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Congress passed two new tax laws in autumn 2004: the Working Families Tax Relief Act of 2004 (WFTRA) and the American Jobs Creation Act of 2004 (AJCA). Both laws include numerous new provisions that promise to deliver tax savings to nearly every American. Some of the most notable changes include individual tax rate reductions, an itemized deduction for sales taxes, new requirements for charitable donation of vehicles, a reduction in SUV expensing limits, a new deduction for domestic production activities, and an increase in the child and dependent care credits. We’ve summarized several of these new provisions below to assist you in determining what may apply in your situation. However, we caution you that the new rules are very complex and everyone’s tax situation is different. As such, you may not qualify for some of the provisions due to income phaseouts and other limitations not discussed below. We urge you to seek professional assistance before acting on anything you read in this summary.

For tax years beginning in 2004 and 2005, the AJCA provides that individuals who itemize may elect to claim an itemized deduction for state and local general sales and use taxes instead of deducting state and local income taxes. For taxpayers in states that do not have an income tax such as Washington, this could mean significant federal income-tax savings. Even some who are subject to state income tax will benefit from this change if they pay more sales tax than state income tax.

Taxpayers making the election may claim either (1) the actual sales and use taxes they paid during the year or (2) an amount taken from the IRS table. To the table amount, taxpayers may add the actual amount of sales tax paid on motor vehicles, boats, and other items specified by the IRS. Those using the actual-tax-paid method should be prepared to provide proof by way of sales receipts, etc., of the sales tax paid.

The IRS has long felt that some taxpayers who donate property to charities are taking advantage of certain loopholes in the tax law.

Take charitable donations of cars, for instance. Under the law, the itemized deduction amount generally equals the car's fair market value on the date of the contribution (other deduction limits apply.) While a charity is required to acknowledge donations of $250 or more in writing, the donor is responsible for determining the deductible value. The IRS's concern: donors have been deducting far greater amounts than what charities could realize on sales of the vehicles to third parties.

Under the AJCA, the rules are tightened up for contributions made after 2004. The new law generally limits the charitable contribution deduction for donations of motor vehicles, boats, and planes to the actual amount the charity receives from the sale of the vehicle. Charities are required to provide this information to the donor within 30 days of the sale.

Effective for purchases after October 22, 2004, the AJCA limits the maximum dollar amount under Section 179 for sport utility vehicles to $25,000. Under the old law, an SUV with a gross loaded vehicle weight in excess of 6,000 lbs. could be expensed under Section 179 up to a possible maximum of $102,000. Certain vehicles are excluded from the reduced Section 179 expense (e.g., vehicles with a seating capacity behind the driver of nine persons or more, etc.)

The $1,000 child tax credit allowed in 2004 for each qualifying child under age 17 was supposed to decline to $700 for 2005-2008 and then increase to $800 for 2009 and back to $1,000 for 2010. Due to a "sunset provision", the credit is scheduled to revert to $500 for 2011 and beyond.

The WFTRA increases the child tax credit to $1,000 for years 2005 through 2009. Therefore, the credit remains at $1,000 through 2010. Absent a further law change, the credit will still revert to $500 in 2011. The credit is reduced when adjusted gross income exceeds certain levels (e.g., $110,000 for joint filers, $75,000 for unmarried filers). For low-income taxpayers, the child tax credit is refundable, within certain limits.

In addition, under the WFTRA, the tax law's definition of "child" is standardized. Thus, a uniform rule applies in determining who is a "child" for purposes of the child tax credit, dependency exemption, earned income credit, dependent care credit, and head of household filing status.

The AJCA provides a new tax deduction for a percentage of business income earned from manufacturing and certain other production activities occurring in the United States. The deduction, which is expected to generate some $77 billion in benefits over 10 years, is available to regular C corporations, S corporations, partnerships, sole proprietorships, cooperatives, and estates and trusts.

The deduction equals a percentage (3% for years 2005-2006, 6% for years 2007-2009, and 9% for years 2010 and later) of the lessor of:

- The "qualified production activities income" of the taxpayer for the tax year, or

- Taxable income determined without regard to the new deduction (modified adjusted gross income for individual taxpayers).

The deduction is limited to 50% of the wages paid by the taxpayer during the calendar year that ends in the tax year. Wages include elective deferrals made to 401(k) plans and other retirement plans. If you would like to know more information regarding this deduction please contact us.

Prior tax law required that the 10% income-tax bracket amounts be reduced after 2004, so that less income would be taxed at a 10% rate and more taxed at 15% or higher tax rates.

The WFTRA repeals the scheduled reduction in the 10% bracket amounts. For 2005, the 10% bracket is currently estimated to apply to the first $7,300 of taxable income (single filers and married couples filing separately), $14,600 (for joint filers), and $10,450 (for heads of household), with the amounts to be adjusted for inflation for 2006 through 2010. The 10% bracket is scheduled to be eliminated in 2011 absent congressional action. Almost all taxpayers gain some benefit from the higher 10% bracket amount.

The Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004 were enacted with the goal of stimulating the economy through individual and business tax breaks. As a result, it is very important to look at your tax and financial situation now and determine how these laws will affect you. We would be happy to help you with your planning and with a variety of other related services that our firm offers. Let our professionals be of service to you.