Tax Planning for 2004 and Beyond

by : Tiffany Morisue

As the year is quickly coming to a close, there is still time for you to take actions that will allow you to save taxes for this year and possibly next year as well. However, time is running out......

There have been a lot of tax legislation changes recently that may have an impact on your year-end tax planning for 2004. There are two major tax acts that have provisions that affect 2004 and beyond.

The American Jobs Creation Act of 2004 allows taxpayers to elect to take state and local general sales and use taxes as an itemized deduction in 2004 and 2005 instead of deducting state and local income taxes. This option can benefit taxpayers living in states with no income tax or others depending on their particular situations. This tax act also creates tougher deduction and substantiation rules for charitable contributions of autos after 2004, giving taxpayers an incentive to donate autos this year instead of next year.

The Working Families Tax Relief Act of 2004 extends some credits and deductions through 2005. The Act keeps the child tax credit at $1,000 through 2009 and extends marriage penalty relief. One deduction that has been extended through 2005 is the deduction for teaching-related expenses incurred by educators. A not-so-welcome change is that the “bonus" first-year depreciation was not extended, so it generally will not be available for assets bought and placed in service after 2004.

The following is a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply to everyone, but many taxpayers can benefit from numerous items. A consultation with your tax professional before year-end would allow that trusted advisor to work with you to narrow down tax savings actions specific to your situation – a customized tax savings plan.

Checklist of Tax Savings Actions:

• Increase the amount you set aside for next year in your employer's health flexible spending account so that you can get tax-free reimbursements for over-the-counter drugs.

• Consider arranging with your employer to defer a year-end bonus until 2005 (to defer taxes to 2005).

• If you own an interest in a partnership or S-corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.

• Consider prepaying expenses that can generate deductions for this year. If you are short on cash to do so, you can do so via credit card.

• Consider paying fourth quarter estimated state and local taxes by December 31st so they will be deductible for 2004 (if you itemize your deductions).

• Since 2004 is the last year for "bonus depreciation," business taxpayers should consider putting new equipment in service before year-end to get a 50% bonus first-year depreciation allowance, plus regular depreciation deductions on the remaining adjusted basis.

• Business taxpayers should also consider purchasing equipment, furniture, fixtures, etc. that qualify for the $102,000 business property expensing option (Federal Section 179 Deduction).

• Consider settling an insurance or damage claim in order to maximize your casualty loss deduction this year.

• You may be able to save taxes this year and next year by applying a bunching strategy to "miscellaneous" itemized deductions and medical expenses since the total for each of these categories must exceed a percentage of your adjusted gross income before anything is deductible. Examples of "miscellaneous" itemized deductions include job-related expenses not reimbursed by one's employer (e.g., uniforms), subscriptions to professional journals, union and professional dues, tuition for job-related courses, and tax preparation and tax consultation/planning fees.

• If you are facing a penalty for underpayment of estimated tax, you may be able to eliminate or reduce it by increasing your withholding.

• Self-employed individuals should consider setting up a self-employed retirement plan.

• You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $11,000 each year to an unlimited number of individuals but you cannot carry over unused exclusions from one year to the next.

• If you are thinking of donating a used auto to charity, consider doing so before 2005 in order to maximize your deduction.

• If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that you are considering selling, you should consider how to best coordinate timing your gains and losses to minimize tax on your gains and maximize the tax benefit from your losses.

These are just some steps that can be taken before year-end to save taxes. Do not let the cost of a meeting with your tax professional deter you from taking advantage of professional advice that could save you hundreds or even thousands of dollars in taxes (and penalties and/or interest in some cases). Additionally, it will allow you to be better prepared for tax preparation in early 2005. Depending on your tax situationArticle Search, a thorough consultation could take as little as an hour!