Deducting Sales Tax, Giving Vehicles
to Charity, Continuing the Child Tax Credit.
Volume 12, Number 51,
Issue 598
New Deduction for State and Local Sales Tax. Prior to 1987, you could deduct both your state and local income taxes and sales taxes as an itemized deduction. After 1986, however, Congress removed the deductibility of state and local sales taxes. Generally for 2004 and 2005, the Jobs Act allows you to "elect" to deduct "either" state and local income taxes or state and local sales taxes, as itemized deductions. If you elect to deduct sales taxes, your deduction is either 1) your actual sales taxes substantiated by receipts, or 2) an amount provided in IRS tables (based on your filing status, income, etc.), plus any sales tax you pay on the purchase of a motor vehicle, boat, or other items prescribed by the IRS. Tax Tip. This new election will be particularly beneficial to the residents of states with little or no state income taxes or states where the state income tax rate is generally lower than the sales tax rate. However, this option may also help individuals in any state where the state income tax liability has been significantly reduced because of state credits, etc. Also, taking the sales tax deduction rather than the state income tax deduction may avoid including a state income tax refund in federal taxable income in a subsequent year.
Donations of Motor Vehicles, Boats, and Aircraft. Generally, if you contribute non-cash property to a charity, you are entitled to a charitable contribution equal to the fair market value of the contributed property. Items valued at more than $5,000 (except marketable securities) generally require a "qualified appraisal." In recent years, the IRS has been concerned that some taxpayers were contributing automobiles, boats, etc. and deducting an inflated value as a charitable contribution. To curb these perceived abuses, the Jobs Act adds stringent reporting and documentation requirements, for the donor and the charity, that must be satisfied in order to claim a charitable deduction in excess of $500 for a "qualified vehicle". A "qualified vehicle" generally includes motor vehicles designed for highway use, boats, or airplanes. The new rules are effective for contributions made after December 31, 2004. Generally, under the new rules, you will be required to receive a detailed, written receipt from the charity. If the charity sells the vehicle without any material improvement or significant use of the vehicle by the charity, your charitable deduction cannot exceed the gross sales price of the vehicle which must be listed on the receipt. The charity will be required to send a copy of the receipt to the IRS, and you will be required to attach a copy of the receipt to your tax return. Furthermore, significant penalties are imposed if the charity fails to provide a timely, accurate and complete receipt. Tax Tip. You will not be subject to these new stringent reporting requirements if you contribute a vehicle by December 31, 2004. However, if the vehicle has a value of more than $5,000, an appraisal is required.
Increased Child Tax Credit. The $1,000 child tax credit was scheduled to drop from $1,000 to $700 in 2005. The Family Tax Act maintains the credit at $1,000 through 2010. Also, you may be entitled to a refund of your child tax credit even if your credit exceeds your federal income tax liability. Last year, you could have received a refundable credit to the extent of 10% of your "earned income" in excess of $10,500. For years beginning after 2003, the Act increases the refundable credit to 15% of your earned income in excess of $10,750. Moreover, starting in 2004, the Act includes tax exempt "combat pay" in the definition of "earned income" for purposes of the refundable child tax credit. Tax Tip. Last year, if you had one qualifying child, you had to earn at least $20,500 to be entitled to a full "refundable" child tax credit of $1,000. For 2004, you need earned income of only $17,417 to qualify for the full $1,000 refundable credit.
David B. Robinson, CPA
This issue is dedicated to the Firehouse Theatre in Richmond. Learn more about the Firehouse at www.firehousetheatre.org
Index of Previous Issues of Tax Fax
