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Income Tax Law Changes
Some recent tax law changes are effective for the 2004 Tax Year. If these items affect you, be sure to get the details when you prepare your tax return early next year.
Educators Deduction - This had expired at the end of 2003, but was restored by Congress or two more years. The Internal Revenue Service has advised teachers and other educators to save their receipts for books and other classroom supplies. |
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They will be able to deduct up to $250 of such expenses again this year, following recently-enacted legislation.
The Working Families Tax Relief Act of 2004 reinstated the educator expense deduction, which had expired at the end of last year, for both 2004 and 2005. Expenses incurred any time this year may qualify for the deduction, not just those since the Act was signed on October 4. The deduction is available to eligible educators in public or private elementary or secondary schools.
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To be eligible, a person must work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide.
An educator may subtract up to $250 of qualified out-of-pocket expenses when figuring adjusted gross income (AGI). This deduction is available whether or not the taxpayer itemizes deductions on Schedule A.
The IRS suggests that educators keep records of qualifying expenses in a folder or envelope with a label such as "Educator Expense Deduction" noting the date, amount and purpose of each purchase. This will help prevent a missed deduction at tax time.
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. The original purchaser of a qualifying hybrid gas-electric car may deduct $2,000 for the year the vehicle is first used, if that year is before 2006. In 2006, the deduction is scheduled to drop to $500.
These vehicles qualify for the clean-fuel vehicle deduction:
- Ford Escape Hybrid - Model Year 2005
- Toyota Prius - Model Years 2001 through 2005
- Honda Insight - Model Years 2000 through 2004
- Honda Civic Hybrid - Model Years 2003 and 2004
Individuals must use Form 1040, not one of the shorter forms, to claim this deduction. They should put "Clean-Fuel" and the deduction amount on the dotted line to the left of line 35, including this amount in that line's total adjustments to income. (They would have used line 33 on the 2003 Form 1040; line 34 on the 2002 form; line 32 the previous two years.)
Qualifying individuals who did not claim the deduction when they filed may claim it on an amended return (Form 1040X). Generally, taxpayers may amend returns up to three years from the original return's due date.
The Internal Revenue Service has certified the Toyota Prius for model year 2005 as being eligible for the clean-burning fuel deduction. The certification means taxpayers who purchase this vehicle new may claim a tax deduction of $2,000 on their individual income tax return, Form 1040.
Federal tax law allows individuals to claim a deduction for the incremental cost of buying a motor vehicle that is propelled by a clean-burning fuel. By combining an electric motor with a gasoline-powered engine, these hybrid vehicles obtain greater fuel efficiency and produce fewer emissions than similar vehicles powered solely by conventional gasoline-powered engines.
Under the recently signed Working Families Tax Relief Act of 2004, the clean-burning fuel deduction is up to $2,000 for certified vehicles first put into service in 2004 and 2005. The deduction will be limited to $500 for vehicles placed in service in 2006 and no deduction will be allowed after that year. The one-time deduction must be taken in the year the vehicle is originally used. The taxpayer must be the original owner. Individuals take this benefit as an adjustment to income on Form 1040. They do not have to itemize deductions on their tax returns to claim it.
The amount of the deduction for the 2005 model year Prius was set after the manufacturer, Toyota Motor Sales, U.S.A., Inc., documented for the IRS the incremental cost related to the vehicle's electric motor and related equipment. The IRS previously certified the Toyota Prius for model years 2001, 2002, 2003 and 2004. The IRS also previously certified the Honda Insight for model years 2000, 2001, 2002, 2003 and 2004 and the Honda Civic Hybrid for model years 2003 and 2004.
Child Tax Credit - 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.
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.
Question: I am a member of the U.S. Armed Forces performing services in a combat zone. Is any part of my military pay for serving in this area excluded from gross income?
Answer: Yes, if you serve in a combat zone as an enlisted person or as a warrant officer (including commissioned warrant officers) for any part of a month, all your military pay received for military service that month is excluded from gross income. For commissioned officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.
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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. The IRS will provide optional tables for 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.
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.
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.
Deduction for Discrimination Suit Costs - A new deduction is available for those who pay attorney's fees and court costs in connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.
Under this new deduction, amounts paid for attorney's fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.
Income Tax |
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| ©2007 Michael Johnston, CPA. All Rights Reserved. |
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