January 20, 2005
This newsletter continues a very broad overview of The American Jobs Creation Act of 2004. This Newsletter focuses on those provisions that primarily affect individuals.
- Itemized Deduction for State and Local Sales Taxes. Individuals who itemize their deductions can now elect to deduct state and local sales taxes instead of state and local income taxes. Although the principal beneficiaries are residents of states that do not have an income tax, the new deduction provides an alternative for taxpayers living in states that impose both income and sales taxes. The amount of the deduction can be based on actual taxes paid or by using IRS-prepared tables. The record keeping required to prove the sales taxes actual paid during the year is prohibitive (total the sales tax from every sales receipt you have saved) but mat be worthwhile if you have made major purchases during the year on which sales taxes were paid. There are some open issues here such as whether the New Jersey mansion tax (imposed on buyers of a home where the purchase price exceeds $1,000,000) is a state sales tax.
This provision is retroactive to JANUARY 1, 2004. Therefore, the deduction will be available on your income tax return due this April.
- Charitable Deduction Rules Tightened on Donations of Vehicle. Obtaining a deduction for the charitable contribution of your car (or a boat or airplane) is now more difficult. Starting January 1, 2005 you may no longer use the ìBlue Bookî value in determining the value of the car. Your deduction is now limited to the amount the charity later sells the vehicle for. The charity must prepare, and you must attach to your return, a statement identifying the vehicle and stating the amount for which it was sold. Failure to attach the statement will result in disallowance of your deduction.
- Charitable Deduction Rules Tightened on Donations of Intellectual Property. There are also new limitations on charitable donations of intellectual property, i.e., patents, copyrights and similar property, made after JUNE 3, 2004. Rather than deducting the value of the intellectual property in the year of the contribution, you are now allowed to deduct only its cost, reduced by any amortization or depreciation deductions that you have taken. Then, over the next 10 years, you will be allowed to deduct a portion of any net income that the charity receives from its exploitation of the property, but only after offsetting the amount of the initial deduction.
- Proof Required for Charitable Donations Increased. The Act increases the requirements for substantiating contributions of property (excluding contributions of cash or publicly traded stock) made after JUNE 3, 2004. The new law codifies existing IRS rules that require that: (1) certain information be provided on the return if the deduction exceeds $500; and (2) the taxpayer obtain a qualified appraisal for property with a value exceeding $5,000. There is also a new requirement that the appraisal be attached to the tax return when the deduction exceeds $500,000.
- Tax Shelters. The "tax shelters" category includes 30 provisions. Several are procedural in nature, such as a new penalty for failing to disclose "reportable transactions", changes in the substantial underpayment penalty, and changes in certain reporting requirements. Other "tax shelter" provisions change substantive tax rules. For example, one new rule prevents you from excluding gain on the sale of a principal residence acquired in a tax-deferred like-kind exchange within the prior 5 years. A major provision limits the tax benefits of certain leasing transactions with "tax indifferent parties" such as tax-exempt organizations and government entities, including foreign governments.
- Among the hundreds of provisions is one that allows the IRS to hire private debt collectors that meet certain requirements and agree to follow the IRS rules respecting taxpayer privacy. The private collection agencies will be paid on a commission basis. The primary concerns are that
- the collectors will cost more than the additional revenue they bring in since they will be getting a commission on taxes people would have paid anyway,
- procedural protections for taxpayers and legitimate defenses taxpayers have will be ignored or circumvented by the collection agencies, (3) the IRS could handle this cheaper and better by adding additional staff in their collection division.