New tax laws may change your tax strategy

Question: Now that Congress has approved and the president has signed another new tax act, I feel uncertain about my 2004 tax bill, my tax outlook for 2005 and what deductions our practice might have lost. Do you have any guidance for me?

Answer: It is not surprising that you are befuddled. Congress has recently passed two significant tax acts within one month of each other that contain a wide variety of tax law changes.

The Working Families Tax Relief Act extends the child tax credit of $1,000, maintains the married standard deduction amount to twice the standard deduction for single taxpayers and allows the 15% tax bracket end for married taxpayers to be twice the single taxpayer's amount. These changes are effective for tax years 2005 through 2010.

The act maintains the $58,000 alternative minimum tax exemption amount for 2005, which was scheduled to drop to $45,000. And it also uniformly defines qualifying child for purposes of the dependency exemption, the child credit, the earned income credit, the dependent care credit and head of household filing status.

If you have been claiming any of these credits or head of household status, you should consult your tax adviser to determine the effects on your personal tax situation.

The legislation also extends the research credit, the work opportunity tax credit and welfare-to-work credit for amounts paid or incurred through Dec. 31, 2005. And it extends the tax donation for qualified computer technology and equipment made by C corporations to educational organizations or public libraries until the end of 2005.

The end of 2005 is also the extension period for the "above the line" $250 tax deduction for educator's books, supplies and other out-of-pocket costs.

The American Jobs Creation Act was designed to repeal the export tax breaks that the World Trade Organization ruled to be an illegal subsidy. It replaces the export tax breaks with a tax deduction, allowable for regular and alternative minimum tax, equal to 9% of net income from domestic production activities.

The tax deduction is available for businesses and individuals that have qualified production activities income. For S corporations, trusts and partnerships, the deduction is determined at the shareholder, partner or individual levels.

The new acts also make some changes regarding tax deductions for donated automobiles. For tax years ending in 2004 or earlier, the charitable contribution deduction for a noncash donation, such as a vehicle, generally equals fair market value of the contributed property. Contributions of $250 or more must be supported by a contemporaneous written acknowledgement from the charity providing certain information about the donation. Appraisal requirements apply to donations valued at more than $5,000.

For tax years after 2004, the contribution deduction for motor vehicles, boats and airplanes will be limited.

For claimed values exceeding $500, the deduction will depend upon the charity's use of the item, and higher substantiation rules will apply.

If the charity sells the vehicle without any significant intervening use, your donation will be limited to the proceeds from the charity's sale.

So if you are contemplating donating a vehicle, do it in 2004 to get a better tax deduction.