Published December 2004

Consider tax-law changes
in your year-end planning

By Mary Decker
Guest Columnist

Fall is a great time to do year-end planning. By now, you should have a fairly good idea of what your income and deductions will be for the year. That makes it easier to estimate your tax liability and take timely action. Planning also reduces surprises (and stress) at tax time.

Recently, President Bush signed The Working Families Tax Relief Act and The American Jobs Creation Act (The Jobs Act). These changes could have a significant impact on your year-end planning. Here’s a quick look at some of those changes.

• State sales-tax deduction: For 2004 and 2005, you can take a deduction for state and local sales taxes. If you pay any state income taxes, you have to choose between the two deductions. This option is retroactive to Jan. 1, 2004. You should be rounding up your receipts right now! The IRS will publish a table you can use in lieu of keeping your receipts. Beware of the alternative minimum tax (AMT), though. Taxes are nondeductible for AMT, so a last-minute purchase might not give you the tax benefit you expect.
• 50 percent bonus depreciation: This extra deduction for the cost of business equipment and other property ends Dec. 31, 2004, and it wasn’t extended. If you are planning any major purchases for your business, you may want to make them in 2004 rather than 2005.
• Shorter recovery period for leasehold improvements: The Jobs Act includes a provision to reduce the depreciation period from 39 years to 15 years for qualifying leasehold improvements placed in service after Oct. 22, 2004, and before Jan. 1, 2006. If you were considering making improvements, you may want to do so during this window of opportunity.
• Vehicle donations: Starting in 2005, the deduction will be limited to the price the charity gets for selling it, which may be far less than its fair-market value. If you are thinking of donating a used car, consider doing so before year’s end.
• Section 179 expensing extended: The $100,000 first-year expensing election was to expire after 2005, but the Jobs Act has extended that to years beginning before 2008.
• SUV deduction capped at $25,000: The Jobs Act amends the law to limit the property expensing deduction for luxury sport utility vehicles to $25,000. This is effective for SUVs placed in service after Oct. 22, 2004. Before this change, you could include the entire cost of the SUV in your $100,000 depreciation expensing deduction. This may affect your vehicle buying decisions at year’s end.

Don’t forget traditional year-end tax planning strategies, such as:

• Accelerating payment of expenses (even with a credit card) to get more deductions.
• Deferring income into the next year.
• Timing capital gains to absorb capital losses.
• Making gifts to take advantage of the $11,000 annual gift tax exclusion.

The “fine print”: The new laws are complex and contain many other provisions not discussed above. Please see your tax adviser regarding your particular situation.

Mary Decker, a shareholder with Hascal, Sjoholm & Co. P.S. in Everett, is a certified public accountant and a certified financial planner. She can be reached at 425-252-3173 or by e-mail to maryd@hascal.com.

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