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Ron Lykins & C0 Tax Advisors 45 West Main Street  Westerville, Ohio 43081



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Ron’s Tax Talk

by Ronald G. Lykins, CPA, MBA, Ph.D.
Volume 2

Issue 1

Significant 2004 Tax Law Changes
January 15, 2005
1. 2004 Tsunami Aid Tax Deduction Option: On January 7, 2005, President Bush signed legislation allowing taxpayers who donate to claim deductions on their 2004 tax return. Checks (or charges) must be written by January 31, 2005.

2. Option to deduct sales tax instead of state and city income taxes. Taxpayers may deduct their actual sales taxes or use the IRS tables. If taxpayers use the IRS tables they can add sales taxes paid for the purchase of automobiles, trucks, boats, motor homes, etc.

3. Increased Reporting for Noncash Contributions: If the total non-cash charitable contribution exceeds $500, the taxpayer must file Form 8283.

For non-cash contributions greater than $5000, the taxpayer must get an appraisal and complete Section B of Form 8283. The donee organization must also complete a section on this form.

4. Stricter Requirements for Donating Vehicles: Effective January 1, 2005, charitable contributions of automobiles, trucks, boats, etc. (if greater than $500) is limited to the proceeds that the charity receives from the sale. If the charity uses the vehicle rather than selling it, the donor may deduct fair market value (FMV). A qualified appraisal is required if the vehicle’s FMV exceeds $5,000.

5. Child Care Credit: The new law extends the $1,000 tax credit through 2010.

6. Marriage Penalty: This penalty is somewhat mitigated but not eliminated. The new law raises the standard deduction for a joint return to $9,700 ($10,000 in 2005). For taxpayers who itemize in lieu of the standard deduction, the new law increased the size of the 10% and 15% tax bracket to twice that of a single return. Sounds like “a big deal” but trust me, it is not!

7. Alternative Minimum Tax (AMT) . The AMT is a second federal income tax system affecting higher-income taxpayers. It restricts you from claiming certain deductions and requires you to increase your taxable income. The tax preparer we must figure the tax you owe under both systems and you pay whichever amount is higher. The new tax law retains the exemption amounts of $58,000 for a joint return, and $40,250 for single taxpayers. Individuals with income above these amounts may possibly be subject to the AMT.

8. $250 “Above the Line” Deduction for Teachers: The new tax law extends this above-the-line deduction for teachers and other school professionals for expenses paid or incurred for book, supplies, computer equipment, software, other equipment and supplementary materials used by the educator in the classroom. Educator expenses in excess of $250 is a miscellaneous deduction on Schedule A.

9. 2004 Mileage Deduction: Mileage reimbursement rates for business is 37.5 cents/mile and charitable, medical, and moving mileage allowance is 14 cents per mile.

10. Tax credit for Purchase of Qualified Electric Vehicle: A 10% tax credit up to $4,000 is available to buyers of qualified electric vehicles.

11. Deduction for Qualified Clean-fuel Vehicle Property: A taxpayer who purchases a qualifying automobile may deduct up to $2,000 for vehicles purchased in 2004 and 2005.

12. Qualified Dividends: Under the Tax Relief Act of 2003, qualified dividends received by individuals, trusts, and estates are subject to a maximum tax rate of 15%. The Family Act of 2004 made numereous and favorable changes to this investment benefit. For example, qualified dividends from REIT’s will generally be taxed at a rate of 15%.

13. Section 179 Expensing of Equipment. A taxpayer can elect under IRS Sec. 179 to deduct up to $102,000 of the cost of depreciable tangible personal property used in a trade, profession, or business in the year the property is placed in service.

14. Section 179 Deduction for Sports Utility Vehicles & Vans That Weigh More than 6000 Pounds: For qualified vehicles placed in service after October 22, 2004, taxpayers who use their vehicles for business over 50% may deduct up to $25,000 in the first year of service. Prior to October 22 of this year taxpayers could immediately deduct up to $102,000 on qualified vehicles. The rules are extremely complex but the potential tax benefits are extraordinary.

15. Depreciation Limits for “Luxury Automobiles” Used in Business: Autos, trucks, and vans weighing less than 6,000 pounds are subject to depreciation limits. However, it is possible for vehicles placed in service in 2004, and eligible for 50% bonus, to deduct up to $10,610 the first year. Note this 50% bonus depreciation expires after 2004.

16. Monumental Penalties on Failure to Report Interest Earned in Foreign Financial Accounts: The IRS requires taxpayers to disclose if they have accounts in a foreign country. Be sure your tax advisor knows if you have accounts outside the United States, and that all income earned in these accounts is reported. Violation of reporting requirements could result in penalties ranging from $10,000 up to $500,000.

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