Advanced tax planning for 2004 and 2005

... Qualified tuition program (QTP) distributions. QTPs are special tax-preferred vehicles that allow you to set aside money for qualified higher education expenses. For the first time on your 2004 return, you may be able to exclude from income distributions from a private QTP if the distributions are not more than your qualified higher education expenses.

 

... IRA deduction. Those of you who are active participants in an employer-sponsored retirement plan can have higher levels of modified adjusted gross income (AGI) before you start losing out on the ability to make an above-the-line deduction (meaning you can take it even if you don't itemize) for contributions to a traditional individual retirement account or IRA, as more commonly known. Modified AGI is your gross income less above-the-deductions computed in a special way. The deduction phaseout range is modified AGI of $65,000 to $75,000 for joint return filers and $45,000 to $55,000 for single taxpayers. We can determine what your deductible contribution will be, and whether you might be better off forgoing a deduction in favor of treating the contribution as a nondeductible contribution to a Roth IRA from which an ultimate withdrawal may be tax-free.

 

... Tuition and fees deduction . This above-the-line deduction for higher-education expenses is expanded. You may be able to deduct up to $4,000 if your modified AGI is not more than $65,000 ($130,000 for joint returns), or deduct up to $2,000 if your AGI is higher than that limit but not more than $80,000 ($160,000 for joint returns). Here, if you don't qualify for either category, there is no partial deduction. For example, if you exceed the $160,000 figure on a joint return by even $1, you get no deduction. If you are slightly over the limit, we may be able to show you how to get below the limit next year and in some cases even for this filing season.

 

... Health savings account (HSA) deduction. Under new rules, eligible individuals (those with high-deductible health plans) may make deductible contributions to a health savings account. Qualifying contributions to HSAs are deductible above-the-line. We can explain how HSAs work and how you may benefit by one.

 

... Fees and costs of discrimination suits. There is a new above-the-line deduction for attorney fees and costs of discrimination suits paid after Oct. 22, 2004.

 

... Sales tax deduction. If you itemize deductions, you can elect to deduct state and local general sales taxes instead of state and local income taxes. Generally, you can use either your actual expenses or the IRS's Optional State Sales Tax Tables to figure your state and local general sales tax deduction. This deduction mostly benefits individuals who live in states without income taxes but it can benefit individuals in states with both income and sales taxes. The new choice may actually provide a deduction to some individuals in dual tax states who previously got no deduction for state taxes. Figuring the deduction amount under the tables can be tricky as can deciding on which deduction to take. It is not just a matter of which potential deduction is higher—a lower sales tax deduction may produce bigger savings because some states allow sales taxes but not income taxes to be deducted on state returns. We can figure all of this out for you.

 

... Charitable contributions. Under a law passed in January 2005, if you itemize deductions, you can claim a charitable contribution deduction on your 2004 return for cash donations made through Jan. 31, 2005, for the relief of victims in areas affected by the Dec. 26, 2004 Indian Ocean tsunami. In most cases, you will be better off taking the deduction for January 2005 tsunami relief donations on your 2004 return but not always. We can determine which year will produce the highest savings for you.

 

... Education credits. Eligible individuals may claim an income tax credit for the cost of higher education expenses for themselves, spouses, and dependents. For 2004, the modified-AGI-based phaseout range for the education credits is higher: $42,000-$52,000 ($85,000-$105,000 for joint filers).

 

... Adoption credit. The maximum adoption credit is higher ($10,390), and phases out when modified AGI exceeds $155,860.

 

... Earned income tax credit (EITC). The maximum credit is higher and the AGI-based phaseout figures are revised. There is a new nontaxable combat pay election, which allows eligible individuals to treat otherwise tax-free combat pay as earned income for purposes of the EITC.

 

... Additional child tax credit. The credit limit based on earned income is increased to 15% of your earned income that exceeds $10,750. If you were a member of the U.S. Armed Forces who served in a combat zone, your nontaxable combat pay counts as earned income when figuring this credit limit.

 

... Expanded eligibility for Schedule C-EZ (Schedule C-EZ ). Eligible small businesses may file simplified Schedule C-EZ (Profit or Loss from Business) instead of the longer and more involved Schedule C. For 2004, the maximum amount of business expenses you can have and qualify to file Schedule C-EZ is doubled to $5,000.

 

... Tax computation using maximum capital gains rates ( Schedule D ). You will now use the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions to figure your tax if you have net capital gain or qualified dividends. However, if you have any 25% rate gain (unrecaptured Sec. 1250 gain from the gain of certain realty) or 28% rate gain (such as from the sale of collectibles), you will still use the Schedule D Tax Worksheet to figure your tax. We can explain these different concepts and how to complete these worksheets.

 

... Capital Loss Carryover Worksheet ( Schedule D ). You must use the Capital Loss Carryover Worksheet to figure your capital loss carryover from 2003 to 2004. You will need a copy of your 2003 Form 1040 and Schedule D to do this. For 2002 and earlier returns, you figured your carryover to the next year as you prepared the current year return. Starting with the 2003 return, the IRS did not include a worksheet for figuring the carryover to the next year. Now, the IRS has included the worksheet in the 2004 return package for figuring the carryover from 2003.

 

... Depreciation and expensing. For those engaged in a trade or business, new rules apply to the depreciation of vehicles acquired by trade-in; expensing of heavy SUVs placed in service after Oct. 22, 2004 is limited to $25,000; and an additional 50% (electively, 30%) first-year depreciation allowance applies to most new depreciable personal property placed in service during 2004, as well as some software.