&&TaxBusiness and Personal ACCOUNTING, TAX,

SOFTWARE & FINANCIAL PLANNING SERVICES

Still Time For Tax Savings

The tax laws can provide oppor-tunities for the wise and traps forthe unwary. Often, tax savings canbe achieved by taking action beforeyear end. Call us before implement-ing any of these.

Jobs Creation ActThe American Jobs Creation

Act of 2004 (AJCA) offers provi-sions that are retroactive, someimmediately effective, some effec-tive next year, and others whichare not implemented until 2006.

Here are some of the more sig-nificant provisions of the AJCA:

Enhanced expensing limitsextended. The Act extends for anadditional two years the increasedSection 179 deduction, and thechoice to revoke the election on a prior year’s return. The extensionapplies through the 2007 tax year.

The maximum annual expens-ing for tax years that begin in2004 is $102,000. These ruleshave not been adopted by all statesfor state income tax.

New limits on expensing SUVs.For property placed in service afterOctober 22, 2004, the AJCA lim-its the ability of taxpayers to claimdeductions under Code Section179 for certain vehicles to$25,000. The change applies tosport utility vehicles rated at14,000 pounds gross vehicleweight or less.

New rules for certain charitabledonations. The Act generally limitsthe deduction for motor vehicles,boats and airplanes contributed tocharity after 2004, for which theclaimed value exceeds $500. If this

potential deduction applies to you,please call us for details on IRSlimitations. You must make yourdonation before December 31,2004 for the best tax advantage.

Itemized deduction for stateand local sales taxes. The Actallows taxpayers who itemize theirdeductions to deduct state andlocal sales taxes, instead of takingan itemized deduction for stateand local income taxes. Taxpayerswho make this election may either:

(a) deduct their actual salestaxes, or

(b) use the IRS-published tables and then add to that theactual sales tax for motor vehicles,boats and other items specified bythe IRS.

Start saving receipts in case it ismore advantageous to use the salestax deduction.

Working Families ActThe Working Families Tax

Relief Act of 2004 (WFTRA)extended and simplified efforts todefer scheduled reductions in taxbreaks for individuals. Significantprovisions include:

Child Tax Credit still $1,000.The child tax credit, which wasscheduled to be reduced,will stay at $1,000

through 2010.Combat pay and the earned

income credit. Combat pay that isexcluded from gross income underCode section 112 can be treated asearned for purposes of the earnedincome credit, for any tax year end-ing after October 4, 2004, andbefore January 1, 2006.

Archer MSAs extended. The2004 WFTRA extends ArcherMSAs through 2005.

2005 AMT exemption. In recentyears, Congress has provided ameasure of relief from the AMT byraising the AMT “exemptionamounts,” thereby reducing the like-lihood of an AMT liability. The Actextended the higher exemptionamounts to 2005.

Educators’ deduction extended.The IRS advises teachers to savetheir receipts for purchases ofbooks and classroom supplies. Suchout-of-pocket expenses could lowertheir taxes. To be eligible a personmust work at least 900 hours dur-ing a school year as a teacher,instructor, aide, counselor or princi-pal in public or private schools.

Up to $250 in qualified expenses

may be deducted,even if the

educator doesnot itemize

his or herdeductions.

Sharon L. Murphy, EA

DECEMBER 2004

Please call our office todiscuss any of the itemsin this newsletter thatmay pertain to you.

11716 W. Bluemound Rd. Wauwatosa, WI 53226

Phone: 414/453-8655Fax: 414/453-6396

Email: info@murphyea.comWeb site: www.murphyEA.com

Financial Guide

If you need to pay tax estimates,

please call our office with your

income and expenseinformation by

December 20, 2004.

PRIVACY POLICYWe do not disclose anynon-public personal information about ourclients or former clients to anyone, except asinstructed to do so bysuch clients, or requiredby law. We restrict accessto non-public personalinformation only to IRS or state authorities and we maintain physical, electronic, and proceduralsafeguards to guard yourpersonal non-public information.

11716 W. Bluemound Rd. Wauwatosa, WI 53226

414/453-8655

Murphy FinancialServices, Inc. web site is at

www.murphyEA.comIf you misplace yournewsletters, or yourinformation sheets

that I have given you(i.e. contributions,

enrolled agents, etc.),you will be able tofind them on the

web site.

Please note that ournew e-mail address is:info@murphyea.com.

Health SavingsAccounts (HSA)

New for 2004, an HSA is a trustcreated or organized in the U.S. forthe purpose of paying the qualifiedmedical expenses of an account ben-eficiary. An HSA can only be estab-lished for the benefit of an “eligibleindividual” who is covered under ahigh deductible health plan.

Within limits, an above-the-linededuction is allowed for an indi-vidual’s contribution to an HSA.Some states do not follow this taxtreatment.

Employer contributions to anHSA on an employee’s behalf areneither included in the employee’sfederal income, nor subject toemployment taxes.

Any individual can establish anHSA with a qualified trustee(Insurance Company, Bank or ThirdParty Administrator), in much thesame way that individuals establishindividual retirement accounts.

No IRS authorization is requiredto establish an HSA. Also, an eligi-ble individual who is an employeemay establish an HSA with or with-out the employer’s involvement.

Year-end TaxPlanning Tips

It is usually advantageous forindividuals to postpone incomeuntil 2005 and accelerate deduc-tions into 2004 to lower their taxbill. This may allow larger deduc-tions, credits, and other tax breaksfor 2004 that are phased out overvarying levels of adjusted grossincome.

If your 2004 income is lowerthan normal, it may be advanta-geous to convert IRAs to Roth IRAs.

Take advantage of bonus depre-ciation. Business owners may wantto take advantage of the 50%bonus depreciation by putting newequipment in service before year-end. This year (2004) is the lastyear for the bonus allowance.

$11,000 gift tax exclusion.Taxpayers can save gift and estatetaxes by making sheltered giftsbefore the end of the year. For

2004, taxpayers can give $11,000per year, per individual.

Note: If the gift is made bycheck, it is not considered a com-pleted transfer until the check iscashed.

Bunch deductions. Some taxpay-ers who file Schedule A Form 1040may do well to “double itemize.”Individuals can pre-pay expenses togenerate almost twice the itemizeddeductions every other year. For“opposite” tax years (when he orshe has virtually no itemized deduc-tions) the taxpayer is still allowed touse the standard deduction. Call usto see if this would be advantageousfor you.

Use flexible spending accounts.Because a cafeteria plan cannotallow participants to defer com-pensation from one year to thenext, employees are reminded tosubmit claims to the employer foreligible expenses before the end ofthe year.

NoteworthyThe standard mileage rate is

37.5¢ per mile in computing thedeductible costs of operating upto four automobiles used forbusiness. The rate in 2005 willbe 40.5¢ per mile.

The IRS has tens of thou-sands of refund checks that havebeen returned to them. If youhave a refund due, make sureyou receive it each year. If youhave your refunds automaticallydeposited in your bank account,you won’t have to worry aboutgetting your refund check.

If you don’t want all the telephone solicitors calling you,make sure you renew your telephone number on theWisconsin no-call listing. Call 1-866-966-2255.

Participants must forfeit anyamount remaining in their flexiblespending accounts at the end of theplan year. This is commonly referredto as the use-it-or-lose-it rule.

Mutual fund tax consequences.If a fund’s investment portfolio hasdone well in a given year, the fundmay make a large distribution nearthe end of the year. These gains willbe taxed to the investor as ordinarydividends if short-term gains, and ascapital gain distributions if long-term gains.

In general, investors should buymutual fund shares after the recorddate for a shareholder distribution,especially large year-end capitalgain distributions.