This year has been a very busy one for us. Our profession has become one of constant deadlines. Whether it is personal income taxes, business income taxes, payroll and/or sales tax returns, your information is needed sooner rather than later. Too many of you wait until the last possible moment to send us your information, creating a back log of work that has to be accomplished within a short period of time. In the future, I request that you send us your information earlier.

Year end tax planning can be especially rewarding this year. 2004 has been a major year for tax developments. The "American Jobs Creation Act of 2004" and the "Working Families Tax Relief Act of 2004" have combined to result in more tax laws being passed this year than any time since 1986. The Internal Revenue Service has issued a flood of tax rulings and guidance. Year end tax planning provides you with the opportunity to lower your overall tax liability and help you avoid new tax traps.

Tax legislation has enacted a list of tax breaks that either run out at the end of the year or are limited by annual amounts that start again in 2005. The number one issue which will effect business related clients is bonus depreciation. This is a deduction of 50% of the cost of new business equipment and other property. Bonus depreciation, in addition to regular depreciation, may be written off in the year of purchase. Bonus depreciation ends on December 31, 2004 and it is not being renewed. Purchasing equipment in 2004, rather than in early 2005, will save you thousands of tax dollars.

I have advised many clients as to the pitfalls of donating vehicles to charities. The Internal Revenue Service has finally addressed the issue. Starting in 2005, your deduction for a vehicle contributed to charity for which you are claiming more than a $250 deduction will be limited to the price the charity receives for selling it, which is usually a deep discounted wholesale price. If you are thinking about donating a used car or truck you should attempt to donate it by the end of 2004.

Two provisions impact motor vehicles. The new tax law tightens the loophole for depreciation of large SUV’s. The accelerated Section 179 depreciation deduction for vehicles with a gross loaded weigh in excess of 6,000 pounds is now capped at $25,000. In comparison, the first year deduction amount for vehicles under 6,000 pounds is capped at $10,610 for the balance of 2004 and will be reduced to approximately $2,960 next year due to the elimination of bonus depreciation after December 31, 2004.

Congress has reinstated the $250 per year teachers deduction for out of pocket classroom expenses, retroactively back to January 1, 2004.

In addition, over a dozen business tax credits and deductions that had expired earlier in 2004 or at the end of 2003 have been extended through 2005.

Effective January 1, 2005 there is a significant new deduction for many businesses, called the "Manufacturer’s Deduction". It will benefit a considerable number of businesses not traditionally thought of as manufacturers. Congress chose to define "manufacturer" very broadly. In addition to traditional manufacturing, businesses that qualify for the new deduction include construction companies, engineering and architectural firms, film and video production companies, computer software makers, and many service providers. The deduction starts at 3% and grows to 9% by 2010. Many questions regarding this deduction remain to be answered by the Internal Revenue Service. Starting with the 2005 tax year businesses can deduct 3% of the net income earned from U.S. production activities. The deduction cannot exceed the firms taxable income and is further limited to 50% of the W-2 wages paid by the taxpayer. We will keep you informed on the upcoming Internal Revenue Service rules and regulations as they are released.

The new tax law directs the Internal Revenue Service to enter into partial installment agreements with taxpayers who owe money. Generally, partial installment agreements will be subject to review at least once every two years. Congress has also authorized private collection of federal tax debts. Private debt collectors will be able to offer taxpayer’s short term installment agreements.

On the individual side, the child tax credit which was scheduled to be reduced in 2005 will continue at $1,000 through 2010. Since 2001 Congress created a new 10% tax bracket. Under the new law the first $7,150 of income for a single taxpayer and the first $14,300 of income for a married couple will be in the 10% bracket. For heads of household the 10% bracket ends after $10,200 in income. The new tax law will also enhance marriage penalty relief through 2010. It continues the expanded 15% bracket and a higher standard deduction for married couples.

For 2004 and 2005, individuals who reside in states with little or no state income taxes will now be able to deduct sales tax as an itemized deduction. The taxpayer can deduct the amount of sales tax as substantiated by receipts or an amount from an IRS table increased by the amount of sales tax paid for a motor vehicle, boat or other item prescribed by the IRS. The IRS will release charts in early 2005 providing us with the deductible amounts.

Congress really did not get involved with the Alternative Minimum Tax (AMT) issue. AMT is a separate tax calculation that penalizes taxpayers who itemize and are located in high taxed metropolitan areas. More upper income taxpayers fell into AMT in 2003, and it is projected to only get worse in the future. According to estimates released by the House of Representatives Joint Committee on Taxation, AMT taxpayers under the present law will increase from 3.3 million in 2004 to 26.2 million in 2010. In the future, middle income Americans will be subject to a tax which was originally intended for very wealthy individuals who had no income tax liability. AMT is widely viewed as discriminatory against high-tax state residents along with large families who can not take deductions and exemptions under AMT rules. AMT reform has been on accountants radar for years. The problem with fixing it is that there would be substantial revenue loss especially at a time when the nations budget deficit is at a record high.

We continue to advise our clients to fully maximize allowable contributions to tax deferred retirement programs. For self-employed and corporate clients, you must open a profit-sharing plan by December 31, 2004, however, the plan contributions can be funded up to the due date of the tax return, including extensions. The maximum contribution to a profit-sharing plan in 2004 is $41,000 and will increase to $42,000 in 2005.

IRA’s, on the other hand must be funded by April 15, 2005. The maximum contribution to an IRA for 2004 is $3,000 and will increase to $4,000 in 2005. (An additional $500 contribution will be allowed for individual who will be at least 50 years old by the end of the year). We always recommend a Roth IRA contribution if you are able to do so. Contributions to a Roth IRA are not tax deductible. The maximum yearly contribution is phased out for higher income taxpayers. Roth IRA’s are phased out for single taxpayers with adjusted gross income between $95,000 and $110,000, married taxpayers filing jointly between $150,000 and $160,000 and married taxpayers filing separately between $0 and $10,000.

401k plans are becoming widely used. The maximum 401k contribution for 2004 is $13,000 and $14,000 in 2005. Individuals who will be at least 50 years old by the end of the year may contribute an additional $3,000 in 2004 and $4,000 in 2005.

The social security tax rate has remained the same at 6.2% with the wage base increasing from $87,900 in 2004 to $90,000 in 2005. Social Security benefits will rise by 2.7% in January 2005. The normal retirement age for social security is going up again. Those who turn 62 in 2004 must wait until they are 66 to get full benefits (2 months later than individuals who turn 62 this year). The medicare B premium will be $78.20 per month in 2005 (up $11.60).

In 2005, the optional mileage allowance for owned or leased automobiles, which includes vans and pickups, will be 40.5¢ per business mile, up 3¢ from the 2004 business travel rate.

As mentioned in my previous letters to you, issues persist with clients who use discount brokers that do not provide them with realized gain/loss reports. Many discount brokerage houses do not provide you with the required information needed to prepare your tax returns. Speak to your broker regarding their ability to provide you with the necessary reports. If you change stock brokers or your stock brokers change brokerage firms, you must make sure you have your historical cost information. Many times when you leave your broker, your new broker does not ask for or does not receive your historical cost basis information. When you then sell a security, you may not know what your original cost was.

We have had an increasing problem with clients who tend to ignore the April 1, August 1, and October 1 deadline. We need your information by these dates or we will NOT be able to guarantee timely filing of your tax returns. Please do not ignore these dates.

This firm was started more than twenty years ago and the practice has continued to grow. We are a full service firm, here to assist in all aspects of your business and individual tax planning needs. Understand that we stay within the realm of our expertise. We utilize the knowledge and ability of other individuals on our team when the need arises. Over the years we have developed business relationships with many competent individuals who can assist with your business and financial needs. These individuals include mortgage brokers, attorneys, insurance agents, along with financial planners and investment advisors. By addressing your needs and giving you the service you require, we know that we have instilled a mutual sense of confidence and loyalty.

It has been three years since the last time we increased our fees. I find it necessary that effective January 1, 2005, all individual tax returns and most business entity clients will receive at least a 10% increase in fees. In addition, my normal billing rate will increase to $225 per hour.

We thank you for your past business and hope that your faith in us will continue. We have always treated your referrals with the same courtesy, respect, and care that you have received from us.

We urge anyone who needs to go over their 2004 tax projections or requires any tax planning to make an appointment as soon as possible.

There have been changes made to our staff. Along with Cathy and Patty, Felice Mergruen has joined the staff. She is a CPA with more than 20 years experience who has an expertise in QuickBooks. Kelly Gloria is a college intern who has been with us for the last six months. We are still looking to add one more tax specialist to the firm prior to tax season.

My staff and I would like to wish you and your family a safe, happy, healthy holiday season and a prosperous New Year.

Very truly yours,