TAX NEWS

The Good News...

• Congress has increased the standard deduction for married couples to $9500, double the amount for single taxpayers. For heads of household, the deduction is $7000.
• This year's federal income tax rates are scheduled to decrease. Because of lower tax rates --- 10 percent income bracket extended, top rate lowered from 38 percent to 35 percent --- and higher credits, your personal tax liability will greatly improve this year.
• Section 179 depreciation has gone up to $100,000 from $24,000. Now a small-business owner can take $100,000 of his or her capital purchases.
• Bonus depreciation has increased from 30 percent to 50 percent, further improving capital deductions.
• If you have a home office, you can now claim other space you use in your basement or garage or shed to store work materials, even if that space isn't used exclusively for work.
• There is some relief from the "marriage penalty" that affects a few couples, but only for 2 years.
• Some dividends will be taxed at the lower rate accorded long-term capital gains, but there are several qualifications that must be met. Be sure you have copies of all your 1099-DIV's.
• If you want to e-file but you will owe money, you can e-file as early as you want but you don't have to pay until April 15.
• Those who use the Head of Household should consider e-filing, since once you pass the e-file requirements you will not be pestered by that annual Head of Household Audit Letter.
• Southern California Wildfires: If you lost a home in the wildfires this fall, a disaster loss deduction may be claimed either (1) on the 2004 income tax return or (2) by amending the 2003 income tax return (for a faster refund).
• Be sure to contribute as much as you can to an IRA or other retirement plan. Even if you do not get a tax deduction, the investment grows tax-deferred, even tax free if it is a Roth IRA.
• Very low-income people may be eligible for a tax credit for their IRA contributions this year. It disappears if your Adjusted Gross Income is over $25,000 if single, $50,000 if married.
• Phase-out limits are gradually being raised and tax rates gradually lowered over the next few years, at least until the federal government decides it needs more money.
• There is now an insurance break for the self-employed. If you are self-employed and qualify, you can deduct 100% of your 2004 health insurance premiums.
• With respect to the credit for dependent kids, if you claim kids under age 17 as dependents, you qualify for a $1000 credit for each child. (The total shrinks for joint filers who earned more than $110,000 and for single filers earning more than $75,000).
• We do now have a sales tax deduction on Schedule A. We can deduct either the sales tax or state income tax paid, whichever is better.
• Depreciate business and investment property faster, including bonus first year depreciation. But depreciate your business SUN more slowly. Limited to $25,00 first year bonus depreciation.
• Depreciation - This year, you can take up to $102,000 of the cost of certain business assets and 50% bonus depreciation of the remaining balance for qualified purchases before claiming regular depreciation. But the federal rules are complex and California has completely different rules.
• California NOL - California's net operating loss deduction is back. If you had losses in prior years, we can take them this year but it's important we plan our income strategy to maximize use of the losses and minimize federal tax.
• Pension plans - The maximum contribution to a profit sharing plan increased for 2004 to $41,000. Now is the time to talk about setting up a plan before the end of the year to maximize the amount you can set aside for your retirement. There are many great options and as long as the plan is established now, you don't have to contribute until next year when you file your tax return.

The Bad News...

• Even though you can expense up to $100,000 of new business equipment this year on your Schedule C, the limit for your California state form is still $25,000.
• If you are buying a vehicle that weighs over 6,000 pounds in order to get a big first-year write-off, be aware that when you sell it you will have to recapture (pay tax on) all excess depreciation taken. Note that all new vehicles of any weight and new equipment qualify for additional first-year depreciation if you choose, but again there is recapture if you sell.
• Although tax rates are lower, withholding was decreased, so you may owe anyway.
• If you are aware of the fact that employment taxes are being withheld and not paid over to the government, you can be fined huge amounts.
• There is insignificant relief from Alternative Minimum Tax (AMT, otherwise known as "Awful Mean Tax'' or the ''Stealth Tax"), but very little and only for 2 years, after which it reverts to the 1999 level (worse than last year). Don't pre-pay taxes this year unless you consult with me, as it is likely to put you into AMT. Soon 1/3 of all taxpayers will be paying AMT unless you can talk your legislators into reform.
• Any person or business with a net operating loss from a prior year will not be able to use it to offset income in 2003.
• The Teacher Retention Credit has been eliminated since 2003. But luckily, teachers may still take the $250 deduction for school supplies and expenses against income - for federal but not California purposes.
• If you sold California real estate in 2004, the State will require that 3-1/3% of the GROSS sales price be withheld and paid to the State, unless an exception applies. The exceptions are: sales of $100,000 or less; sale of a principal residence; like-kind exchanges; sales at a loss (be prepared to prove the loss). If your gain is minimal, say $1,000 and your sale price is $300,000, you will still be required to have $10,000 withheld for the State. Of course, you'll get your withholding back when you file your 2003 tax return, but that can be a long time to wait on an interest-free loan to the State! The State will not grant a waiver or a reduced rate of withholding. The penalty for not complying is $500 or 10% of the withholding amount, whichever is greater.
• If you have donated goods to a charity, make certain to put a FMV to them. If the value is more than $500, we will fill out an additional form as well. Cash and goods to charities do count. Beginning in 2005, however, if you donate an automobile to a charity, you can only deduct whatever the charity received in the sale.
• SUV deduction changed - The first-year deduction for a new SUV has been cut from $102,000 to $25,000. Although this change has already happened, there are other changes that make it more advantageous to buy that vehicle this year.
• Exchanging rentals and selling residences - If you are working on a strategy to exchange rental property for residential property that you may subsequently live in, the rules have changed. You must now wait at least five years to sell any property you obtained in an exchange.

New for 2005:

• Make sure you take all travel and entertainment deductions. Any business-component aspect of meals or trips qualifies.
• Consider employing your spouse and children. You could pay your spouse a small salary, provide him or her with family health insurance as a benefit and receive a full write-off of health insurance, rather than a 70 percent credit. And your children's pay is tax-free up to $4750.
• If you have one or more children under age 17, be prepared to indicate how much you received from the IRS for the advance child care credit payment because I will need to know this in order to complete your tax returns.
• If you bought new business equipment, I will need to know the exact date and whether you bought it new or used.
• California use tax on items you purchased in another state or over the Internet is now payable with your state income tax return rather than separately to the State Board of Equalization (SBE) if you so elect. If you so elect, please provide me with an itemized list of all items purchased, the purchase price of each item and the amount of sales tax paid to another state on each
  item.
• Be sure to give me your HUD-1 for any real property sold in 2004. If you had State tax withheld on the sale, be sure I know how much and don't be surprised if there are problems, as I am told escrow agents have not always been handling it correctly. Also expect to be paying Alternative Minimum Tax (AMT) on your Federal tax return.
• The Social Security website has a "breakeven" calculator to help you decide whether to retire at 62 or 65 www.ssa.gov/retire.
• A living trust is more important than ever now due to the dramatic increase in probate fees by the State to try to recoup revenues lost due to the rising Federal estate tax exemption.
• Manufacturer's deduction - Starting next year, the IRS will give special deductions to manufacturers. If your company is in the manufacturing sector, you may want to postpone purchases until next year.
• California amnesty - If you have any outstanding California tax debts or a pending federal audit - or letters from IRS or the state - we may be able to save you some money when you pay off the state. Let me know as soon as possible so we can prepare to solve your problems during amnesty.
• Beginning in 2005, the divorce decree controls who gets the exemption. No matter who has custody of the child, as long as the parents together provide more than one-half the support the non-custodial parent claims the child if the divorce decree so provides. If the divorce decree is silent, the custodial parent may give the exemption to the other parent. If you are the non-custodial parent and your divorce decree doesn't give you the right to the exemption, you may want to talk to your attorney.

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