Year-end tax planning can be especially rewarding
this year. 2004 has been a major year for tax developments. The American Jobs Creation Act of 2004 and the Working Families
Tax Relief Act of 2004 have combined to result in more new tax law being enacted this year than at any time since 1986. The
IRS, too, has had a banner year in issuing a flood of tax rules and guidance. But rather than being overwhelmed by these record-breaking
events, we see them as great opportunities ... to lower your overall tax payments and to help you avoid new tax traps. Year-end
tax planning is the key to start to unlock many of those savings immediately.
Three reasons make year-end planning important this
Last-minute opportunities: Legislative
changes in the tax law make certain tax breaks available only through December 31, 2004 - act now, or never again;
Limited time to prepare: Legislative
changes create certain opportunities or pitfalls that start on January 1, 2005 -preparation can give you a head-start on both
New application of traditional considerations:
You should not lose focus of traditional year-end tax planning techniques -especially as they apply to differences in your
individual tax profile since last year.
Unlike any other time of the year, late Fall finally
provides you with a fairly accurate view of how your income and deductions for the year will turn out. Armed with that snapshot,
we usually can craft certain tax-planning steps to alter the results more in your favor. With legislation as an added variable
this year, year-end tax planning offers many more opportunities to save overall taxes in this way.
Last minute opportunities
Legislation has created a
long list of “must-do” items to take advantage of tax breaks that either run out at the end of the year or are
limited by annual amounts that start again in 2005:
[Note: The following list
is not comprehensive and specific items affecting your particular tax situation may not have been included. Please call Everett, Flesher & Boetticher, P.C. if you want to discuss a more customized list.]
50 percent bonus depreciation.
Bonus depreciation can be of tremendous value to a business. A full additional 50 percent of the cost of business equipment
and other property, in addition to regular depreciation, may be written off in the year of purchase. Bonus depreciation ends,
however, on December 31, 2004, and it isn’t being renewed. If your business is planning a purchase,
doing it in 2004 rather than in early 2005 may save you thousands of tax dollars.
Starting in 2005, your deduction for a vehicle contributed to charity for which you are claiming more than a $250 deduction
will be limited to the price the charity gets for selling it -that’s usually a deeply-discounted wholesale price. If
you’re thinking of donating a used car or truck soon, do it by the end of this year if possible, when you still can
deduct its full fair market value.
State sales taxes.
Up until 1987, taxpayers could take itemized deductions for both their state and local income taxes and their state and local
sales taxes. The 1986 Tax Reform Act did away with the deduction for sales taxes. The new law brings it back, but only as
an option to be taken instead of state and local income taxes. Taxpayers in states with low- or no-income taxes will benefit.
Since this option is effective retroactively to the start of 2004, many taxpayers are now scrambling to find sales receipts,
especially if they purchased several “big-ticket” items earlier this year. The IRS also will be publishing average
sales tax tables soon to be used in lieu of producing receipts for day-to-day purchases. For those taxpayers affected, timing
big-ticket purchases and even alternating between taking the sales tax and the state income tax deduction each year may make
Congress has reinstated the $250 per year “teachers'” deduction for out-of-pocket classroom expenses, retroactively
back to January 1, 2004.
Business credits and deductions.
Over a dozen business tax credits and deductions that had expired earlier in 2004 or at the end of 2003 have been extended
through 2005, including the work opportunity tax credit; welfare-to-work tax credit; the research credit; charitable contributions
of computer technology and equipment used for educational purposes; expensing of environmental remediation costs; credit for
electricity produced from certain renewable resources; suspension of the 100-percent-of-net-income limitation of percentage
depletion; credit for qualified electric vehicles; deduction for qualified clean-fuel vehicle property; and for contributions
to Archer medical savings accounts.
Enhanced expensing. Small businesses also get a helping hand from enhanced expensing. Two years ago, Congress raised the small business
expensing threshold from $25,000 to $100,000. Congress also indexed it for inflation. Unfortunately, the $100,000 limit was
temporary. It was scheduled to expire at the end of next year. The new law extends the $100,000 limit for two more years.If you're planning to make some capital
improvements to your business, you also may benefit from enhanced depreciation rules. The new law gives restaurant owners
and other businesses special depreciation rates.
The new law
also changes the tax treatment of large SUVs. Because the vehicle caps on depreciation and first-year expensing have not applied
to cars or trucks weighing more than 6,000 pounds, businesses could deduct up to the full cost of a large SUV. That tax break
is over, but only in modified form. Effective immediately, vehicles over 6,000 pounds, but not more than 14,000 pounds, are
limited by a $25,000 cap on the amount of "first-year expensing."
Limited time to prepare
Many of the provisions in the American
Jobs Creation Act start on January 1. Among them, two new tax opportunities stand out as requiring preparation in 2004 to
maximize their benefits in 2005:
S corporation reform. Many
people choose to operate their businesses as S corporations because they combine the best of corporations and partnerships.
S corporations are so popular that they are one of the fastest growing business entities in the U.S.
S corporations are sure to be even
more popular under the new tax law. Instead of 75 shareholders, S corporations can have 100 shareholders. One family can also
elect to be treated as a single shareholder. If you’re thinking of starting a business, or converting your business
to a different structure, the new rules make S corporations very attractive. All these changes apply to tax years beginning
after December 31, 2004.
Nonqualified deferred compensation.
The new law makes important changes to the tax law as it is applied to deferred compensation. Most of these changes start
immediately on January 1, 2005. Preparation, starting now, can save major problems next year. If certain operational or design
failures occur in a nonqualified deferred compensation plan, the deferred amounts will be included in the affected plan participants’
gross income immediately unless it is still subject to a substantial risk of forfeiture. The plan failures that a nonqualified
plan must avoid include those having to do with distributions, the acceleration of benefits, and the timing and nature of
the election to defer compensation and other elections allowed under the plan.
Year’s end signals
your last chance to balance the timing of income and deductions for tax purposes between the current and the upcoming year
to your maximum advantage. Accelerating payment of expenses to generate deductions, deferring receipt of income to defer payment
of tax on it up to a full year, carefully timing capital gains to match capital losses, and making last-minute contributions
to tax-deferred accounts, such as retirement savings and flexible spending accounts, all play roles in a successful year-end
tax strategy. So should testing your current tax status for alternative minimum tax (AMT) liability. Year-end planning can
reduce exposure to this “stealth” tax that trapped over one million taxpayers last year, and continues to grow.
If you’ve had a change in circumstances during the year-such as marriage or divorce, birth of a child, a death, promotion
or job loss, inheritance, or property loss -year-end tax planning takes on extra importance, too.
Other traditional considerations
taxable income to reduce tax on social security benefits;
taxable gifts to take advantage of the $11,000 annual gift tax exclusion ($22,000 for couples).
medical expenses and/or miscellaneous itemized deductions to maximize use in connection with adjusted gross income minimums;
or accelerating year-end bonuses;
S corp or partnership basis to enable deduction of losses;
expenses using a credit card to accelerate deductions without the need for immediate cash.