the car’s fair
Document the charitable
As of January 1, 2005, the
rules change. For 2005, if the claimed value of a motor vehicle, boat,
or plane donated to charity exceeds $500 and the item is sold by the
charity, the taxpayer’s deduction is limited to the gross proceeds from the
sale. The charitable organization must provide an acknowledgement to the
donor within 30 days of the sale, stating the amount of gross proceeds.
Alternatively, if the charity significantly uses or materially improves the
vehicles, the charity must certify this intended use and duration and
provide an acknowledgement to the donor within 30 days of the contribution –
in which case the donor may deduct the vehicle’s fair market value.
Although charities that accept donated vehicles should know the rules in
2005, they may not decide on a sale until months after the donation.
Therefore, prior to the donation in 2005, have an understanding with
the charity as to whether they will sell or use the vehicle.
Social security and Medicare. The wage base is projected to increase
from $87,900 (2004), to $90,000 (2005), $93,000 (2006), $97,500 (2007) and
$101,400 (2008). Medicare B premium was $66.60 a month in 2004, and will be
$78.20 a month in 2005.
Health Savings Accounts (HSA). This is a new medical expense plan
effective January 1, 2004. Conceptually, the HSA is an individual retirement
account for medical expenses. Earnings are generally exempt from tax.
Favorable deductions are available to individuals and self-employed persons.
The plan works best for healthy, younger persons or families, who
currently do not incur large medical expenses. They will be able to fund
an HSA for use in later years when their medical bills will probably be
greater and at the same time reduce current year outlay for medical
insurance costs. The plan may be attractive to small employers who are
looking to control the exponential rise in insurance premiums for employees.
Distributions from HSA are tax-free, provided the distributions relate to
qualified medical expenses of the account beneficiary or family members.
The rules are complex. You may contact me for further information or find
information at www.msabank.com
FDIC coverage for bank accounts in excess of $100,000. The rules are
simplified and expanded. Bank funds in a Family Trust, Decedent’s Trust, or
Marital Trust that covers Trustors and various beneficiaries will receive
$100,000 coverage for each person (covering a person only once). Old
rules protected the owner of the Trust and not the beneficiaries.
Domestic partners. Effective January 1, 2005, those registered with
the State as Domestic Partners will be subject to community property laws,
will be responsible for their partner’s debts, and be subject to the
California court system. More information is available to
S corporations. An election can be made to allow members of a family
to be treated as one shareholder in determining the number of eligible
shareholders, which has been increased to 100. (A family is defined as the
common ancestor and all lineal descendants of the common ancestor, as well
as the spouses, or former spouses of these individuals – for six generations
or less removed from the youngest generation of shareholders who would (but
for this rule) be members of the family.)
Substantiation for business use of autos, home computers and cell phones.
The general rule for autos has been to take your odometer reading at the
start and end of the year to know total miles driven. Then, to determine the
business miles by maintaining a log that shows business miles driven, date
driven, and business purpose. From this you can determine the percent
business use and apply the percent to the actual expenses, or use the
business miles times the mileage rate allowance. (For home computers and
cell phones the regulations suggest using ‘minutes of use’ instead of
You may also arrive at business use by a sampling method by maintaining your
log or record for 3 months, or one week a month.
Bonus depreciation expires December 31, 2004. The rule has been that
you can elect either 30% or 50% of special depreciation on any original use
property (including automobiles) used in a trade or business which is
depreciable under the MACRS system of depreciation with a recovery period of
20 years or less. If business use of the property falls to 50% or less,
bonus depreciation and any amount expensed under Section 179 must be
recaptured (taken into income).
There is little time left this year to acquire and put into use before
December 31, 2004, property that will be eligible for bonus
Section 179 expensing. This section allows a taxpayer to deduct a
portion of the cost of certain new or used business personal property
instead of depreciating it. The maximum deduction for 2004 is $102,000.
After October 22, 2004, this deduction is limited to $25,000 for a sports
utility vehicle rated at 14,000 pounds gross vehicle weight (GVW) or
less. An SUV is defined to exclude any vehicle that 1) is designed
for more than nine individuals in seating rearward of the driver’s seat, 2)
equipped with an open cargo area, or a covered box not readily accessible
from the passenger compartment, of at least six feet in interior length, or
an integral enclosure, fully enclosing the driver compartment and load
carrying device, does not have seating rearward of the driver’s seat, and
has no body section protruding more than 30 inches ahead of the leading edge
of the windshield.
Auto expense. The rules for depreciation of autos are very complex.
Autos are grouped into several ‘categories’, each with different rules.
included any four-wheeled vehicle manufactured primarily for use on
public streets, roads, and highways that has an unloaded GVW
(i.e. curb weight fully equipped for service but without passengers
or cargo) of 6,000 pounds or less.
Trucks or vans
(including a sport utility vehicle or minivan built on a truck
chassis) are treated as passenger autos if they have a
gross vehicle weight rating (i.e. maximum total weight of
a loaded vehicle as specified by the manufacturer) of 6,000
pounds or less.
Some large SUVs,
trucks, and vans (i.e. over 6,000 pounds gross vehicle weight
rating) are not treated as passenger autos.
SUVs (see page
4 under Section 179 expensing for a special rule)
NOTE: The GVW is listed
on a metal plate on the inside of the driver’s door. GVW can be found at
Depreciation rules for the above categories of autos.
are called ‘listed property’ (which by nature lends itself to
personal use), and are also ‘luxury’ autos if their cost exceeds
$14,800. IRS tables for passenger autos allow the least amount of
depreciation for this category of auto.
Trucks or vans
(including a sport utility vehicle or minivan built on a truck
chassis) of 6,000 pounds or less are entitled to slightly higher
depreciation based on IRS tables, to account for higher costs
associated with these vehicles.
Large SUVs, trucks,
and vans over 6,000 pounds are not subject to the depreciation
caps applicable categories a. and b. above. These vehicles are
allowed Section 179 expensing on the first $102,000 of cost, then
30/50% bonus depreciation if acquired and put into use prior to
January 1, 2005 (on the remainder of cost), and regular MACRS
depreciation (on the balance of cost). (As to SUVs, see page 4 under
Section 179 expensing for a special rule)
IRA provisions. The
baby boomers, born between 1946 and 1964, represent almost 1/3 of the United
States population. Of our 281 million people, 76.9 million were 50 and
older. In the next 10 to 15 years about ½ of the baby boomers (40 million)
are going to question, worry, and plan for retirement. 46.3 million
taxpayers held IRA accounts worth a total of $2.6 trillion in fair market
value. There are 3 rules for comfortable retirement:
start saving early
save more money
The maximum contribution to a
Traditional or Roth IRA is $3,000 ($4,000 for 2005 to 2007). Those age 50
and over are allowed an additional ‘catch-up’ contribution of $500 (2004 to
2005) – subject to earned income, if neither spouse is in an employer plan.
ADDITIONAL TAX HIGHLIGHTS
Additional Tax Highlights can be found at our web site at
Breaking News, as Tax Highlights for 2003. The topics listed
there that have not changed in 2004 offer additional valuable insight to the
tax laws affecting you – explained in easy-to-understand language, with many
planning pointers. The 2003 topics that remain unchanged in 2004 are:
10% tax bracket
Dividend income now
taxed at 5% and 15% rates
Sale of stock by
Reduction in capital
As always, I am available
to discuss any of these matters with you.
Your resource for all of your
tax, financial and business planning matters,