It is time again for year-end planning and consideration of tax changes to prepare you for wise decisions which save you money. Tax laws passed in 2004 offer a continuation of some tax breaks granted in 2003, new tax breaks especially for businesses, along with restriction of SUV breaks and car donations and penalty increases for perceived abuse such as phony home businesses and use of abusive tax shelters. Some of the good news: The child credit stays at $1,000 for 2005-2009, the increased 10% tax bracket remains as is, the 15% joint bracket is retained at double the single bracket for 2005-2007, and the joint standard deduction remains double the single amount 2005-2008. Also, scheduled alternative minimum tax (AMT) exemption reduction is now repealed for 2005, and credits such as foreign tax, dependent care, and education credits are allowed fully against the AMT tax, with hopes Congress will address the growing issue of individuals paying higher tax rates due to the size of their otherwise eligible deductions and exemptions and the nature of income taxed before 2006. The non-itemizer $250 deduction for eligible school teachers’ expenses paid for classroom supplies is extended for 2004 and 2005.

For automobiles, hybrid and electric car purchase incentives are extended to 2004 and 2005. The mileage rate for deduction of business use of personal automobiles has been increased 3 cents per mile to 40.5 cents per mile in 2005 from 37.5 cents per mile in 2004. However, the tax break of including the business use portion of heavy (over 6,000 gross weight and less than 14,000 pounds) sport utility vehicles (SUVs) as deductible in full to the section 179 acquisition year write-off as depreciation to the limits of $102,000 for 2004 and $105,000 for 2005, has been reduced to a limit of $25,000 if acquired after October 22. To address other areas of perceived bad tax policy, Congress has approved a change in valuation of auto or boat charitable donations commencing 2005 to a limit of the sales proceeds as reported to you by the charity unless the charity uses it in its charitable activities or improves the vehicle in a substantial way before selling it. Since only in those instances can fair value estimate be used for deduction purpose, you probably are financially ahead selling or trading the vehicle.

Florida residents with sufficient deductions to itemize will benefit from addition of deductible sales tax or state income tax (whichever is higher) beginning in 2004. For Floridians not subject to state income tax, that represents a welcome addition. To a standard table amount to be published by IRS based upon income levels, family size, and residency, you may add tax paid on car and boat purchases, or deduct actual total sales tax paid as evidenced by receipts (which may be higher in years of big-ticket purchases such as expensive art, jewelry, furnishings, etc.)

Floridians and others in hurricane disaster areas this year having major unreimbursed damages may get a casualty loss deduction, and may take it against 2003 income taxes instead of waiting to claim the losses on 2004 returns. Reimbursement is preferable, because casualty loss deductions are limited and based upon both size of loss and amount of income in the year claimed. Call us now to discuss your situation and documentation required if this applies to you.

Business clients should be aware of the end of 50% bonus depreciation for purchase of new business equipment and furnishings December 31, 2004, as well as increasing limits on section 179 writeoff against profits from $102,000 in 2004 to $105,000 in 2005. If purchases are anticipated soon, accelerate them to 2004 for increased acquisition year writeoff even if this is a loss year and basis exists for deduction (consider advancing funds to your S corporation if you have a loss year but no basis for current deduction).

Beginning 2005, business corporations and self-employed business owners which manufacture goods in the U.S. (including construction and architectural, engineering, energy production, computer software, film and videotapes, and agricultural products processing as well as traditional domestic manufacturing companies) can claim a deduction based on production activities and corporate taxable income or individual adjusted gross income of 3% in 2005, 6% in 2007 and 9% beginning in 2009, against regular and AMT tax. Deferring income or accelerating deductions for those businesses this year may provide lower tax rates next year as well as deferral.

Leasehold improvements made after October 22, 2004, and before January 1, 2006, are eligible for 15-year depreciation (vs. 39 years before that date, the same as non-residential building depreciation). This applies to writeoffs of improvements made by landlord or tenant (not available if they are related) in service more than three years after the building is placed in service. (Note: Some improvement components are eligible for faster writeoff of five or seven years, and the undepreciated balance of abandoned improvements may be written off upon abandonment.)

To offset anticipated reduced revenue from business taxes on income, including items above and extension of credits such as research and qualified employment, and environmental remediation cost expensing previously scheduled to expire, deferred compensation plan rules have become more restrictive, export subsidiaries are repealed, some loopholes have been closed, and penalties for use, promotion or approval of tax shelters have been increased.

Though FICA rates remain unchanged, the wage base increases to $90,000 in 2005 from $87,900 in 2004. Social security recipients will receive 2.7% increase in benefits in 2005.