News Briefs ARCHIVES

During 2003, nearly 24 million taxpayers received an advance payment of the increase to the Child Tax Credit. A change in the law raised this credit from a maximum of $600 to $1,000 per child, with the increase sent to eligible taxpayers beginning in July. Taxpayers received up to $400 for each qualifying child claimed on their 2002 return.

Now you must subtract this advance payment when figuring the Child Tax Credit to claim on your 2003 tax returns. If the check was reduced (offset) because of back taxes owed or certain other debts, the total before offset is the amount to use. Each spouse is considered to have received one-half of any advance payment made to a married couple. If the advance payment was more than the taxpayer’s allowable credit, the taxpayer does not have to repay the difference.

The IRS sent each advance payment recipient a Notice 1319 with the payment amount (before any offset) shortly before the check was mailed. A taxpayer who doesn’t have this notice may check the IRS Web site at www.irs.gov

This has changed for 2003. Note the increases in both the section 179 limits and in the bonus amounts as well as mileage rates.

Depreciation and Section 179 Expensing

• The limit on the section 179 expense deduction increased to $100,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the year exceeds $400,000, double last year’s threshold. Off-the-shelf computer software is now eligible for this deduction. These changes apply to taxable years beginning after 2002 and before 2006. Taxpayers have an option as to whether or not to claim this deduction.
• The bonus depreciation rate for new property rose from 30% to 50% for property acquired and placed in service after May 5, 2003, and generally before Jan. 1, 2005. The higher rate does not apply to property acquired under a binding contract in effect before May 6, 2003. Taxpayers may elect out of bonus depreciation entirely, or elect to use the 30% rate instead of 50%, by attaching an election statement to their return.

Automobile Expenses

• The first-year depreciation limit for vehicles is:

• The standard mileage rate for business use of a car is 36 cents per mile.

Keep detailed records.  Cell phone records must be detailed or they will be disallowed by the IRS for lack of substantiation. Keep the records like those you keep for business use of autos or computers.

While Congress has considered allowing charitable contributions to be deductible on the front page of the 1040; for this year ( 2003) they are only a deduction if you itemize on a Schedule A.
To be deductible, charitable contributions must be made to qualified organizations. Qualified organizations include, but are not limited to, Federal, state, and local governments and organizations organized and operated only for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals. Organizations can tell you if they are qualified and if donations to them are deductible.

For a contribution of $250 or more, you can claim a deduction only if you obtain a written acknowledgment from the qualified organization. You generally can deduct your cash contributions as well as the fair market value of any property you donate to qualified organizations. The fair market value of most household or personal items is generally much less than the price paid when new. You should claim only what the item would sell for at a garage sale, a flea market, or a second hand or thrift store. You must fill out Section A of Form 8283 if your total deduction for all noncash contributions is more than $500. If you make a contribution of noncash property worth more than $5,000, generally an appraisal must be done. In that case, you must also fill out Section B of Form 8283.

Contributions you cannot deduct at all include contributions made to specific individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance. You cannot deduct contributions that you give to qualified organizations if, as a result, you receive or expect to receive a financial or economic benefit equal to the contribution.

Although you cannot deduct the value of your time or services, you can deduct the expenses you incur while donating your services to a qualified organization. If the expenses are for travel, which may include transportation and meals and lodging while away from home, they may be deducted only if there is no significant element of personal pleasure, recreation, or vacation in the travel. Actual costs of gas and oil can be deducted, or you can choose to take 14 cents per mile for using your own car.

For more information, refer to Publication 526, Charitable Contributions.

Deductions for Contributions of Auto's

A taxpayer may donate a car to a charity or authorized agent. But to get a deduction they need a receipt.  They can rely on an established used car pricing guide, such as the Kelly Blue Book, to determine the fair market value of the donated vehicle. Print a copy of the page showing the value.

There is a new addition to the old “DIF” score. The IRS has added a new wrinkle to their old standby. It is called the “UI” DIF. The UI stands for unreported income and a high score means a high probability of finding unreported income. The IRS hopes that it will help reduce the 25% no-change rate they now have on audits.

Do you need a “Business License”?

The Franchise Tax Board is currently entering into agreements with 83 cities to provide them with information about business taxpayers.  The cities want to know if taxpayers are filing a business return and should have a local business license.  The state will provide those cities who sign the agreements with a CD listing the following information: Taxpayer Name, address, social security number or tax identification number and principal business activity code.

This begins with the 2001 tax year information and the cities will be looking at the business codes to see if people should have a license or not. At this time Vallejo, Sacramento, Benicia, Concord, and Napa are among the first 83 cities.

With the cities current budget crunch it seems reasonable to assume that additional cities will request this information from the state.

New Tax Deduction for Teachers

Teachers should save their receipts for purchases of books and classroom supplies to receive a tax deduction for out-of-pocket expenses. Available to eligible educators in both public and private elementary and secondary schools, they must work at least 900 hours during a school year as a teacher, instructor, counselor, principal or aide. Educators may subtract up to $250 of qualified expenses from their adjusted gross income (AGI), and do not need to  itemize deductions. Details on this law change are in IRS Publication 3991, "Highlights of the Job Creation and Worker Assistance Act of 2002."

New Home Sellers Break

In 1997 Congress changed the rules on home sales and reporting the gain. At that time they set the rules for those who lived in the home more than two years however the IRS just got around to setting the rules “ for a reduced tax break” if you moved before meeting the two year requirement. It was the “unforeseen circumstance” clause.  It covers a job change or transfer with a move over 50 miles. In addition, if you cannot afford the mortgage and you have to sell or even a big increase in condo fees would qualify you. Other reasons would be; If you have to move for health reasons on a doctors recommendation: it's now too small because you are expecting “ multiple births”; and damage by a natural or man caused disaster. You will have to compute the amount of the reduced exclusion.

CALIFORNIA PROPOSED TAX INCREASES

Governor Davis’ proposed budget has both fee and tax increases as well as spending cuts.  Cuts will cover 60% of the shortage and increases the rest. 

These are the proposed permanent increases:

1. Reinstatement of the 10% and 11% brackets.

2. A 1% across the board sales tax hike beginning July 1, 2003.

3. A 1$ 1.10 per pack cigarette tax increase.

All revenue from these increases will be shifted to local governments as many state responsibilities will be shifted to the local authorities.

 ALSO INCLUDED IN  THE PROPOSED BUDGET ..

(With other items )

Mandatory  e-filing for all tax practitioners who file over 100 returns per year, beginning with the 2004 tax year.

An increase in the vehicle registration fee (The part that is non-deductible) 

Increase in intrastate phone call tax.

Individual taxpayers will generally find their 2003 taxes are lower, thanks to various laws enacted in recent years.

Tax Rates / Standard Deduction

• The 10% rate applies to taxable income up to $7,000 ($14,000 if married filing jointly or a qualifying widow). It remains at $10,000 for a head of household.
• The 15% rate for joint filers and qualifying widow)s tops out at $56,800 of taxable income — twice the level for single persons.
• Tax rates above 15% are now 25%, 28%, 33% and 35%, a drop of two percentage points (3.6 points for the top rate).
• The standard deduction for joint filers and qualified widows — not counting additional amounts for age or blindness — is now $9,500, twice that of a single filer or a married person filing separately.

Capital Gains and Qualified Dividends

• For both the regular and the alternative minimum tax, the top tax rate for net capital gains on sales and other qualified dispositions (including installment payments received) after May 5, 2003, is generally 15% (5% for gains that would otherwise be taxed at a regular rate of 10% or 15%). The top rates on certain depreciable real property and collectibles remain at 25% and 28%, respectively.
• The same 5% and 15% maximum rates apply to most dividends paid after 2002 on a domestic or qualified foreign corporation’s stock that the taxpayer owns for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date. Form 1099-DIV will show the amount of qualified dividends, but the taxpayer must determine whether the holding period is met.
• The 8% rate for qualified 5-year gain does not apply to sales and other qualified dispositions (including installment payments received) after May 5, 2003.

Tax Credits

• The Child Tax Credit is a maximum of $1,000 per child, a $400 increase. Most taxpayers using this credit got an advance payment of this increase during 2003 and must subtract that advance when figuring their 2003 credit amount.
• Up to $3,000 of expenses may be used to figure the Child and Dependent Care Credit — $6,000 for two or more qualifying persons. The credit percentage may be as high as 35%, for those with adjusted gross income (AGI) up to $15,000. The credit phases down to 20% when a taxpayer’s AGI exceeds $43,000.
• Up to $10,000 of higher education expenses may be used to figure the Lifetime Learning Credit, doubling the maximum credit amount to $2,000.
• Qualifying taxpayers may now apply for an advance of the Health Coverage Tax Credit to help pay their monthly insurance premiums. This credit is for certain workers who lost jobs due to the effects of international trade and for those age 55 or over who received benefits from the Pension Benefit Guaranty Corporation.

Retirement Plans / Individual Retirement Arrangements

• The elective deferral limit for 401(k), 403(b) and 457 plans rose to $12,000 in 2003. For SIMPLE plans, the limit rose to $8,000.
• The catch-up contribution limit for persons age 50 or older rose to $2,000 for 401(k), 403(b) and 457plans and to $1,000 for SIMPLE plans.