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Los Angeles Certified Health Business Development Consultant

Last Updated:
Tuesday February 07, 2017

INDEX


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.

OVERVIEW

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 went!

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 TAXES

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.

Planning pointer: 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 taxes.

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:

  1. Determine resources. If you qualify for Medicaid, you don’t have enough money for premiums.

  2. Purchase at the appropriate age to save on premiums.

  3. Don’t forget inflation protection.

  4. 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 value

  • Deduct only the car’s fair market value

  • Document the charitable contribution deduction

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 or www.hsainsider.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 www.aclu.org/getequal/rela/california.html  and www.ss.ca.gov/dpregistry/ .

BUSINESS TAXES

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 miles.)

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 depreciation.

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 3) has
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.

  1. Passenger autos 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.

  2. 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.

  3. Some large SUVs, trucks, and vans (i.e. over 6,000 pounds gross vehicle weight rating) are not treated as passenger autos.

  4. 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 www.kiplinger.com/php/tools/trucktax/tax.php  or www.intellichoice.com.

Depreciation rules for the above categories of autos.

  1. Passenger 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.

  2. 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.

  3. 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 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

  • invest wisely

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 www.llrcpa.com  under 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:

  • Individual and corporate rates

  • 10% tax bracket expanded

  • Dividend income now taxed at 5% and 15% rates

  • Social Security benefit calculator

  • Alternative Minimum Tax

  • Self-employed health insurance

  • Long-term care insurance

  • Section 529 educational plans

  • Gift tax

  • IRA provisions

  • Sale of stock by nonresidents

  • Reduction in capital gains rate

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,

 

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