Wait: There still are tax deductions for procrastinators
On the Money
From the January 7, 2005 print edition
There always seem to be many tax advice columns right before the end of the calendar year. While some of us spent New Year’s Eve celebrating and toasting the annual rotation of the human odometer, others were busily writing last minute (and hopefully deductible), checks in fervent attempts to minimize unpleasant events on April 15, 2005.
For example, buying a large SUV for business before December 31st, generated a deduction of up to $100,000. First-year deductions for such a purchase in 2005 are now capped at $25,000.
Additionally, you will no longer be able to deduct non-cash donations over $500 (including a car, boat or plane) unless you’ve received documentation from the charity indicating whether the property will be sold or used by the organization. You will only be able to deduct the amount the charity receives from the sale.
Hopefully you got your donation into the hands of your favorite charity by December 31.
But in the time-honored spirit of procrastination, there’s still something you can do to minimize 2004 tax liabilities. This is particularly pertinent to Individual Retirement Accounts.
Although 2004 contributions to 401(k)s and 403(b)s are still required by Dec. 31st, contributions (generally limited to $3,000) to a deductible IRA may still be made until the due date of your tax return. Just be certain to notify the trustee that it is a 2004 contribution.
The extended date of the tax return (which can be as late as Oct. 15, 2005) is the cut-off for making 2004 contributions to a SEP (Simplified Employee Pension) or SIMPLE (small employer sponsored) IRA.
Taxpayers turning 50 before the end of the taxable year that meet the Modified Adjusted Gross Income (MAGI) requirements for the
Traditional or Roth IRA, are allowed to make an additional $500 contribution to the regular contribution as long as you have earned income to support the excess amount.
Consider using a cash advance from a credit card to make the contribution. The IRS considers the expense deductible in the year that the charge is incurred, not when you pay the credit card bill.
Remember, you cannot contribute into your IRA more than you earned income. If such contributions exceed the limits for that tax year, they are classified as “excess contributions” and the owner may be subject to an excise tax on them.
Excess contributions can be corrected by withdrawing the excess amount any time up to the due date of the return. If the excess amount is withdrawn during the specified period, it is as if the contribution was never made, and no excise tax is due.
As you can see, tax legislation is encouraging a focus on retirement. If you have exhausted the above measures for the 2004 tax year, now is the time to at least formulate some changes for 2005.
Become involved with your employer’s retirement plan and open an IRA. In 2005 there are increased retirement contribution limits. The maximum IRA contribution limit will increase from $3,000 to $4,000 and the maximum 401(k) and 403(b) employee contribution limit will increase to from $13,000 to $14,000.
Also, beginning in 2005 the IRA deduction income phase-out is increased by $5,000. If you are covered by a retirement plan at work, you can also take an IRA deduction if your modified adjusted gross income is less than $80,000 (married filing joint) or $60,000 (single or head of household); as opposed to $75,000 and $55,000 in 2004.
One a final note: double check your withholding level. The Internal Revenue Service announced that in the fourth quarter 2004, individuals will pay 5 percent interest for underpayments on taxes, an increase of 1 percentage point from the previous quarterly level.
If all this seems baffling, just remember:
“A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.” – Russell B. Long, U.S. Senator.
“I am proud to be paying taxes in the United States. The only thing is, I could be just as proud for half the money.” – Arthur Godfrey, entertainer
“People who complain about taxes can be divided into two classes: men and women.” – Unknown
“Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” – F. J. Raymond, humorist.
Here’s wishing many refunds of the day. Happy New Year.
As always, please check with your CPA, or tax advisor to confirm that any suggestion made here is applicable to your situation.
© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.