October 12, 2004

Hi Everybody,

I have some information for you today about new tax legislation.

With an eye towards Election Day, Congress has just approved some tax legislation that should help keep the economy rolling and those deficits growing. The bill, which still needs to be signed by the President, doles out most of its goodies to corporations, but there are a couple items that affect individuals that I wanted to bring to your attention.

First, sales tax may now be deductible. Prior to 1986, both sales tax and state income taxes were deductible as itemized deductions. Sales tax as a deduction was dropped as part of the sweeping tax reforms of 1986. With this new legislation, a taxpayer may now deduct whichever tax provides the greater deduction (but only if they itemize deductions).

The deduction for sales tax can be based on actual purchases or by using amounts contained in IRS-provided tables. For most taxpayers, the state tax deduction will still provide the larger deduction. However, for some who have made large taxable purchases during the year, such as a car or a boat, the sales tax deduction may allow for a bigger deduction.

The other significant change affecting individuals has to do with charitable contributions, specifically the donation of big ticket items like cars and boats. Prior to the new law, an individual was allowed a charitable deduction for the fair market value of a car or a boat donated to a charity.

To arrive at the fair market value, and the resulting deduction, you used to simply look up the “blue book” trade-in value. However, the new rules generally limit your charitable deduction to the amount the charity realizes in gross proceeds on the resale of you car or boat. Under the 2004 legislation, this new rule doesn’t take effect until tax year 2005. So if you were thinking of donating that “old clunker,” it may be now or never.

I hope this helps and as always I welcome your questions and feedback.

Regards,

Jim