Please keep in mind that this covers only the highlights of the most important changes in the new law. Please consult your tax advisor for more details on how you may be affected, and whether immediate action is needed to take advantage of the tax breaks in this important tax legislation.
New Law Changes Affecting Individuals
New itemized deduction for state and local general sales taxes. Individuals who itemize will be able to deduct either state and local income taxes or state sales taxes on their 2004 and 2005 federal tax returns. Previously, only state and local income taxes were deductible. Individuals who take the sales tax option may deduct their actual sales taxes or use IRS-published tables. This change will primarily benefit individuals in states with sales taxes but with no or limited individual income taxes (i.e., Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming). But even individuals who live in states that impose both income taxes and sales taxes may be affected. For example, residents of states with an income tax and sales taxes should determine whether their sales taxes for a particular year will exceed their income taxes for that year. In some cases, they may want to bunch major purchases into the same year so that sales and use taxes for that year will exceed the income taxes paid for that year. By doing this, they can deduct their sales and use taxes in one year, and their income taxes in another year.
Tougher rules for charitable donations of autos. Tougher rules will apply to the charitable deduction for autos (as well as boats and planes) donated to charity after 2004 if the vehicle has a claimed value of more than $500. If the charitable organization immediately sells the auto (for example, to a wholesaler) without making material improvements to it, your charitable deduction generally can't exceed the charity's gross proceeds from the sale. By contrast, under the pre-2005 rules, the charitable contribution deduction for a noncash contribution (including an auto) generally equals the fair market value of the contributed property. Thus, if you are thinking of donating an auto (or boat or plane), you'll probably wind up with a bigger deduction if you make the gift this year rather than next year. Beginning next year, tougher substantiation rules also will apply to donated vehicles that have claimed value of more than $500 (e.g., the charity must provide a contemporaneous written acknowledgment of the gift bearing a number of specific facts, such as the sales price if it immediately sells the vehicle).
Statutory stock options are officially free of FICA and FUTA. The Jobs Act provides that FICA and FUTA taxes do not apply and income tax withholding isn't required when a statutory stock option is exercised. This term refers to an incentive stock option or an option to purchase stock under an employee stock purchase plan. The exercise of a statutory stock option also is not taken into account to determine Social Security benefits. Although these changes are effective for options exercised after Oct. 22, 2004, the IRS had said back in 2002 that pending detailed guidance it would not assess FICA or FUTA taxes, or require withholding, on statutory stock options.
Tougher rules for nonqualified deferred compensation plans. Under current rules, compensation deferred under a nonqualified deferred compensation plan (one that isn't subject to the usual tax rules that apply to pension plans) generally is taxed to the recipient when it is no longer subject to a substantial risk of forfeiture. Effective generally for amounts deferred in tax years beginning after 2004, a sweeping new set of rules will apply. Amounts deferred under a nonqualified deferred compensation plan will not be subject to a substantial risk of forfeiture (and thus will not produce income tax deferral) if distributions from the plan can be made for any reason other than passage of a certain period of time, termination of employment, death, disability or unforeseeable emergency (e.g., financial hardship resulting from illness), or change of control in the employer. There also won't be a substantial risk of forfeiture if funds are held in certain specialized vehicles called offshore rabbi trusts. Additionally, the plan will have to require that compensation for services performed during a tax year may be deferred only if the participant so elects no later than the close of the preceding tax year or at the time provided by IRS regulations.