Section 179 election could be an ace up your sleeve, especially this year.
Section 179 of the tax code allows you to “expense” (I.e., deduct in the current year) up to $102,000 in business asset costs in 2004, rather than rely on stingy depreciation rules that require asset write-offs spread out over five years, seven years or more.
If you want to rake in Section 179 windfall each year, you’ve got to know when to hold ‘em and know when to fold ‘em.
Strategy: Look back on tax returns from the past couple years to see if you’ve overlooked any Section 179 deductions.
Why now? New IRS regulations clarify that you’re allowed to make the Section 179 election on an amended return. The new rules apply to tax years 2003, 2004 and 2005. (IRS temporary regulation 1.179-5T)
Before the IRS issued these rules, you could claim Section 179 write-off only on your original tax return for the year in which it applied. You couldn’t amend previous returns to grab the tax break.
To earn a Section 179 deduction on an amended return, you must specify the assets for which the election applies, plus the portion of its cost, you can now elect to expense more or all of the remaining cost. You generally have three years to file an amended return.
Amended bonus: New rules also allow you to revoke a prior Section 179 election that, in retrospect, wasn’t advantageous. Previously, you could undo Section 179 elections only by earning specific IRS consent.
Warning: Good times won’t last forever. After 2005, the maximum Section 179 write-off falls back to $25,000, unless Congress votes to extend it further.
Plus you must contend with two other annual limits: (1) for 2004, the cap is reduced on a dollar-for-dollar basis if you buy more than $410,000 during the year. (2) Deduction is limited to your business’s taxable income. So, you can’t claim an expensing deduction if you show a tax loss for 2004. Any excess carries over to future years. Bottom line: Take advantage of this window to review your past three years’ tax returns to look for Section 179 savings.
Source: Research Recommendations

SOCIAL SECURITY WAGE BASE INCREASES TO $90,000 IN 2005

Social Security (OASDI) wage base will increase to $90,000 for 2005 from $87,000 in 2004, according to an announcement by the Social Security Administration. The maximum 2005 OASDI tax payable by each employer and employee is $5,580, or 6.2% of the wage base. (all taxable wages earned are subject to the 1.45% Medicare tax).
SSA also announced that the 2.7% annualized increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) reported in September will apply to Social Security benefits in 2005.
FICA taxes are comprised of two separate taxes: OASDI taxes (old-age, survivor and disability benefits paid as social security benefits) and Medicare, or HI (hospital insurance) taxes. The HI taxes fund the system of medical and hospital benefits paid to the aged. Total FICA tax rate of 7.65% (6.2% for OASDI and 1.45% for Medicare) remains the same for 2005.
In 2005, an employee with wages of $95,000 can have withheld from pay the OASDI maximum of $5,580 (0.062x$90,000). The employer pays a matching amount of FICA taxes for each employee, effectively doubling the employee’s total of $6,957.50.
Source: BNA, Inc.

MAIL CALL

Deduct Kids’ Medical Costs After Divorce
Q. I am divorced, and my wife has custody of our two young children. The divorce agreement says my wife can claim two dependency deductions. But I pay their medical expenses, so can I claim the medical deduction for them?
A. Yes. You can usually deduct medical expenses if you spend the money on yourself, your spouse or another dependent But a key exception exists: A child of divorced parents is treated as being the dependent of both spouses for this purpose. So you’re allowed to add medical expenses you pay for your children to your own expenses. You can deduct any amount that exceeds 7.5 percent of your adjusted gross income.


No Heavy Lifting In Roth Conversions
Q. In a recent article, you discussed a new ruling related to converting a traditional IRA into a Roth IRA. The article makes it sound like there‘s nothing to it. Is that true?
A. Yes, it’s usually as easy as setting up any other account at a financial institution. To establish a Roth IRA, all you need to do is fill out the paperwork and arrange to transfer the funds from your existing IRA. The financial institution will provide a transfer form. If you still have questions, any financial planner worth his salt can help you through the process.
TIP: Remember that you must pay on the amount converted to the Roth IRA.

Payroll Taxes For Shareholder/Employee
Q. I’m planning to set up an S Corporation this year. My title will be president, but my main function will be sales. Will I have to pay self-employment tax on all the income from the corporation?
A. No. As an employee of the corporation, you should receive a salary that’s subject to regular payroll taxes, just like every other employee. This assumes that you’re being paid a reasonable amount for the services you’re providing. On the other hand, as the sole shareholder of the S corporation, profits left after the corporation deducts your salary are also passed through to you and must be reported on your tax return. However, this pass-through income is not subject to the self-employment tax or federal payroll taxes.

Artful Step-Up For Inheritances
Q. We inherited a piece of valuable artwork from my wife’s uncle (who had no children). Unfortunately, no one has any idea how much he paid for it and we can’t find any records. If we sell it, do we have to pay tax on the full amount of gain?
A. Thankfully, no. It doesn’t matter how much your wife’s uncle paid for the art because you benefit from a “step-up” in basis after his death. So you must pay tax only on the appreciation in value of the artwork from the time you own it. Obtain an independent appraisal of its current worth. If you hold the art for at least one year, any gain will be considered long-tem capital gain, which is taxed at a maximum federal rate of 15 percent.

No Interest Deductions On 401K Loans
Q. I may borrow money from my 401K plan. I’ve heard this is a good deal because I’m basically paying myself back. Can I deduct the interest on the loans?
A. No. You cannot deduct the interest on a loan secured by elective deferral compensations to your 401k account. But the interest payments you make, plus the repayments of principal, effectively build your account back up. You can generally borrow up to 50% of your vested account balance, limited to a maximum loan amount of $50,000.
Tip: Make sure you will be able to pay the loan back on time. Otherwise, you’ll face a heavy tax cost because your unpaid loan balance will be treated as a taxable distribution from your account.
Source: Research Recommendations

 Caution  Do not adopt any of our recommendations without consulting a tax professional