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TAXES
Last Chance to Trim Your Taxes
(Page 3 of 3)
by Mary Beth Franklin
Reverse logic
Traditional tax planning calls for postponing income (and the tax bill that comes with it) until the following year whenever possible, and for accelerating deductions. But that strategy can backfire for the growing legion of Americans subject to the alternative minimum tax. The AMT is a parallel tax that has its own set of rules. It does not allow deductions for state and local taxes, investment expenses, employee business expenses, or personal exemptions for yourself, your spouse or your children.
As regular tax rates decline, the chance of being snagged by the AMT increases, particularly for people who live in states with high income taxes or high local property taxes, or who have large families. So before you rush to pay next year's property taxes or state income taxes in advance to boost your 2004 deductions, make sure you won't lose them to the AMT.
--Research: Amy Esbenshade Hebert
BUSINESS BREAKS
Bonus depreciation disappears
In hopes of spurring the economy after the September 11 terrorist attacks, Congress offered businesses a special incentive to buy new equipment: bonus depreciation. For a piece of equipment to be depreciated over five years, for example, the pre-9/11 rules called for 20% of the cost to be written off the first year. Thanks to the bonus, however, a 2004 purchase of new equipment earned a first-year write-off of 60% of the cost -- 50% plus 20% of the remaining 50% of the cost. This break disappears on New Year's Eve. So, if you're thinking of buying new equipment for your business, it may pay off to beat the deadline.
The end of bonus depreciation will also close the door on supersize first-year depreciation for business automobiles. For new cars put into service by December 31, a business can deduct up to $10,610 of the cost. For new cars put into service next year, the deduction will fall to about $3,000. Be sure to crank that into your year-end planning.
FAMILY FRIENDLY
Tax breaks dodge a bullet
The latest personal tax cut, signed into law a few weeks before the election, is really an anti tax increase. Rather than slipping new goodies into the tax code, the law revives breaks that expired at the end of 2003 and those that were about to die at the end of December.
The right for teachers to deduct up to $250 spent on classroom supplies, scheduled to disappear at the end of last year, will apply to 2004 and 2005 returns. The deduction for taxpayers who buy hybrid vehicles has been restored to last year's $2,000 level for 2004 and 2005, rather than falling to $1,500. And the $5,000 tax credit for first-time homebuyers in the District of Columbia, which expired at the end of 2003, has been restored for 2004 and 2005.
The effort to mitigate the marriage-tax penalty -- which forces some couples to pay more tax on a joint return than they would if they filed individually -- was scheduled to disappear at the end of this year. But thanks to the new law, the increased standard deduction and wider 15% bracket will keep saving couples money. The expanded 10% bracket -- which saves money for both singles and couples because more income is taxed at 10% rather than 15% -- was also revived.
Also scheduled to disappear after this year was a temporary increase in the exemption amount for the alternative minimum tax. If that had occurred, millions more taxpayers would have become AMT victims next year. But don't worry ... at least not yet. Congress preserved the higher exemption amounts for 2005.
For a look at one new tax break -- which will allow millions of Americans to deduct sales taxes -- that Congress slipped into the corporate tax bill passed right before the election, see "Another Break for No-Tax States" in the December issue of Kiplinger's Personal Finance.
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