The giant American Jobs Creation Act, passed by Congress and signed by President Bush earlier this month, was stunningly complicated and aimed mostly at businesses, two characteristics that made it a MEGO (my eyes glaze over) for many Americans.
But ordinary taxpayers should be aware that the new law does contain a number of provisions that, for better or for worse, may affect them.
In some cases, individuals will reap benefits from provisions for businesses that will naturally flow to owners and workers. But many of the changes wrought by the bill are straightforward tax cuts and "loophole" closers aimed directly at individuals.
A few have broad reach, noted Lorin D. Luchs, partner in the national tax office of accounting firm BDO Seidman, but many affect people only in specific circumstances. But in both cases, the consequences can be important, so here's a quick look at some of the changes.
Sales tax. Individuals will have a choice on their 2004 and 2005 tax returns of deducting either their state and local income taxes, as they have in the past, or their state and local sales taxes, which have been nondeductible since 1986.
The clearest winners from this change, of course, are residents of states with no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington state and Wyoming). They get a deduction where there had been none, and their main decision is whether they should itemize if they normally take the standard deduction. If they are thinking of making a big purchase, such as a car or a boat, they may want to do some quick calculations about whether to buy this year or wait until January. The tax benefits could be better in one year or the other, depending on income and other possible deductions.
The bill allows taxpayers to choose between keeping track of the exact amount of tax they paid -- which means hanging onto receipts -- or using tables that are to be provided by the Treasury Department. The bill also allows taxpayers to use the table but add on the tax from a big-ticket item such as a car or a boat.
Residents of states with both income and sales taxes will generally see no benefit from this, since they will remain better off deducting their state and local income taxes. But some moderate-income taxpayers, especially in states with low income taxes and high sales taxes, should run the numbers both ways.
Attorneys' fees. Current law requires that damage awards, other than for physical injury, be included in taxable income. Since many such cases involve "contingency" fees -- attorneys get a share of the award, but nothing if the case is lost -- the question arises as to whether money that goes straight to the lawyer should be included in the taxable income of the plaintiff. Courts have split on that, some saying, in effect, lawyers' fees aren't income to the plaintiffs since they never had a right to them, and others saying that the whole award is income and that the fees can then be deducted. This is a significant distinction, because the deduction is subject to all sorts of limitations and to the alternative minimum tax.
The bill resolves the issue in favor of the taxpayer in cases involving illegal discrimination under various civil rights or other laws. It specifies that in such cases the taxpayer is entitled to an "above the line" deduction, meaning the fee is subtracted directly from adjusted gross income and is not subject to the various limitations that can apply to itemized deductions.