Some recent tax law changes are effective for
the 2004 Tax Year. If these items affect you, be sure to get the
details when you prepare your tax return early next year.
Educators’ Deduction — This
had expired at the end of 2003, but was restored for two more
years. IR-2004-124
has more information.
Clean Fuel Vehicle Deduction — The
maximum amount of this deduction was scheduled to drop this year
and next, but has been retained at the $2,000 level through 2005.
IR-2004-125
has information on this deduction and the newest vehicle to qualify
for it.
Child Tax Credit — Taxpayers with
a credit amount more than their tax could get a refund of the
difference, up to 10% of the amount by which their 2004 taxable
earned income exceeds $10,750. This percentage was raised to 15%
for 2004, meaning a larger refund for many of these taxpayers.
Combat Pay — Some military personnel
receiving combat pay get larger tax credits because of two law
changes. The new law counts excludable combat pay as income when
figuring the Child Tax Credit and gives the taxpayer the option
of counting or ignoring combat pay as income when figuring the
Earned Income Tax Credit. Counting combat pay as income when calculating
these credits does not change the exclusion of combat pay from
taxable income.
For more about the effect of excludable income
on the EITC, see Q&A-37
in Miscellaneous Provisions - Combat Zone Service.
For more details on combat pay, see Military
Pay Exclusion – Combat Zone Service
Sales Tax Deduction — Taxpayers who
itemize deductions will have a choice of claiming a state and
local tax deduction for either sales or income taxes on their
2004 and 2005 returns. The IRS will provide optional tables for
use in determining the deduction amount, relieving taxpayers of
the need to save receipts throughout the year. Sales taxes paid
on motor vehicles and boats may be added to the table amount,
but only up to the amount paid at the general sales tax rate.
Taxpayers will check a box on Schedule A, Itemized Deductions,
to indicate whether their deduction is for sales or income taxes.
Expense Limit for SUVs — Businesses
should be aware of a change regarding the deduction for certain
sport utility vehicles (SUVs) placed in service after Oct. 22.
Under the American Jobs Creation Act of 2004, businesses cannot
take a first-year deduction of more than $25,000 for an SUV. The
business would depreciate the remaining cost. (The limit for vehicles
placed in service before Oct. 23 was $100,000.) The new limit
does not affect other types of property where the taxpayer decides
to expense the cost instead of depreciating the property.
Sale of Personal Residence Acquired in a Like-kind
Exchange — Taxpayers who convert rental property to a
principal residence should know that a tax law change may limit
their ability to exclude gain on the sale of that residence if
they obtained the property through a like-kind exchange. Generally,
a taxpayer can exclude up to $250,000 of gain on the sale of a
home, provided the individual has owned and used it as a principal
residence for two out of the five years before the sale. The exclusion
is $500,000 for a married couple if both meet the use test. The
American Jobs Creation Act of 2004 does not allow any exclusion
if the taxpayer sells the home within five years of acquiring
the property through a like-kind exchange. The new law applies
to sales after October 22, 2004.
