Tax planning at mid-year 2004 - anticipating important changes   Summer usually isn't the time people are thinking about tax planning but this year, you should. Congress is debating another round of tax cuts and extensions of current incentives that make planning a real roller coaster ride.    The best advice is to anticipate change. Just last month, Nina Olson, the National Taxpayer Advocate, predicted that millions of Americans are going to be very surprised over the next few years that they owe alternative minimum tax (AMT). Very few taxpayers are aware of the looming AMT problem.   The AMT is just one example. Since 2001, the tendency in Congress has been to enact temporary tax cuts. Some of these tax incentives will expire in 2005; others in 2007, others in 2010, and beyond. Many taxpayers think that just because they got to take advantage of a generous credit or deduction last year, the same incentive will be available this year. Because so many of the tax cuts are temporary, it's risky to make that assumption.   Tax Bill this Summer   Major tax legislation may be enacted this summer. Both the House and Senate have passed bills repealing the extraterritorial income regime (ETI) in the Tax Code. However, these bills go far beyond ETI repeal. They include a host of other tax measures. Some of the tax incentives are the same in the House and Senate bills. Others are not. Before Congress can pass a final bill, the House and Senate must agree on one version.   Here are some highlights to get you thinking about planning:   --Small business expensing: Several years ago, Congress increased the amount small businesses can expense, that is immediately deduct, each year. The higher amount, $100,000 (indexed for inflation), is only temporary. If Congress doesn't make it permanent or extend it, small business expensing could fall back to $25,000. If you're thinking about investing in new equipment, you may want to make a purchase or plan a purchase for 2004.   --Corporate tax cut: In place of the ETI regime, which the World Trade Organization ruled is an illegal trade subsidy, Congress may lower the corporate income tax rates. The top rate could fall as much as three points. Congress also needs to decide which businesses will be eligible for lower corporate tax rates. Some lawmakers want to extend the lower rates to all manufacturers and small businesses.   --AMT relief: Higher AMT exemption amounts are set to expire at the end of this year. The House bill would continue the higher exemptions for one more year. According to the White House, if the higher exemption amounts are allowed to expire, nine million more taxpayers will be paying AMT in 2005. Will you be one? The Senate also voted to extend for one more year the temporary allowance of the nonrefundable personal credits against AMT liability. These include the dependent care credit, the credit for the elderly and disabled and the HOPE and Lifetime Learning credits.   --Marriage penalty relief. Married couples filing jointly have traditionally been hit with the so-called "marriage penalty." In 2001, Congress enacted marriage penalty relief. It raised the standard deduction for married couples and expanded the 15 percent tax bracket. Originally, full relief was not scheduled to kick-in until 2009. Congress accelerated relief in 2003 but, and many people are not aware of this, full relief is only temporary. It is for the 2003 and 2004 tax years. The House bill would make full marriage penalty relief permanent.   --Child tax credit: Many taxpayers were happy to receive an advance on the higher child tax credit in 2003 and they may be expecting a check this year. They won't be getting one. When Congress voted to boost the child tax credit to $1,000 it made the higher credit temporary...just for the 2003 and 2004 tax years. Advance payments were only sent in 2003. Unless Congress acts, the credit will fall to $700 in 2005. The House bill would keep the credit at $1,000.   --Homeowners: The Senate bill would permit homeowners to deduct mortgage insurance. Private and federal mortgage insurance generally would qualify. The Senate also voted to create some temporary tax cuts for energy-efficient improvements to residential housing. If you're thinking about adding energy-efficient windows or an alternative fuel source, such as a solar heating unit, you may want to wait and see if Congress enacts these energy incentives.   --State sales taxes: Tennessee does not impose an income tax on wages and business income. Typically, Tennesseans have no state income taxes to deduct on their federal returns, but make up the difference with a hefty sales tax. The House bill would allow taxpayers to take a deduction for state sales and use taxes in lieu of state income taxes.   --Extenders: Some tax credits and deductions have been around so long they seem permanent. They aren't. Congress just keeps extending them. Last year, some popular incentives expired. They may be extended in the big tax bill this summer or in other legislation. These include the teacher's classroom expense deduction, corporate donations of computers and scientific equipment, the Welfare to Work and Work Opportunity Tax Credit, and the research tax credit.   These proposed bills are huge; the Senate version is more than 900 pages! For more information and how to get started on mid-year planning, contact our office today.       Can I still write off a heavy SUV... one with a loaded weight of over 6,000 pounds?     Yes.  Congress hasn't shut the loophole allowing businesses to expense up to $102,000 of the cost of a qualified SUV that is placed in service this year.  But act soon.  The break will be pared.  To help offset the cost of corporate tax easings, the Senate has OK'd a bill to limit expensing to $25,000 for SUVs with loaded weights between 6,000 and 14,000 pounds.  You'll have some warning before the reduction goes into effect.  The cutback is expected to apply only to SUVs put in use after the bill is signed.       Will I be eligible for a tax break if I buy a hybrid car?     If you buy the car and use it this year, you may be able to claim a clean-fuel deduction of up to $1,500 on your 2004 federal return. The car has to be new and it must meet certain environmental standards. The IRS has published a list of cars that qualify for the deduction. The deduction is available only in the year you buy the car. The maximum deductible amount is scheduled to drop in 2005 and 2006, and the deduction is set to expire after 2006.         The content of this transmission does not constitute a professional service. Always consult with a competent professional service provider for advice on tax, accounting, and other financial matters specific to your situation. If you wish to engage our firm for this purpose, please contact our office.