December 2004 Newsletter

Major Tax Deadlines
For December 2004

December 31 - Last day to set up a Keogh retirement plan for 2004. Deductible contributions for 2004 can be made any time up to the filing deadline for your 2004 return.

December 31 - Deadline for taking required minimum distributions from IRAs and other retirement accounts.

December 31 - Deadline to complete 2004 tax-free gifts of up to $11,000 per recipient.

December 31 - Deadline for paying expenses (including state estimated tax payments due January 05) you want to be able to deduct on your 2004 income tax return.

What's New in Taxes

New Law Changes Deduction Rules For Donating Vehicles To Charity

If you donate a used vehicle to charity, you are allowed to take a tax deduction for your generosity, but only if you itemize deductions on your tax return. It's estimated that over 700,000 taxpayers took a deduction for donating a used vehicle to charity in 2000. The tax law at that time allowed a deduction equal to the estimated fair market value of the vehicle.

The American Jobs Creation Act of 2004 changed the rules for vehicle donations in an effort to close the gap between what the charity actually receives and what the taxpayer deducts. Here's a look at the change that goes into effect in January 2005.

* Old law

Rule: You could estimate the fair market value of the donated vehicle and deduct that amount on your tax return.

Application: The deduction was often determined by "blue book" value. Most of the time charities used agents to sell donated vehicles at auction, usually for far less than blue book value. Charities received a "contribution" far smaller than what the taxpayer took as a deduction.

* New law

Rule: The charity must inform the taxpayer of the price the donated vehicle sold for at auction. This is the amount the taxpayer can claim as a tax deduction. If the charity keeps the vehicle for its use, it must give the taxpayer an estimate of the value. This requirement applies when the claimed value of the vehicle exceeds $500.

Example: If a taxpayer gives a car with a blue book value of $3,000 to a charity, that value can no longer be used — even as a starting point — for determining the value of the vehicle and the amount of the deduction. If the charity sells the car for $575, that's the amount that can be taken as an itemized deduction.

Note: The new vehicle deduction rules apply to other donated vehicles, too, such as boats and airplanes.

 Nine Steps To Consider To Reduce Your 2004 Taxes

1. Drain your flexible spending account (FSA). FSAs allow you to set aside pretax dollars for medical expenses and child care. After year-end, you lose any unspent dollars in the account. So squeeze in expenses to drain your account. Tip: You can now use account dollars to pay for over-the-counter drugs.

2. If you think you might be hit with a penalty for underpaying 2004 taxes, have your employer withhold extra taxes from your last few paychecks. The IRS treats wage withholding as being spread evenly over the year.

3. To increase 2004 deductions, pay 2004 state and local income taxes or property taxes before December 31. Also consider making planned 2005 charitable contributions this year so you can claim the deduction for 2004.

4. Make gifts of appreciated stock to children age 14 or older. At that age, the children won't be hit with the kiddie tax, and they can sell the stock and be taxed at their lower rate. (Or they can hold the stock until they sell it to fund college expenses.)

5. If you've made a loan that you're now unable to collect, you may be entitled to a bad debt deduction. It's important to be able to show that you tried to collect, so take the necessary steps before year-end.

6. Get your investment records in order so you can make wise year-end sell decisions, either to rebalance your portfolio at the lowest tax cost or to offset gains and losses.

7. Make gifts before year-end to utilize your tax-free $11,000 gifting allowance for 2004. You can give this amount to as many individuals as you like.

8. Track down those reinvested dividends for any stock you sell in 2004. They'll add to your stock basis and reduce taxable gain.

9. Update your estate plan for any 2004 changes in your life. Letting your estate documents become outdated could expose you to higher taxes.

Chuckle of the Month

"The problem with communication is the illusion that it has occurred."
-- George Bernard Shaw

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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.