• The American Jobs Creation Act of 2004
  • February 5, 2005 | Author: Dana M. Neu
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • The American Jobs Creation Act of 2004 was signed into law on October 22, 2004. While the Act is primarily focused on business taxpayers, there are a few key provisions that relate to individuals. These include the choice of deducting state income or sales tax as an itemized deduction, more stringent rules regarding the charitable deduction for the contribution of vehicles, and the reformation of certain S Corporation requirements.

    State Income Tax vs. State Sales Tax: Beginning in 2004, individual taxpayers may elect to take state and local sales taxes as an itemized deduction rather than deducting state and local income taxes. They may deduct actual sales taxes paid or use the tables published by the IRS, adding the actual sales tax paid for certain purchases to the table-derived amount. In states such as Minnesota that have a state income tax, taxpayers will need to determine whether their sales tax exceeds their income tax for that particular year and deduct accordingly.

    Charitable Donations of Vehicles: In 2005, the deduction for the contribution of a vehicle (including automobiles, boats, and airplanes) valued over $500 that is resold by the charitable organization is limited to the gross proceeds received by the charity. In addition, the charity must provide the taxpayer with a written acknowledgement of the vehicle donation. Since charitable organizations often sell donated automobiles, boats, and airplanes for less than the blue book or trade-in value, the value of charitable deductions taken by donors in 2005 and thereafter will be significantly reduced.

    S Corporation Reform: For tax years beginning after 2004, the maximum number of shareholders in an S Corporation will increase from 75 to 100. Family members (up to six generations) can now elect to be treated as one shareholder for purposes of determining the number of shareholders involved in an S Corporation. Also, the Act provides for a more liberal interpretation of the terms of an electing small business trust (ESBT) that holds shares in an S Corporation. These three changes will make it easier for individuals to establish, operate, or be invested in S Corporations.