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.
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.
Deduction for Discrimination Suit Costs — A new deduction is
available for those who pay attorney’s fees and court costs in
connection with discrimination suits. Taxpayers can take the new
deduction whether they itemize or not. The deduction cannot exceed
the amount includible in income for the year on account of a
judgment or settlement resulting from the discrimination claim.
Generally, personal legal expenses are not deductible, but an
employee who incurs legal expenses related to doing or keeping his
job could deduct these expenses on Schedule A as a miscellaneous
itemized deduction. However, under The American Jobs Creation Act of
2004, an individual with legal fees and court costs arising from a
discrimination suit may deduct the costs directly from income on the
front of the tax return; this is known as an above-the-line
deduction.
Under this new deduction, amounts paid for attorney’s fees and court
costs are deductible in computing alternative minimum tax, and are
not subject to the 2 percent floor on miscellaneous itemized
deductions or the overall limitation on itemized deductions. The
Act, signed into law on Oct. 22, 2004, describes the discrimination
claims qualifying for this new deduction. Only costs paid after Oct.
22, 2004, for judgments or settlements occurring after that date
qualify for this deduction. |
Frequently
Asked Questions