Tax Tip for December 2004
Year-End Tax
Planning Strategies
The 4th
quarter is the ideal time to discuss year-end tax planning strategies and
consider recent tax law changes.
-
Depreciation: Consider purchasing before year-end furniture and equipment
which will be used for business purposes. Internal Revenue Code (IRC) section
179 allows businesses to elect to expense (rather than depreciate over several
years) in the year of purchase up to $102,000 of the cost of qualifying fixed
assets. Keep in mind that there is a new law regarding the expensing of sport
utility vehicles (SUVs) used for business that are placed in service after
October 22, 2004. For SUVs weighing more than 6,000 lbs and less than 14,000
lbs, IRC 179 depreciation is limited to $25,000. Additionally, for assets not
expensed using IRC 179, the temporary provision allowing 50% additional 1st
year depreciation allowance expires December 31, 2004. As always, please contact
us prior to making major purchases so we can ensure that you receive the maximum
tax benefit.
-
Postpone income until 2005 and accelerate deductions
into 2004 to lower your 2004 tax bill. Postponing tax generally is a primary
goal of year-end tax planning. It's particularly effective if it helps you to
claim larger deductions, credits, and other tax breaks that are phased out over
varying levels of adjusted gross income. These include Roth IRA contributions,
conversions of regular IRAs to Roth IRAs, child credits, higher education tax
credits, and deductions for student loan interest.
One
opportunity for accelerating deductions that is often overlooked is to pay your
anticipated Arizona tax liability before year-end. By paying your state tax
liability prior to year-end, you accelerate into 2004 the itemized deduction for
state taxes paid, rather than having to wait to claim the deduction on your 2005
tax return.
- Bunch
deductible expenses such as medical expenses, charitable contributions, mortgage
interest and investment expenses into one year to maximize your itemized
deductions.
- Harvest
capital losses. If you are holding onto stocks or mutual funds in nonqualified
accounts (i.e. not a retirement account, annuity, or other tax deferred
account), and have lost value since original purchase, consider selling before
year-end to capture the capital losses for tax purposes.
- Take
advantage of the Arizona School Tax Credits. Qualifying contributions made
before December 31, 2004 will generate a dollar-for-dollar state tax credit as
well as a federal charitable contribution itemized deduction. The total
available credit is $700, or $875 if married filing jointly (“MFJ”), and breaks
down as follows: $500, or $625 if MFJ, to a qualifying private school, and $200,
or $250 if MFJ, to a qualifying public school, both K through 12th grade.
- Take
advantage of the Arizona Charitable Tax Credit. Similar to the School Tax
Credits, qualifying contributions made before year-end can generate a state tax
credit as well as a federal charitable contribution itemized deduction. The
total available credit is $200. Contributions made to charities that assist the
Working Poor qualify. A list of these charities appears on the Arizona
Department of Revenue web site. The one twist to this credit is that in order to
qualify, your total 2004 charitable contributions must exceed your baseline year
(typically 1996) charitable contributions.
- New State
and Local Sales Tax Deduction for 2004 & 2005. A new law allows individual
taxpayers to choose an itemized deduction for state and local general sales
taxes in lieu of the itemized deduction for state income taxes. So that
taxpayers won't need to keep a shoe box of sales receipts, the new law gives
taxpayers the option of using IRS sales tax tables (not yet released by IRS) and
adding actual sales taxes paid for cars, boats and such other major items
specified by the IRS.
- Donation
of vehicles to charity. If considering donating a vehicle to charity in the near
future, you may want to do it prior to December 31, 2004. For 2004, when an
individual gives a car to charity the amount of the charitable deduction is
usually the fair market value of the property. Beginning in 2005, the charitable
deduction for contribution of a vehicle that is resold by the charity is limited
to the gross proceeds received by the charity upon resale. Since charities often
sell vehicles at auctions or in bulk sales where the prices are below Blue Book,
donor deductions for gifts of vehicles will be greatly reduced.
- Health
savings account (HSA) is a relatively new health insurance plan option that
offers a tax-favorable way to set aside funds to meet future medical needs. In
short, key elements are: (a) you must be covered by a
“high deductible health plan” (b) contributions you make to an HSA are
deductible, within limits, (c) contributions your employer makes aren't taxed to
you, (d) earnings on the funds within the HSA are not taxed, (e) distributions
from the HSA to cover qualified medical expenses are not taxed, and (f) unused
amounts are carried forward, not forfeited. HSAs offer
a very flexible option for providing health care coverage, but the rules are
somewhat involved. Please contact me if you would like to explore this
item further.
Other planning areas that we can
assist with throughout the year include:
- Stock
Option Planning
-
Retirement Planning
- Mortgage
Planning
- College
Planning
- Estate
Planning
The tax planning strategies
mentioned in this letter are general suggestions that may not apply to every
taxpayer.
By doing year-end
tax planning now, we can take a proactive approach to reducing your taxes,
rather than just being reactive. Please call us if you have any questions or if
we can be of further assistance.
