Some of the Key Changes That Affect Your 2004 Taxes
·
Reduced Tax Rates.
The cornerstone of the new law is rate reduction. The law
accelerates the rate reductions created in 2001 that had been
scheduled to become effective in 2006 in most cases. These rate
cuts apply to tax rates above the 15% tax bracket.
The 2003 Act also accelerates the broadening of the 10% tax
bracket that had been scheduled to occur in 2008, and adjusts
the 15% bracket for married couples filing joint returns. This
change is intended to provide some relief from the marriage
penalty.
·
Increase in Child Tax Credit. A big change was the increase in the child tax credit from
$600 to $1,000 per eligible child for 2003 and 2004. The child
tax credit applies for a child under the age of 17 if the
taxpayer's AGI is below a threshold amount.
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Taxpayers with a
credit amount more than their tax could get a refund of the
difference, up to 10% of the amount by which their 2004 taxable
earned income exceeds $10,750. This percentage was raised to 15%
for 2004, meaning a larger refund for many of these taxpayers.
·
Capital Gain Rate Reduction. The top rate on long-term capital gains declines to 15%,
down from 20%, for sales and exchanges occurring after May 5,
2003. As a reminder, this 15% tax rate applies only to gains on
assets held for more than one year.
·
Dividend Income Rate Reduction. Income from qualifying dividend income is now taxed at a
top rate of 15%. Generally, the reduced rates apply only to
dividends from a domestic corporation or a qualified foreign
corporation.
·
Educators’
Deduction. This had
expired at the end of 2003, but was restored for two more years.
·
Clean Fuel
Vehicle Deduction. The
maximum amount of this deduction was scheduled to drop this year
and next, but has been retained at the $2,000 level through
2005.
·
Combat Pay.
Some military personnel receiving combat pay get larger tax
credits because of two law changes. The new law counts
excludable combat pay as income when figuring the Child Tax
Credit and gives the taxpayer the option of counting or ignoring
combat pay as income when figuring the Earned Income Tax Credit.
Counting combat pay as income when calculating these credits
does not change the exclusion of combat pay from taxable income.
·
Sales Tax
Deduction. Taxpayers
who itemize deductions will have a choice of claiming a state
and local tax deduction for either sales or income taxes on
their 2004 and 2005 returns. Publication 600, Optional State
Sales Tax Tables provides tables to use in determining the
deduction amount, relieving taxpayers of the need to save
receipts throughout the year. Sales taxes paid on motor vehicles
and boats may be added to the table amount, but only up to the
amount paid at the general sales tax rate. Taxpayers will check
a box on Schedule A, Itemized Deductions, to indicate whether
their deduction is for sales or income taxes.
·
New Law
Encourages Tsunami Relief Contributions.
Contributions made to qualified charities to help victims of the
Tsunami can be deducted for tax year 2004 even if they are made
in January 2005, under a new law enacted on Jan. 7.
·
Sale of Personal
Residence Acquired in a Like-kind Exchange.
Taxpayers who convert rental property to a principal residence
should know that a tax law change may limit their ability to
exclude gain on the sale of that residence if they obtained the
property through a like-kind exchange. Generally, a taxpayer can
exclude up to $250,000 of gain on the sale of a home, provided
the individual has owned and used it as a principal residence
for two out of the five years before the sale. The exclusion is
$500,000 for a married couple if both meet the use test. The
American Jobs Creation Act of 2004 does not allow any exclusion
if the taxpayer sells the home within five years of acquiring
the property through a like-kind exchange. The new law applies
to sales after October 22, 2004.
Changes Affecting Businesses
·
Increase in Section 179 Expensing.
The dollar limit on first-year expensing, also known
as the Section 179 election, increases to $100,000 for equipment
placed in service after December 31, 2002. The previous limit
was $25,000. This means a business placing in service equipment
costing $100,000 can deduct the cost in the first year and does
not have to depreciate it over a number of years.
·
Expense Limit
for SUVs. Businesses
should be aware of a change regarding the deduction for certain
sport utility vehicles (SUVs) placed in service after Oct. 22.
Under the American Jobs Creation Act of 2004, businesses cannot
take a first-year deduction of more than $25,000 for an SUV. The
business would depreciate the remaining cost. (The limit for
vehicles placed in service before Oct. 23 was $100,000.) The new
limit does not affect other types of property where the taxpayer
decides to expense the cost instead of depreciating the
property.
·
Bonus Depreciation Increase. The provisions for bonus depreciation increases from
30% to 50% for equipment acquired after May 5, 2003. This
higher limit runs only through 2004.
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