HAPPY NEW YEAR: TAX UPDATES AND OTHER NEWS OF INTEREST
Michael E. Parmelee - Partner, January 10, 2005
Dear Client:
We wanted to take this opportunity to wish you Happy New Year! Of course, the new year brings with it not only our best wishes for you, but the impending filing of your 2004 income tax r
eturn and an advance look at some of the new laws affecting not only your 2004 return but some additional changes for 2005.
Hot Off the Press: Congress Passes Tsunami Retroactive Deduction
Congress, on January 6, 2005, passed a new law allowing you to deduct on your 2004 return any cash contributions made in January, 2005 for aid to tsunami victims’ relief in Southeast Asia. The donation must be specifically earmarked for this effort. (For example, if you make a donation to the Red Cross, you must earmark the donation for tsunami victims – not just a general donation to the Red Cross). Your donation should be to a qualified domestic charitable organization (not a foreign organization). If you are not sure whether the particular charity you are considering is a qualified charity, call us and we can review the IRS list of qualified charities for you. You will have an election to take the donation either on your 2004 or 2005 return. (California has not conformed).
Act Now: California has a very limited Time Period for Tax Penalty Amnesty Application
We know that most of our clients are in compliance with both California and Federal filing and reporting for all prior years. However, if you are not or if you have a relative or friend who is not, California has recently announced a limited amnesty period that will start on February 1, 2005 and end on March 31, 2005. They are taking the “carrot and stick” approach. If amnesty is applied for during that period, your penalties for years up through 2002 will be forgiven (you will still owe the taxes and interest). However, if you had the chance to apply for amnesty and did not, then the penalties after the amnesty period will be double the amount they were previously. This amnesty for penalties could also apply to you if you have assessments for prior years that are not yet paid. If you need assistance with this (or have a friend or relative who needs assistance) you must act now to take advantage of this offer. Contact us for assistance. (No IRS conformity).
Electronic Filing is Still Mandatory
Together, we have had the experience of a full year of electronic filing for your individual returns. For 2004 (and the future) California is still mandating the filing of individual returns electronically. While it is more work for us to process, it brings you some added benefits of not having to mail your returns and it also provides you with an electronic “receipt” for the filing. Many other states are now also requiring the same procedure. We will not only continue to file all individual returns electronically (both Federal and State), but we will begin filing partnership returns electronically as well. We believe eventually all returns will be filed (and will be required to be filed) electronically.
Canadian Drugs Not Deductible
If you purchased any drugs from Canada, they will not be deductible as a medical expense. Because the purchase of drugs from Canada is illegal, deduction for the expense is not allowed.
IRS now Grouping Non-Cash Contributions for Purposes of the Appraisal Rule.
Non-cash donations of $5,000 or more (except marketable securities) have always required appraisals of the property under very specific and strict rules. The IRS has announced that it will now apply a “grouping” rule for similar types of items, even if given to different charities. This rule is effective for 2004. What this means is that if you donate $3,100 of household items to one charity in March, and then donate $2,000 of household items to another charity in September, then you have reached the $5,000 threshold and would need an appraisal. The problem, of course, is that until you know this in September, your March items are already gone and unable to be appraised anymore. Be sure to be aware of this, arrange for qualifying appraisals, and contact us for the specific qualification rules for appraisals. (California has not conformed).
IRS to get Tough on Cell Phones and Automobiles
How many of you that use your cell phones for business keep a log of the calls you make? If you don’t you will find that you may lose the deduction if audited. This rule also applies to the use of your automobile or any other property capable of being used for both personal and business use.
Teacher Retention Credit: It’s Gone (Again)
Certain California teachers received a substantial tax credit in the year 2001 and again in 2003. The State suspended the credit in 2002 to save money. They have now suspended it again for 2004. If you received the credit in 2003, your 2004 liability may therefore be higher than you anticipated.
Sales Tax Deduction: It’s Back (Sort of)
New Federal law now allows, beginning in 2004, a deduction on your return for the greater of either the state income taxes you pay (to California or to any state) or the state and local sales taxes you pay (but not both). This rule was put into effect to help residents of those states that have no income tax (such as Washington, Nevada, Texas, Florida and a few others) obtain some equity with other states that financed their activities with income taxes instead of sales taxes. This rule is available to everyone, so if you happen to buy any “large ticket” items such as cars, boats or airplanes, be sure to let us know about that. Also, if you tend to spend more in sales taxes than you do in income taxes be sure to keep track of that. (There is a table of “standard” amounts of sales tax based on your income and family size which we will use to compare to your income tax and we will take the greater of the two amounts for you. However, provide us with detail of sales tax spent and we can deduct the larger of the three items for you.) (California has not conformed).
Donating your Car (or Boat or Airplane) to Charity? Be Aware of the New Rules
Beginning on January 1, 2005, the rules for the deduction of the value of a vehicle to charity (if over $500) have been changed. Previously, you were allowed a full deduction for the fair market value of the vehicle. If the charity subsequently sold the vehicle at a smaller amount, it did not matter. Beginning January 1, 2005, if the charity sells your vehicle, your deduction is limited to the amount for which they sell the vehicle. The charity will have to notify you of the sales price. If the vehicle is to be used by the charity, you must get a certification from the charity that meets new requirements. (California has not conformed).
Exchanging a Rental for a Personal Residence
If you have or are thinking of exchanging a rental property for rental property that would later become your personal residence, you should discuss with us the effect of a new law that now requires you to wait five years to sell any property you acquired in an exchange that becomes your personal residence.
Exemption for Children of Divorced Parents
A new law has changed the rules for claiming the exemption for children of divorced parents. Formerly, the parent with custody was able to claim the exemption. Beginning in 2005, the divorce agreement controls. If the divorce decree is silent (and assuming the parents provide over half the support for the child), the parent with the most income may now be entitled to the exemption. Any parent entitled to an exemption may assign the exemption to the other parent with the proper paperwork. Be sure to see us for information on this very complicated area of the tax law. (California has not conformed).
Division of Trust and Allocation of Assets:
If there is a death in your family or in the family of someone you know, remember that the majority of trusts require a revaluation and division of trust assets on the death of the first spouse. Additionally, that usually begins the period when a new, separate tax return must be filed for the trust of either a first-dying spouse or single taxpayer. If the asset level is high enough, an estate tax return may also be required. Be sure to contact us as soon as possible when this happens. If you don’t have a trust, you should see an attorney right away to have one written for you.
Alternative Minimum Tax
Due to the required calculation and imposition of the alternative minimum tax, and its effect on many more taxpayers, if you have significant gains from any sales of securities, property or other assets, be sure to contact us before the due date of the next quarterly estimated tax payments after the sale(s). We may need to calculate and re-determine your estimates to make the best use of your deductions for state income taxes and to plan for making all required pre-payments of taxes.
How Long Should I Retain my Financial Records?
This is a question we receive often. To assist you with this, we have prepared a special discussion of this and have included it in this mailing for you. It is also available on our website.
Outsourcing? Not Us!
You may have read in the newspapers about firms that hire leased employees in other countries, transmit their clients’ financial records to them electronically, have them process the tax returns and transmit them back to the tax preparation firm for printing. This is done in an effort to save money at the potential risk of having client data in the hands of someone not known. We do not, have not and will not outsource our work to other countries.
World-wide Web Access:
Don’t forget you can find us on the web at either of the following addresses:
You will find lots of useful information there as well as links to other sites..
Special Tax Provisions Applicable to Businesses:
IRS Attacking Un-reimbursed Business Expenses in Personal Returns
If you pay some expenses for your business and have previously deducted them on your personal returns, you should now attempt to get them all paid directly by your business or have your business reimburse you for the expense, based on 2004 court cases.
Depreciation Changes for Business Taxpayers
- SUV Deduction Changes
For all SUV’s (exceeding 6,000 gross vehicle weight) placed in service after 10-22-04, the maximum amount of Sec. 179 first year depreciation has been limited to $25,000 (plus regular depreciation on the remaining cost). This applies to vehicles weighing as much as 14,000 pounds. There are some exemptions for specific vehicles.
- Sec. 179 Expensing
The limit for first-year expensing of new equipment for 2005 has been raised to $105,000 (providing your total purchases of equipment do not exceed $420,000). This also applies to off-the-shelf software. (California limit is still $25,000 with a total expense of $200,000. Also, corporations in California get no Sec. 179.)
- Mileage Rate for 2005 increases to 40.5 cents/mile.
- Qualified Leasehold Improvement Property Recovery Period Now 15 years.
Effective for non-residential assets placed in service from 10/22/04 to 12/31/05. Contact us for details of qualified property and other requirements. (California has not conformed).
Write-off of Organizational and Start-up Expenses
A new law now allows for immediate write-off of organizational costs and start-up expenses up to $5,000 (instead of the old write-off period of five years) provided the total costs do not exceed $50,000. Any amounts over the $5,000, however, will now have to be amortized over a fifteen year period. (California has not conformed).
Sales and Use Tax Amnesty
Just as there is an amnesty period for income taxes, there is also an amnesty period for sales and use taxes. If you have unreported or underreported sales and use taxes for periods prior to 2003, you have from February 1, 2005 to March 31, 2005 to apply for amnesty from the penalties or, like individuals, you may face increased penalties after that.
Manufacturing Activity Deduction
Beginning in 2005, there is a new deduction for 3% (phasing up to 9% in 2010) that applies to all sale (not retail), lease, or rental of any product manufactured, grown or extracted in the US. If you would like more information on this, please contact us. (California has not conformed).
Closing
This short discussion cannot, obviously, include all of the information about the above topics or all of the detail necessary to make informed decisions about any of the subjects. It is intended as a brief discussion only so you can be aware of some of the new potential provisions that may affect you. If you have any questions on these, feel free to make an appointment with us to discuss any areas of interest to you. Let us know in advance your areas of concern so we can be sure to address your specific situation.
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