$250
Above-the-Line Deduction For Teachers. For
2002 through 2005, if you are an eligible educator you will be able to
deduct as an above-the-line deduction (deductible even if you don’t itemize)
up to $250 of your qualified classroom expenses. Your qualified expenses
include books, supplies (other than non-athletic supplies for courses in
health or physical education), computer equipment (including software and
services), other equipment, and supplementary materials.
Planning
Alert! To be an eligible
educator you must be a kindergarten through grade 12 teacher, instructor,
counselor, principal, or aide working at least 900 hours during the school
year.
Adoption
Tax Credit.
If you are considering adopting a child, the adoption tax credit may
substantially reduce your tax bill. This year, you may be entitled to an
adoption tax credit for qualifying adoption expenses of up to $10,390 per
child. Also in 2004, the adoption credit is phased-out as your modified
adjusted gross income increases from $155,860 to $195,860. Tax Tip.
If you finalize the adoption of a special needs child in 2004, you
may receive the full adoption tax credit of $10,390 even if this is more than
your adoption expenses. This credit for the excess
of $10,390 over your actual expenses is allowed only in the year the adoption
is finalized.
Foreign
Adoptions.
If you are adopting a child who is not a citizen or resident of the U.S. when
the adoption commences, you are allowed the credit only if, and when, the
adoption becomes final. The IRS has recently released guidance on when a
foreign adoption becomes final. Call
our firm if you need more information. Planning Alert! Your
adopted child must have a taxpayer identification number (TIN) for you to take
the credit. A child’s Social Security number is normally the TIN. If, after
reasonable efforts, you are unable to obtain a Social Security number for the
child, you can apply for an adoption taxpayer identification number by filing
a Form W-7A with the IRS.
Clean-Fuel
Vehicles Deduction.
If you
purchase a new qualified clean-fuel auto (certain automobiles adapted to run
on clean-burning fuels), you may take a $2,000 above-the-line deduction,
whether or not you used the vehicle in your business.
The IRS has certified the following vehicles as qualifying for this
$2,000 deduction: the Toyota Prius (for model years 2001, 2002, 2003, 2004 and
2005), the Honda Insight (for model years 2000, 2001, 2002, 2003, and 2004),
and the Honda Civic-Hybrid (for model years 2003 and 2004).
Tax Tip. Please
let us know if you have purchased any of these vehicles during 2004 or a prior
year, so we can make sure you get this deduction.
Moving
Expenses.
If you had a job-related move in 2004, you may be entitled to deduct
unreimbursed moving expenses. Deductible moving expenses only include: (1)
moving household goods and personal effects from your former residence to your
new residence, and (2) travel costs (including lodging during the
travel) from your former residence to your new residence.
Tax Tip. If
your employer reimburses your moving expenses, provide your employer with
proper documentation of the moving expenses. Otherwise, the IRS says employer
reimbursements should be included in your Form W-2.
Social
Security Numbers For Dependents. All dependents
must have a social security number, even if they are born as late as
December 31, 2004. If you don't include a valid social security number for a
child (or other dependent), the IRS can disallow tax benefits relating to that
dependent, including the dependency exemption, child tax credit, dependent
care credit, adoption expense credit, HOPE scholarship credit, Lifetime
Learning credit, earned income credit, as well as the exclusion from gross
income of employer‑provided adoption assistance payments. If you do not
have a social security number for your dependents, please apply to the Social
Security Administration for the number using Form SS-5, which can be obtained from any office of the Social Security
Administration.
Penalty
For Under-Withholding Or Under-Estimating.
One way to avoid a penalty for failing to pay or withhold sufficient
income taxes for a tax year is to pay 100% of your prior year’s tax
liability in quarterly estimated payments or through income tax withholding. Planning Alert! If
your 2003 AGI was over $150,000, you must pay in 110% of your 2003 tax
liability to qualify for this safe harbor in 2004. Tax Tip.
If you have not paid sufficient estimates to avoid an underpayment
penalty for 2004 and you have wages subject to withholding, you may have
additional amounts withheld from these wages on or before December 31, 2004.
Any withholding for 2004 is deemed paid equally on each quarterly installment
date for estimated tax purposes, even if the withholding occurs in December.
Tax
Court Finds Taxable Portion of Non-Taxable Physical Personal Injury.
Generally, damage awards for a physical personal injury are fully tax
free (except to the extent allocated to punitive damages).
So, for example, damage payments to a taxpayer for medical malpractice
or a negligent car accident are typically tax free.
However, in a recent case, the Tax Court held that a professional
photographer who was intentionally kicked by an NBA basketball player during a
game, and received a $200,000 settlement for his Aphysical@ personal injury, must pay tax on a portion of the
settlement agreement. In the
settlement, the photographer expressly agreed not to disclose the terms of the
settlement. The Tax Court held that the portion of the damages that could be
reasonably allocated to the non-disclosure provision were taxable, even though
the original claim constituted a physical personal injury.
Tax Tip. If
you anticipate receiving any settlement or lawsuit damage awards for a
physical personal injury, make sure you obtain competent tax advice before
agreeing to the structure of the settlement.
Any damage allocation to punitive damages or non-disclosure agreements
will be fully taxable. Feel free to contact our office if you need more information
on damage award allocations.