New Tax Laws for 2005 Tax Season
By Rafique S.M. Ahmed

Aid for Tsunami victims may be tax deductible. According to a recent IRS notification, contributions to domestic, tax-exempt, charitable organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes provided a US organization has full control and discretion over the uses of such funds.

Taxpayers who intend to take a deduction for their generous contributions for this noble cause, should ensure before contributing for tsunami victims that their US charity has full control and discretion over the disposition of their donations. Tax laws have changed again. Two major tax laws, namely, Working Families Tax Relief Act of2004 and American Jobs Creation Act of 2004, were passed and signed into law in2004. Some of the changes are retroactive to the date the tax laws were signed into law.

For example, under the American Jobs Creation Act of 2004, businesses cannot take a first-year deduction of more than $25,000 for a sport utility vehicle placed in service after October 22, 2004.The limit for SUVs placed in service before October 23, 2004 was $100,000. Nearly 53 million Americans chose e-file options last year. In California, Franchise Tax Board processed over seven million e-file returns in 2004. For the first time ever, FTB processed more e-file returns than paper returns. 14th of January, 2005 is the first day of processing e-file returns by the IRS for this season whereas California has already started processing e-file returns on January 3. The IRS has released two new electronic tools for those tax professionals who successfully e-file 100 or more individual tax returns and are registered to use e-Services.

Disclosure Authorization (DA) gives eligible tax practitioners an online option for submitting Powers of Attorney or Taxpayer Information Authorization forms while Electronic Account Resolution (EAR) allows tax practitioners to electronically correspond with the IRS. The IRS also dedicated a new Internet system exclusively to the filing of information return Forms 1042-S,1098, 1099, 5498, 8027, W-2G and QWF. The new FIRE (Filing Information Returns Electronically) System is available at Always notify the Internal Revenue Service change of address if you move before receiving your income tax refund.

The IRS is looking for 87,485 taxpayers since their refund checks totaling $73 million for tax year 2003 were returned to the IRS by the Postal Service as undeliverable. 14,328 are missing taxpayers in California. If you are one of those missing taxpayers, call the IRS at (800)829-1040. The following are the other important changes that may affect your 2004 taxes:
… Educator's expenses were scheduled to expire at the end of 2003, but have been restored for two more years.
… Taxpayers who itemize deductions will have a choice of either claiming state and local sales taxes or state or local income taxes on Form 1040, Schedule A.
…The adoption credit and the maximum exclusion from income of benefits under an employer's adoption assistance program are increased to $10,390.
…Some of your itemized deductions may be limited if your adjusted gross income is greater than $142,700 for married filing jointly or $71,350 if married filing separately.
…Deduction for each exemption has increased to $3,100 and is subject to phase out if you have high income. … The maximum amount of income you can earn and still get the Earned Income Credit increased. Amount depends on filing status and number of children. The maximum amount of investment income you can have and be eligible for the earned income credit was also increased to $2,650.
…Taxpayers with a child tax 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 providing a larger refund for many of these taxpayers.
…The amount of income you can have and still receive a Hope or Lifetime Learning Credit has increased.
… The amount of qualified education expenses in figuring out your tuition and fees deduction has increased.
… Two changes were made in combat pay for military personnel. 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. However, counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.
… The person legally obligated to make student loan payments may be able to deduct interest payments on that loan made by someone else.
…Fishermen and farmers owing the alternative minimum tax , can elect to use income averaging to reduce their tax. … You may be able to deduct contributions made to your Health Savings account.
… Maximum amount of elective deferrals under a salary reduction agreement that could be contributed to a qualified plan increased to $13,000. ($16,000 for aged 50 or over). SIMPLE plans increased to $9,000 ($10,500 for aged 50 or over).
… The income limit for using Form 1040A, Form1040EZ and Telefile increased to taxable income of less than $100,000.
… The maximum amount of Clean Fuel Vehicle deduction was scheduled to phase out this year, but has been retained at the $2,000 level through 2005.
… Drastic changes are made in sale of personal residence acquired in a Like-kind Exchange. Generally, taxpayers can exclude up to $500,000 for a married couple ($250,000 for individual) of gain on the sale of a home, provided the taxpayers have owned and used it as a principal residence for two out of the five years before the sale. The American Jobs Creation Act of 2004 does not allow any exclusion if the tax payer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October22, 2004.
… A new deduction is available for those who pay attorney's fees and court costs in connection with discrimination suits. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim.
… Standard mileage rate for business miles increased to 37.5 cents/mile. Both Medical and Moving mileages also increased to 14 cents a mile each.
… The maximum wages subject to Social Security tax@6.2% increased to $87,900. All wages are subject to Medicare tax @1.45%.
… 2004 is the last year when you can take a full deduction at fair market value of your donated vehicle to a charity. In the future, your deduction will be limited to actual amount of sale of your donated vehicle. Forms and publications are available online, or by calling 1-800-tax-form (1-800-829-3676).The IRS Tax Fax offers forms and instructions by return fax.

You need to call 703-368-9694 from a fax machine. You can also call the writer's office at (800)929- 3309 for assistance. (Rafique S.M. Ahmed is a professional Tax Accountant and has been providing accounting and tax services in California for more than thirty years. He is also an Authorized IRS Electronic Filing Provider and can be reached at (800) 929-3309. He is located at 1109 Via Verde, San Dimas, CA 91773).


Editor: Akhtar M. Faruqui
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