|Newsletter Volume 12 (December 2004)|
Dear Clients, Family & Friends,
As I seem to say – another year is about done. It must be age, but each year goes by faster than the last. A lot has happened in my life this year & in my extended family there are three new members joining our world in the next six months and a new grown up member about to join the gang – welcome Trevor and the three as yet unnamed bambinos!
In the Tax World, there were two massive bills signed in the fall. They encompass many changes, some for businesses and some for individuals. One example of these changes has to do with those massive SUVs blocking my little car. If you bought yours by October 21 and it is a business vehicle, you can write off up to $102,000 of the purchase price (with some qualifications). If you bought it on the 22 nd , you can only deduct $25,000. (People always ask me why I like this career – this is why – constant changes challenge me.) There is more on the code changes later.
Because of the rapidly changing situation in taxes, I have started sending email newsletters to those of you whose address I have. These messages have dealt with taxes and privacy and fraud issues. If you did not receive these, they are available on my website. The only reasons you would not have received these missives is either I don't have your correct address or your ISP is blocking reception. Some ISPs (like AOL) may think I am a spammer due to the volume of people I send them too. Please contact your provider to allow these to go through (if you wish). If you do not have email, I will be happy to send these through the post if you contact me to do so.
About the biggest change in the tax laws for most of us in Washington is the deductibility of sales taxes. You have probably heard by now about this so I will sum up the relevant points without too much detail. Please call me if you need more information. There are two ways to calculate your deduction. One is using an as yet unpublished IRS table to look up your amount based on income, family size & sales tax rate. The other is to add up all sales taxes paid since the start of this year. If you want to use the table method, you can add on to the table certain large ticket items such as autos, boats, planes & big home improvement projects.
More on Sales Tax : If you live out of WA, you may deduct the sales taxes paid but only if you do not deduct your state income taxes paid.
Car Donations : If you are planning on donating an auto to charity, you better do it by December 31. The rules change after that & not in your favor. If the charity sells the car, you will only be able deduct the amount they receive, not the value as you can do this year. Generally, charities sell these donated vehicles for a fraction of their fair market value. Thus, a taxpayer's charitable contributions for such donations will be substantially limited after 2004.
SUV (more): To qualify for the $102,000 deduction, vehicles have to weigh over 14,000 pounds instead of the 6,000 earlier (do I detect Detroit ramping up the bodywork?)
Equipment : If you need to buy equipment for your business, do it before the end of the year to take advantage of the ‘Bonus Depreciation' rules that expire then.
Teachers : The deduction for educator expenses that expired at the end of 2003 has been reinstated for 2004 and 2005. Thus, up to $250 of expenses incurred by a K-12 teacher, instructor, counselor, principal or aide for books, supplies, computer equipment and other equipment, and supplementary materials used by the eligible educator in the classroom may be deducted as an above-the-line deduction.
Hybrid Autos : The credit was renewed for those of you who buy those little Hondas & Toyotas that run on electricity & gas.
Retirement Plans : The maximum amount that can be deferred for 2004 under 401(k) retirement plans is $13,000, with a catch-up contribution of up to $3,000 for taxpayers 50 and older. The IRA deduction is now allowed for more people covered by retirement plans
Starting a new business : For new business start-ups, there is an immediate $5,000 deduction for start-up expenses and a $5,000 deduction for organizational expenses.
Mileage rate up next year : Amazingly enough, the IRS realized that it does cost more to operate a car and has raised the standard business mileage rate to 40.5 cents. This is a three cent increase – the largest one year jump I have ever seen! The rate for medical miles is 15 cents & for moving & charity work the rate is 14 cents (it must not cost as much to drive when going to the doctor or helping out a homeless shelter, weird huh?) Let me know if you need a new logbook.
Children : You may not have realized it but the IRS has had seven different definitions of ‘child'. These covered the different tax aspects of kids. Someone (maybe the mileage guy) cut those down to one definition – way to go guys!
Health Savings Accounts : There is a lot to these new health insurance policies so please call me for more info. In a nut shell, they are a way to save a LOT of $$$ on your health insurance if you are an employer or pay for your own insurance as an individual or a self employed person. (My rate has dropped from $579 per month to $219!)
Stocks & Mutual Funds : This is not new, but if you have sold any securities we need to know the ‘basis' of them. This is either the purchase price (stocks & bonds) or the purchase price plus reinvested capital gains and dividends (mutual funds). If you don't know this info, please get it from your broker prior to your appointment. This is vital to calculating your taxes .
Home Purchase or Refinance : please bring with you the HUD-1 (closing escrow) statement so we can find all the deductions available.
Tuition & Related Expenses : For 2004 and 2005, you may deduct as an adjustment to income. In other words, an above-the-line deduction up to $4,000 (up from $3,000 in 2003) of qualified higher education tuition and related expenses, if your modified adjusted gross income (MAGI) is not more than $65,000 ($130,000 for a joint return). A taxpayer can deduct expenses for herself, her spouse, or her dependent, even if the taxpayer does not itemize deductions. If your MAGI exceeds $65,000 but not $80,000 (exceeding $130,000 but not $160,000 for married taxpayers) you are entitled to a $2,000 above-the-line deduction for qualified educational expenses.
IRA Distributions : If you turned 70 during 2003, you must start taking distributions from your traditional IRA. You must do so by December 31 and include the distribution in 2004 income. If you don't, the failure to take the distribution invokes a hefty penalty (50% of any distribution shortfall).
As always, feel free to pass this newsletter along to your own family & friends so they can read it too. Better yet, have them call me for their own FREE copy. I always appreciate referrals & reward you with a discount for you trusting me to help others.
I hope you find this a valuable resource & if you have any questions I would like you to call or e-mail me about them. Many of you are aware I do not charge for my time when answering your questions. The fees I charge for preparing your return include this service from me. Of course, if we spend a lot of time in the office for some serious planning, then there will be a fee charged.
I look forward to seeing each of you soon,
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