The 2004 tax year is coming to an end, and it's time to think about
actions you and your business should take by the end of the year,
and any planning that should be done for the future, in order to
minimize taxes. The American Jobs Creation Act of 2004 and the
Working Families Tax Relief Act of 2004, both passed in
October, provide significant opportunities for tax savings. As a
result, it may be worth taking a second look at your individual and
business plans for 2004 and later years. Principal features of the
new tax laws that affect individuals are:

(1) The option to deduct sales tax in lieu of a state income tax
deduction;

(2) An extension of the $1,000 child tax credit to 2009;

(3) An acceleration of the increase in refundability of the child tax
credit to 15 percent of the taxpayer's earned income in excess of
$10,750;

(4) Marriage penalty relief in the form of an increase in the basic
standard deduction for joint returns for 2005-2008 so that it is
effectively twice the basic standard amount for individuals;

(5) An expansion of the 10 percent bracket for single individuals
to $7,150 ($14,300 for married individuals filing jointly);

(6) A continuation through 2005 of the higher exemption amounts
for the alternative minimum tax ($58,000 for married individuals
filing jointly and surviving spouses and $40,250 for single
individuals);

(7) A provision that includes combat pay in earned income for
several purposes;

(8) A continuation of the $250 above-the-line deduction for
teacher classroom expenses;

(9) A continuation of the deduction for clean-fuel vehicles and the
tax credit for electric vehicles;

(10) A provision that includes in income the gain on a sale of a
principal residence acquired in certain like-kind exchange
transactions (i.e., no exclusion of gain is allowed for such sales);

(11) The exclusion from income of payments received under
certain education loan repayment programs; and

(12) The elimination of FICA and FUTA taxes on the exercise of
certain stock options. In addition, beginning in 2005, the deduction
available for donating a vehicle to a charity is severely limited.

Thus, if you were planning on donating a vehicle to charity, it
should be done by the end of 2004. Other changes to be aware of
for 2004 include the following:

(1) The IRA deduction is now allowed for more people covered
by retirement plans;

(2) The amount of tuition and fees that may be deducted has been
increased to $4,000 if adjusted gross income is below certain
thresholds;

(3) The maximum amount that can be deferred in 2004 for 401(k)
plans is $13,000, with a catch-up contribution of up to $3,000 for
taxpayers 50 and older.

For 2004, businesses should be aware of the following changes:

(1) For new business start-ups, there is an immediate $5,000
deduction for start-up expenses and a $5,000 deduction for
organizational expenses;

(2) The recovery periods for depreciating certain assets have
been reduced – thus increasing depreciation deductions for the
year;

(3) New requirements apply to certain non-qualified deferred
compensation plans;

(4) This is the last year to take advantage of the bonus
depreciation provisions;

(5) The provision allowing businesses to expense the cost of a
sports utility vehicle up to $100,000 has been reduced to
$25,000; and

(6) Many of the business credits that had expired in 2004 have
been extended.

For 2005, even more significant changes are taking place. For tax
years beginning after 2004, businesses can deduct from taxable
income an amount equal to 3 percent of the lesser of (1) qualified
production activities income for the year, or (2) taxable income.
The percentage doubles to 6 percent for 2007 through 2009. For
all tax years after 2009, the deduction is equal to 9 percent.
Generally, qualified production activities income is domestic
production gross receipts, reduced by the sum of: (1) the costs of
goods sold that are allocable to those receipts; (2) other
deductions, expenses, or losses that are directly allocable to those
receipts; and (3) a proper share of other deductions, expenses,
and losses that are not directly allocable to such receipts or
another class of income. The definition of "domestic production
gross receipts" is very broad and many businesses are now busy
evaluating their activities to see if the receipts from those activities
qualify for the deduction or, if they do not, how their activities may
be rearranged to take advantage of this new provision.

In addition, there have been major changes in the S corporation
provisions, although many will not affect most S shareholders. In
light of all these new developments, it is important that you contact
our offices so we can discuss the impact of these changes on your
individual and business tax situation.

For our clients who are projected to owe additional income tax, a
tax projection can help determine which tax-minimizing strategies
should be used before the end of the year to reduce or eliminate
any tax due.

For our clients who are due a refund, we can ensure your tax
return is filed as early as possible, allowing you to receive your
refund and enjoy your money more quickly.

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