HIGHLIGHTS OF 2003 AND 2004 FEDERAL AND CALIFORNIA TAX LAW CHANGES & HIGHLIGHTS

 

 

FEDERAL CHANGES & HIGHLIGHTS

 

Last year at this time we summarized the federal tax law changes that came about by way of the Economic Growth and Tax Relief Reconciliation Act of 2001, coupled with the additional changes by way of the Job Creation and Worker Assistance Act of 2002.  The trend toward tax relief continued in early 2003, when Congress passed the Jobs Growth and Tax Relief Reconciliation Act of 2003.  This act provides several new provisions and variations to the previous year’s tax law changes some of which are highlighted below.  In addition we’ve included various other updated or revised tax rules that were enacted in 2003. As always, please feel free to call us if you’d like additional information on any of these new rules.

 

1.      Child Tax Credit Increased – The credit for each qualifying child has increased from $600 to $1,000 in 2003.  Many of you may have already received the additional “advanced child credit” of $400 that would have been mailed by fall of 2003.  For qualifying taxpayers, if the credit advance was not yet paid, you will receive the new higher amount upon the filing of your 2003 return.  For those already in receipt of the credit, the previous amount will still apply.  (Note that if your income exceeds certain thresholds, the amount of credit you receive may be less than the amounts mentioned above.)

 

2.      Increase in the “Asset Expensing Election” - For qualifying businesses the amount eligible for Asset Expensing has increased from $25,000 for 2002 to $100,000 for 2003.  Equipment must be used in excess of 50% to qualify for the first-year expensing election.  Additionally, based upon this change, “off the shelf “ computer software now qualifies for expense treatment.

 

3.      50-Percent “Bonus” Depreciation  - Congress has increased the additional first-year depreciation allowance from 30 to 50% for new (as opposed to used) personal property acquired after May 5th, 2003 and placed in service prior to January 1, 2005.  First-year new personal property acquired prior to May 6th 2003 is still eligible for the 30% “bonus” depreciation outlined in the previous tax law change.

 

4.      Increased Deprecation limit on Luxury Automobiles - The first year depreciation limit on qualified automobiles is $7,660 for those placed in service before May 6th 2003, and $10,710 for automobiles placed in service after May 6th 2003.  An SUV, truck, or van that is weight-rated at 6,000 pounds or more (gross vehicle weight) is not subject to the luxury auto limitations, thus such vehicles now qualify for the enhanced expensing under any one of the above provisions. 

 

5.      Self-employed health insurance deduction – If you were self-employed in 2003 and paid health insurance premiums, you may now deduct 100% of those premiums paid for you, your spouse, and your dependents. The deduction is also available if you are a general partner in a partnership, a limited partner receiving guaranteed payments, or a more-than-2% shareholder of an S corporation from which you received wages. Note that the deductible portion of any qualified long-term care premiums is also included in this deduction.

 

6.      Exclusion on Sale of Personal Residence – clarification of “unforeseen circumstances” - The IRS has issued regulations that clarify what is required to qualify for a partial ($250,000/$500,000) exclusion of the gain on the sale of a personal residence.  Based upon the new rules, taxpayers that are forced to move due a) change in the place of employment b) health problems, or c) unforeseen circumstances you may now qualify for a partial capital gain exclusion.  Unforeseen circumstances have been clarified to include:

 

(1) death  (2) divorce or legal separation; (3) becoming eligible for unemployment compensation; (4) a change in employment that leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses; (5) multiple births resulting from the same pregnancy; (6) damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism; and (7) condemnation, seizure, or other involuntary conversion of the property.

7.      Child and Dependent Care Credit – The computation of the credit is now based upon expenditures for day care of up to $3,000 per dependent, to a maximum of  $6,000 per family.  For most taxpayers the credit is 20% of the total expenditures to a maximum of $1,200.

 

8.      Teachers’ Deduction for un-reimbursed classroom expenses – For 2003, eligible teachers and educators can deduct from gross income up to $250 of  “ordinary and necessary” expenses used in the classroom.  Examples of eligible expenses are books, supplies, and computer equipment/software. 

 

9.      Health Savings Account - Employers, employees and other workers now have another way to cope with rising health care costs by way of setting up this new type of pre-tax account. Health Care Savings Accounts will enable both workers and the self-employed with high-deductible health insurance plans to make pre-tax contributions of up to $2,600 (single taxpayers) each year or $5,150 (for families) to cover health care costs.  The plans are relatively easy to set up and administration costs are generally nominal.  Plan contributions must be funded by April 15, of the year following each respective tax year, but may also be pre-funded.  Distributions from the plan may be made at any time against qualified medical expenses on a tax-free basis.  Any amounts that accumulate in the plan may be distributed penalty free (like an IRA) by taxpayers exceeding 65 years of age.  For more information on HSA’s and other pre-tax medical plans, please click http://www.execusite.com/fccp-cpas/newsletter.html.

 

10.  Increase in Lifetime Learning Credit – The amount of the Lifetime Learning Credit has been double to $2,000 for years starting in 2003.  The computation of the credit is now based upon 20% of qualified tuition up to $10,000.  Note that this incentive applies on a “per taxpayer” basis, while the Hope Scholarship Credit for the first 2 years of college applies on a per student basis.  Note that a taxpayer may only claim the Lifetime Learning Credit for a student for which the Hope Credit is not being claimed. 

 

11.  Health Insurance Costs Credit –Eligible individuals will be allowed a refundable tax credit equal to 65 percent of the amount paid for health insurance coverage during periods in which they receive trade adjustment assistance (TAA) (or TAA alternative payments) and retirees receiving benefits from the Pension and Benefit Guarantee Corporations (PBGC).

 

12.  Military Tax Relief – The Military Tax Relief Act of 2003 provides several tax breaks related to military personnel.  For details of these tax breaks please click here; http://www.irs.gov/newsroom/article/0,,id=118104,00.html

 

13.  Residential Energy Credit – Now Pending in Congress is a new tax incentive in the form of a credit for energy efficiency improvements incurred by homeowners.

Examples of qualifying improvements (in proposed legislation) would include insulation, exterior windows, doors and metal roofs.  Based upon this new legislation, taxpayers about to make improvements to their homes may want to wait a few more weeks before substantially completing any projects, so they do not chance losing out on the various tax incentives. Supporters expect the proposed legislation to pass later this month.  Please feel free to contact us in order to check on the status of this change, if it affects you.

 

 

CALIFORNIA TAX LAW CHANGES AND OTHER ITEMS OF INTEREST:

In general, California incorporates most federal tax acts “by reference”.  This means that unless noted otherwise in California’s Revenue and Taxation Code, California taxes individuals and businesses like the federal government does, but at different tax rates. Except for selective cases such as the rules governing pensions, California has not yet adopted, “by reference”, most of the federal law changes brought about from any of the major tax acts since 2000. Unfortunately, due to this “lack of conformity”, compliance with California tax laws is made more complicated.

California Law Changes and updates:

 

1.      Mandatory e-file for California – For the 2003 tax year, California is requiring that

CPA firms must “e-file” their client’s 2003 returns.  You may “opt-out” of such electronic filing is you prefer.  However, in order to do so you’ll need to request from us FTB a Form 8454.  By law, we will need to retain this form, so it will be necessary to submit the form back to us prior to the completion of your annual tax engagement.  We encourage you to allow us to e-file your returns, since electronic filing reduces input errors that lead to tax notices, while it also benefits our state financially by reducing the costs of data input at the FTB service centers.

 

2.      Teacher Retention Credit – The teacher retention has been reinstated for the 2003 tax year.  (The credit was suspended for 2002.) The amount of the credit is based on a formula that involves both the taxpayer’s length of service as a “credentialed teacher” as well as the relationship of their wages paid in teaching to their total income.

The first tier of the credit is $250 for qualified teacher with 4-6 years of full time service, and move up to as high as $1,500 for teachers who have 20 plus years of service.

 

3.      California Use Tax on FTB Tax Returns – California taxpayers may now pay use tax with their personal return.  Taxpayers are liable for use tax if they purchased goods or equipment outside of California, (including Internet and mail order purchases,) for use or consumption within California and did not yet pay California sales or use tax on the purchase.  In the event that you wish to pay your use tax conveniently with Form 540, please provide with a the total amount of sales tax you owe.   (That being the total purchases of goods not taxed, times your county tax rate.)

 

Note that if you do not pay your use tax on the California 540, and you are liable for such tax, there are other forms you may file, however they are somewhat more complicated. 

 

4.      California Disaster Relief Tax Provisions – California taxpayers directly affected by the Southern California Wildfires have been granted special administrative tax relief.  If you incurred a loss of property, due to this tragedy you have some tax options involving the timing of claiming a loss.  Please contact us for more specifics.

 

5.      Withholding on Sales of California Real Estate – In last years letter we outlined the new rules creating a 3 1/3 percent withholding on most sales of real estate in California.  For the most part, despite much debate, these rules continue on unchanged.  In the event that you are entering a transaction in which you’ll be selling real property (other than a home qualifying for the $250,000 personal exclusion), you will very likely be subject to this withholding requirement. 

 

Note that in the event that you expect to have amounts withheld from real estate sales in 2004, be sure to let us know, as such withholding will very likely effect the amount of estimated payments or withholdings you otherwise need to make for the year.  If you’d like to hear more about these rules, please call our office, or refer to this link:

http://www.ftb.ca.gov/individuals/wsc/California_Real_Estate.html

 

 

6.      Military Service Benefits – Extensions of time are provided to members of the National Guard ordered into active service by the Governor of California or active federal service by the President of the United States for emergency purposes and to reservists called to active duty.  The extensions apply to, among other things, court proceeding, contract obligations, rental agreements, taxes or assessments, and health or medical insurance. In addition, California allows an exemption from taxes to any California taxpayer who dies on active duty with any branch of the armed forces of the United States.

 

Other federal changes and items of interest:

 

1.      Donating Vehicles to Charity – Donations of used cars and trucks are one of the

fastest growing categories of charitable gifts. The IRS is aware that charities may not be getting the full benefit of the donation; and that in some cases taxpayers are deducting too much. 

 

Recently the IRS has issued notices that remind taxpayers that they are only allowed to deduct the fair market value of their vehicles. Thus, to avoid problems taxpayers should make adjustments to the estimated value (ie. deductible amount) based upon the condition, mileage, marketability, and other factors. The FMV of the vehicle may differ dramatically from its "blue book" value, according to the IRS.

 

In the event that you are claiming a deduction for an automobile, we suggest that you read more about it here: http://www.irs.gov/newsroom/article/0,,id=118693,00.html

 

 

2.      Automobile Expense and Mileage Rate Changes – In 2003 the business mileage rate for federal purposes is 36 cents per mile on only one car per taxpayer that is used for business purposes.  In 2004 the rate will increase to 37˝ cents per mile on up to four cars used for business by any one taxpayer. 

 

3.      Alternative Minimum Tax (update)  - “AMT” will impact an increased number of individual taxpayers in 2003 and 2004.  The main reason for the increased is due to the fact that the new tax law changes reduced the regular tax rate for on “ordinary income” but left the rate unchanged for AMT purposes.  (Ordinary income is all income other than long-term capital gains.)

 

In the event that you pay this additional tax (found on Form 1040, Line 42) in 2003, you should consider engaging us to do some tax planning in order to reduce the incidence of the AMT tax for 2004.  (Note that AMT will be more likely for taxpayers expecting large capital gains, paying relatively large amounts of state and local tax, or who incur “phantom income” from the exercise of Incentive Stock Options.)  Note that it isn’t always possible to avoid this additional tax, however, with careful planning we may be able to save you considerable tax dollars.

We also remind you that the IRS is cracking down on tax fraud.  "If it sounds too good to be true, it probably is!"  For additional information about fraudulent tax schemes, scams and cons that the IRS wants you to know about, please check out the following link: 

http://www.ustreas.gov/irs/ci/tax_fraud/index.htm

To all of you that made it down to the end here, THANKS FOR LISTENING!