2004 Tax Act

On October 22, 2004, the President signed the American Jobs Creation Act of 2004. Unlike most recent tax legislation, the new law is "revenue neutral." It includes about $140 billion worth of good news for taxpayers in the form of new and expanded breaks. These are offset by about $140 billion worth of bad news in the form of revenue raisers.

There are literally hundreds of changes. Many will not affect you, your family, or your business. However, a good number of the changes may make a difference. This letter covers the provisions we think are most likely to fit into the latter category.

Individuals

New Deduction for State and Local Sales Taxes

The 2004 Jobs Act allows individuals the option of claiming an itemized deduction for either general state and local sales taxes or state income taxes, but not both. This change is intended to put those who live in jurisdictions with low or no personal income taxes on an equal footing with those who are able to deduct state and local income taxes. Under the new rule, you can choose to deduct actual sales tax amounts or instead deduct predetermined amounts from IRS tables (plus actual amounts incurred from purchases of motor vehicles, boats, and certain other items to be specified by the IRS in future guidance). The new deduction is only available for tax years beginning in 2004 and 2005 (unless Congress takes further action to extend the break).

Unfortunately, you cannot claim the new deduction under the alternative minimum tax (AMT) rules.

Tougher Rules for Deferred Compensation Arrangements

The new law includes a batch of complicated rules intended to make it more difficult for employees to enter into valid deferred compensation arrangements. The new rules generally require deferred compensation elections to be made before the beginning of the year in which the related compensation will be earned. However, elections to defer performance-based compensation can be made as late as six months before the performance period ends. New restrictions are imposed on when deferred compensation payouts can be received and on elections to change the form of payment or delay payments. These generally unfavorable new rules are effective for amounts deferred under nonqualified deferred compensation arrangements in tax years beginning after 2004.

The new rules will require significant planning and compliance efforts to gain the desired tax benefits under deferred compensation arrangements.

Charitable ContributionsVehicles,...