Two new tax laws were passed during the fall of 2004: the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004. Here are some highlights of the bills.
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[black small square] Working Families Tax Relief Act of 2004
Parents of children under 17 can continue to claim a $1,000 child tax credit for every child through 2010. Without the new law, the child credit would have dropped to $700 per child in 2005. The child tax credit is in addition to the standard deduction. It's a dollar-to-dollar credit applied to your tax liability.
Marriage penalty relief
Married taxpayers filing jointly will continue to benefit from full marriage penalty relief through 2010. This is an extension of the previous law. Without the change, two unmarried taxpayers could pay less tax on their total income than two who are married.
[black small square] American Jobs Creation Act of 2004
Congress voted to limit dramatically the deduction for vehicles contributed to charity. If the charity sells your vehicle without using and improving it (which is usually the case under most vehicle-donation programs), your charitable deduction can't exceed the gross proceeds from the sale-usually a deeply discounted, below-wholesale price. Stiff penalties will be imposed on charities that don't approach this obligation honestly. The charity is required to give you and the IRS the information in writing.
The new acknowledgment rule applies for contributions made after December 31, 2004. If you donated a vehicle before this, you can still take the blue book value for that vehicle on your 2004 return.
State sales tax deduction
The new law lets individuals deduct state and local sales taxes instead of deducting state and local income taxes as an itemized deduction on Schedule A. This election is available for 2004 and 2005 only. If you elect to deduct state and local sales taxes paid, you'll have two options: either determining the deductible amount by accumulating receipts, or using tables to be prepared by the Secretary of the Treasury based on average consumption and other factors.
At first glance, you may not think this is beneficial. But if you made several large purchases this year you may have paid more sales taxes than you owed in state income taxes; similarly, the average consumption tables in low-income-tax states may be higher than income tax owed. The same thing applies to 2005. If you plan to make several major purchases, start saving every receipt for every purchase made this year. If you live in a no-income-tax state, this becomes even simpler. Just deduct all sales taxes paid on your Schedule A and start saving every sales receipt for 2005-or even better, use the average consumption tables.
Sales tax is sales tax regardless of state. These changes apply only to the federal return, so state returns and the taxes owed to each state don't change. Be sure to consult with a tax planner or accountant about your situation to confirm how these changes affect you.