Significant individual provisions of the AJCA.

• Author: Nissenbaum, Martin
• Position: American Jobs Creation Act of 2004

EXECUTIVE SUMMARY

* The new itemized deduction for state and local sales taxes primarily benefits residents of states with little or no income tax; an above-the-line deduction for attorneys' fees benefits plaintiffs in civil-rights type cases.

* Increased reporting for charitable contributions, withholding on supplemental wage payments and deduction limits on I use of personal use of company aircraft will affect many individuals.

* The AJCA also restricts SUV expensing, charitable contributions of vehicles and the gain exclusion for principal residences acquired in like-kind exchanges.

The American Jobs Creation Act of 2004 (AJCA) affects several tax breaks for individual taxpayers and creates others. This article describes and analyzes AJCA provisions on charitable contributions, supplemental wage payment withholding, the sales tax deduction and more.

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The American Jobs Creation Act of 2004 (AJCA) was signed into law by President Bush on Oct. 22, 2004. This article describes some of the more significant AJCA provisions affecting individual taxpayers, and offers insights and planning points.

Deducting State and Local General Sales Taxes

AJCA Section 501 allows taxpayers to elect an itemized deduction for state and local general sales taxes in lieu of the deduction for state and local income taxes. The provision is effective for tax years beginning after 2003 and before 2006.

Taxpayers have two options for determining the sales tax deduction. First, they can deduct the actual total general state and local sales taxes paid if they have receipts. Alternatively, taxpayers may use tables provided in IRS Pub. 600, Optional State Sale.; Tax Tables. The tables are based on average consumption by taxpayers on a state-by-state basis, taking into account filing status, number of dependents, adjusted gross income and rates of state and local general sales taxes. Taxpayers who use the tables may also deduct, in addition to the table amounts, eligible general sales taxes paid on the purchase of motor vehicles, boats and other items specified by the IRS. Sales taxes for such items are not reflected in the tables.

This provision is clearly intended to benefit residents of states with no state income tax. However, because it is available to all taxpayers, it may benefit those whose sales tax bill for the year exceeds their state income tax (e.g., in low-tax jurisdictions or in years they will incur large taxable expenditures).

The sales tax deduction is a preference for alternative minimum tax (AMT) purposes and, thus, may be of little or no value to taxpayers exposed to the AMT. In such cases, if a taxpayer itemizes for state tax purposes and can claim the sales tax deduction, he or she may be better off deducting sales tax on the Federal return, even though the deduction results in no Federal tax savings.

Civil Rights Tax Relief

AJCA Section 703 provides an above-the-line deduction for attorneys' fees and costs paid by, or on behalf of, a taxpayer in connection with any action involving a claim of unlawful discrimination, certain claims against the Federal government or a private cause of action under the Medicare Secondary Payer statute. Under new Sec. 62(a)(19), the amount that may be deducted above-the-line cannot exceed the amount includible in the taxpayer's gross income for the tax year on account of a judgment or settlement (whether by suit or agreement and whether as lump-sum or periodic payments) resulting from such claim.

Definition

According to Sec. 62(e), unlawful discrimination is an act unlawful under certain provisions of any of the following:

* Civil Rights Act of 1991;

* Congressional Accountability Act of 1995;

* National Labor Relations Act;

* Fair Labor Standards Act of 1938;

* Age Discrimination in Employment Act of 1967;

* Rehabilitation Act of 1973;

* Employee Retirement Income Security Act of 1974;

* Education Amendments of 1972;

* Employee Polygraph Protection Act of 1988;

* Worker Adjustment and Retraining Notification Act;

* Family and Medical Leave Act of 1993;

* Chapter 43 of Title 38 of the United States Code (on employment and reemployment rights of members of the uniformed services);

* Revised Statutes (42 USC Section 1981, 1983 or 1985);

* Civil Rights Act of 1964 (42 USC Section 2000e-2,-3 or -16);

* Fair...