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Changes Impacting 2004 Tax Returns
Educators' Deduction
Clean Fuel Vehicle Deduction
Child Tax Credit
Combat Pay
Sales Tax Deduction
Expense Limit for SUVs
Sale of
Personal Residence Acquired in a Like-kind Exchange
Deduction for Discrimination
Suit Costs
Educators' Deduction
This had expired at the end of 2003, but was restored for two more years.
IR-2004-124
has more information.
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Clean Fuel
Vehicle Deduction
The maximum amount of this deduction was scheduled to drop this year and
next, but has been retained at the
$2,000 level through 2005.
IR-2004-125
has information on this deduction and the newest vehicle to qualify
for it.
The original purchaser of a qualifying hybrid gas-electric car may deduct
$2,000 for the year the vehicle is first
used, if that year is before 2006. In 2006, the deduction is scheduled to drop
to $500.
These vehicles qualify for the clean-fuel vehicle deduction:
-
Ford Escape Hybrid — Model Year 2005
-
Toyota Prius — Model Years 2001 through 2005
-
Honda Insight — Model Years 2000 through 2004
-
Honda Civic Hybrid — Model Years 2003 and 2004
Individuals must use Form 1040, not one of the shorter forms, to claim this
deduction. They should put "Clean-Fuel"
and the deduction amount on the dotted line to the left of line 35, including
this amount in that line's total adjustments
to income. (They would have used line 33 on the 2003 Form 1040; line 34 on the
2002 form; line 32 the previous
two years.)
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Child Tax Credit
Taxpayers with a 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,
meaning a larger refund for many of these taxpayers.
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Combat Pay
Some military personnel receiving combat pay get larger tax credits because
of two law changes. 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. Counting combat pay
as income when calculating these credits does not change the exclusion of combat
pay from taxable income.
For more about the effect of excludable income on the EITC, see
Q&A-37 in
Miscellaneous Provisions -
Combat Zone Service.
For more details on combat pay, see
Military Pay
Exclusion – Combat Zone Service
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Sales Tax Deduction
Taxpayers who itemize deductions will have a choice of claiming a state and
local tax deduction for either sales or
income taxes on their 2004 and 2005 returns. The IRS will provide optional
tables for use in determining the
deduction amount, relieving taxpayers of the need to save receipts throughout
the year. Sales taxes paid on motor
vehicles and boats may be added to the table amount, but only up to the amount
paid at the general sales tax rate.
Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate
whether their deduction is for sales
or income taxes.
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Expense Limit for
SUVs
Businesses should be aware of a change regarding the deduction for certain
sport utility vehicles (SUVs) placed in
service after Oct. 22. Under the American Jobs Creation Act of 2004, businesses
cannot take a first-year deduction
of more than $25,000 for an SUV. The business would depreciate the remaining
cost. (The limit for vehicles placed
in service before Oct. 23 was $100,000.) The new limit does not affect other
types of property where the taxpayer
decides to expense the cost instead of depreciating the property.
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Sale of
Personal Residence Acquired in a Like-kind Exchange
Taxpayers who convert rental property to a principal residence should know
that a tax law change may limit their
ability to exclude gain on the sale of that residence if they obtained the
property through a like-kind exchange. Generally,
a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided
the individual has owned and used it
as a principal residence for two out of the five years before the sale. The
exclusion is $500,000 for a married couple
if both meet the use test. The American Jobs Creation Act of 2004 does not allow
any exclusion if the taxpayer
sells the home within five years of acquiring the property through a like-kind
exchange. The new law applies to sales
after October 22, 2004.
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Deduction for Discrimination Suit Costs
A new deduction is available for those who pay attorney’s fees and court
costs in connection with discrimination suits.
Taxpayers can take the new deduction whether they itemize or not. The deduction
cannot exceed the amount
includible in income for the year on account of a judgment or settlement
resulting from the discrimination claim.
Generally, personal legal expenses are not deductible, but an employee who
incurs legal expenses related to doing
or keeping his job could deduct these expenses on Schedule A as a miscellaneous
itemized deduction. However,
under The American Jobs Creation Act of 2004, an individual with legal fees and
court costs arising from a
discrimination suit may deduct the costs directly from income on the front of
the tax return; this is known as an
above-the-line deduction.
Under this new deduction, amounts paid for attorney’s fees and court costs are
deductible in computing alternative
minimum tax, and are not subject to the 2 percent floor on miscellaneous
itemized deductions or the overall limitation
on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the
discrimination claims qualifying
for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or
settlements occurring after that date
qualify for this deduction.
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