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.
* Installment agreements. If you can't pay the taxes you owe all at once, you can enter into an installment agreement with the Internal Revenue Service and pay what you owe over time. Years ago, the agency used to allow such deals when the taxpayer, even on installments, couldn't pay the full amount. But in 1998 the IRS concluded that the law forbade such partial payment installment agreements. The bill clarifies that the law does allow such agreements.
* Stock options. For several years, tax experts have been debating whether incentive stock options, the type typically included in executive pay packages, should be subject to payroll taxes (Social Security, Medicare and unemployment). There has been no specific statutory exemption for them, and the IRS has talked about imposing payroll taxes on them, though it backed off in 2002 pending congressional guidance.
Well, that guidance came in this bill: no payroll taxes on these options.
That removes an uncertainty that some employers argued discouraged them from offering these options.
* Big SUVs. The provision of the bill that probably got the most attention was one that made big sport-utility vehicles -- those over 6,000 pounds -- ineligible for a special write-off generally available on equipment purchased by small businesses. The special write-off remains in place for other equipment but is now limited to $25,000 for big SUVs.
But there's hope for the fleet afoot. A special accelerated-depreciation provision that remains on the books until the end of this year would allow a small-business buyer of a big SUV worth, say, $70,000 to write off $52,000 by combining the accelerated depreciation with regular depreciation and the $25,000 write-off. The remaining $18,000 would have to be deducted over future years.
* Like-kind exchanges. Current law allows owners of real estate held for investment or income to sell a property and defer paying tax on their profit if they buy another business property worth as much as the one they sold or more. This treatment is not allowed for a personal residence.
However, the law does allow taxpayers who sell their residence to exclude profit of up to $250,000 for a single person and $500,000 for a couple.
Some taxpayers have figured out that if they sell a rental property, buy another, rent it for a while, then move in and live there for the required two years, they could sell and get $250,000 or $500,000 tax-free. Under the new law, a property will not qualify for the residential exclusion if it was acquired in a like-kind exchange within the past five years.
This may sound obscure, but congressional experts figure the change will bring the government $200 million it wouldn't have gotten over the next 10 years.
* Corporate airplanes. This may not bring tears to the eyes of beach-goers backed up at the Bay Bridge, but the bill closes down a parlay created by the U.S. Tax Court in 2000 involving the taxation of small-business owners and employees who use a company plane for personal travel. The court held that a company can let its employees (who may also be its owners) use its plane for personal travel and get a full deduction for the company as long as the cost of the trip is treated as compensation income to the employees. Because that income is supposed to reflect commercial fares, it is often small compared with the deduction the company gets for the plane. This allows small-business owners who also work for their company to use the company plane and report a modest amount of income and a much larger deduction, making the plane rides free or nearly so.
The new law specifies that the deduction cannot exceed the reported income when the travelers are company officers, directors or owners.
This change cuts off a rapidly spreading strategy and will bring in nearly $2.3 billion more to the government over 10 years, budget estimators figure.
* Charitable giving. The bill contains a number of provisions tightening up on charitable gifts, a subject we'll be taking up in detail next week.