This past October, President Bush signed two tax bills into law. The American Jobs Creation Act of 2004 focuses mainly on business tax. The Working Families Tax Relief Act of 2004 extended many of the tax law changes in previous tax bills that were due to expire. Some key provisions of both bills are explained below.
Sales Tax Deduction: For tax years beginning in 2004 and 2005, 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. Generally, taxpayers can use either their actual expenses or the optional state sales tax tables to figure their state and local general sales tax deduction, 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. (At the time of writing this article, the optional state sales tax tables, found in IRS Publication 600, were not available, so assessments could not be made as to whom this option would assist.)
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, 2004. Under this act, 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 October 23 was $100,000.) The new limit does not affect other types of property in which the taxpayer decides to expense the cost instead of depreciating the property.
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. This act 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 Oct. 22, 2004.
Child Tax Credit Stays at $1,000: Individuals may claim a child tax credit of $1,000 for each qualifying child under age 17 at the close of the calendar year in which the tax year begins. The maximum credit per child was to be $700 for 2005-2008, $800 for 2009, and $1,000 for 2010. Because of the 2001 EGTRRA sunset provisions, the maximum tax credit per child will (absent a law change) revert to $500 after 2010.
Credit for Qualified Electric Vehicles Through 2005: A tax credit is available for the cost of a qualified electric vehicle placed in service before 2007. The amount of the credit is 10 percent of the vehicle’s cost, limited to a maximum credit of $4,000 for any vehicle.
Educators’ Deduction: The Working Families Tax Relief Act of 2004 reinstated the educator expense deduction, which allows teachers and other educators o deduct up to $250 of expenses for books and other classroom supplies.
