Educator Expenses: An above-the-line deduction of up to $250 is allowed for qualifying classroom expenses for eligible educators (for example, K-12, teachers, counselors and principals) was extended through 2005.

Itemized Deduction for Sales Tax. For the years beginning in 2004 and 2005, taxpayers may elect to take an itemized deduction for State and local general sales taxes instead of deducting State and local income taxes. If taxpayers elect to deduct sales taxes, they may accumulate receipts and deduct their actual sales taxes paid or may use tables created by the IRS. If they choose to use the tables they will also get to deduct actual sales taxes paid on certain items such as cars and boats because sales taxes for those items will not be reflected in the IRS tables. For individuals in states that do not have an income tax, this could mean significant federal income tax savings. Even some individuals who are subject to state income tax will benefit from this change if the amount they have paid in sales tax exceeds their state income tax.

ISOs and ESPPs. FICA (including Medicare tax), Railroad Retirement taxes and FUTA taxes will not be imposed on compensation resulting from the exercise of incentive stock options (ISOs) and employee stock purchase plan options (ESPPs). In addition, federal income tax withholding is not required on a disqualifying disposition of stock acquired in the exercise of a statutory stock option. This provision is effective for options exercised after the date of enactment.

Deduction for Costs Incurred With Respect to Civil Rights Litigation. Taxpayers who incur legal fees and costs in connection with actions involving discrimination and other civil rights violations may take an "above-the-line" deduction for such fees and costs. The deduction cannot exceed the amount of the judgment or settlement includible in the taxpayer's income for the year. The deduction is effective for fees and costs paid after October 22, 2004 (the date of enactment) with respect to any judgment or settlement occurring after the date of enactment.

The deduction also applies to legal and court costs related to certain claims against the federal government and private claims under the Medicare secondary payer law. The deduction applies regardless of whether the legal fees are paid on a contingency basis.

Exclusion on Sale of Principal Residence. Sale of Personal Residence Acquired in a Like-kind Exchange - Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004.

Archer Medical Savings Accounts: MSAs may continue to be established through 2005, or until the statutory limit for the number of accounts is met, whichever is earlier. The trustee report required to be made on August 1, 2004, shall be treated as timely if made before the close of the 90-day period beginning on the date of the enactment of this Act.

Electric Vehicle Credit: The scheduled phase out of the credit is postponed until 2006. Under prior law, 75% of the credit would have been allowed in 2004 (50% in 2005, 25% in 2006, and 0% there after). Deduction for Clean-Fuel Vehicles: The scheduled phase out of the deduction is postponed until 2006. Under prior law, 75% of the credit would have been allowed in 2004 (50% in 2005, 25% in 2006, and 0% there after).

Charitable Contribution Provisions:

Patents and Other Intellectual Property. The charitable deduction in the year of contribution is limited to the lesser of the taxpayer's basis in the contributed property or its fair market value. In addition, the taxpayer may take an additional charitable deduction, for up to 12 years, based on a percentage of the income received by the charity with respect to the property. The additional deduction is 100% of income for the first two years and then decreases by 10% per year until it reaches 10% for years eleven and twelve. The taxpayer must obtain written substantiation from the charity of the amount of income and the charity must file an annual information return reporting the income. Effective for contributions made after June 3, 2004.

Noncash Charitable Contributions. All donors, including corporations, must obtain a qualified appraisal of contributed property (other than inventory, publicly traded securities, or certain vehicles) if the amount of the claimed deduction is greater than $5,000. In addition, all donors are required to attach a qualified appraisal to their tax return if the amount of the claimed deduction is greater than $500,000. Effective for contributions made after June 3, 2004.

Motor Vehicles, Boats and Airplanes. The reporting requirements for donations of cars, boats, and planes are increased if the deduction is greater than $500. In addition, if the charity sells the vehicle, within 30 days of the sale the charity must give the donor a written acknowledgment that states how much it received from the sale. The allowed deduction is limited to the proceeds from the sale. If the vehicle is not sold, the charity must give the donor an acknowledgment within 30 days of the contribution and indicate in the acknowledgment its intended use of the vehicle. The taxpayer must attach the acknowledgment to his or her tax return. Effective for contributions made after December 31, 2004.