Tax Law Changes for Individuals
Here are the major changes that affect tax years beginning in 2004:
Additional Child Tax Credit
Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 15 percent of the amount by which their 2004 taxable earned income exceeds $10,750. Previously, the rate had been 10 percent.
Earned Income Tax Credit
In computing the Earned Income Tax Credit, a taxpayer with nontaxable combat pay has the option of counting that pay as earned income, or omitting it. This has no effect on the amount of combat pay that is not taxed.
For 2004, the maximum amount of the credit is $4,300 for a taxpayer with two or more qualifying children, $2,604 for a taxpayer with one qualifying child, or $390 for a taxpayer without a qualifying child.
The maximum Tuition and Fees Deduction is $4,000 for those with adjusted gross income (AGI) up to $65,000 and $2,000 for those with an AGI over $65,000 but not over $80,000. These AGI amounts are doubled for married persons filing jointly.
Distributions from Qualified Tuition Plans (QTPs) maintained by private educational institutions are excludible up to the amount of qualified educational expenses. This tax break had been limited to State-sponsored QTPs.
The provision allowing educators to deduct up to $250 of expenses paid for purchases of books and classroom supplies as an adjustment to gross income, which was scheduled to expire at the end of 2003, has been extended through the end of 2005.
Health Savings Accounts
An “above-the-line” deduction is available for contributions to Health Savings Accounts made by April 15, 2005. The deduction is limited to the annual deductible on the qualifying high deductible health plan, but not more than $2,600 ($5,150, if family coverage). These limits are $500 higher if the taxpayer is age 55 or older ($500 each if both spouses are 55 or older). A person cannot contribute to an HSA starting the first month he or she is enrolled in Medicare.
Taxpayers may not exclude any gain on the sale of a principal residence if they sold the property after Oct. 22, 2004, and had acquired it in a like-kind exchange during the five-year period ending on date of the sale.
Noncash Charitable Contributions
For most noncash charitable contributions made after June 3, 2004, taxpayers must satisfy certain reporting requirements, based on the value of the deduction. For claimed contributions more than $5,000, taxpayers must obtain a qualified appraisal and attach Form 8283 to their tax return. For claimed contributions more than $500,000 (if art, $20,000 or more), taxpayers must attach a copy of the appraisal.
Taxpayers should note that the American Jobs Creation Act of 2004 altered the rules for the contribution of used motor vehicles, boats and planes after Dec. 31, 2004. For donations after that date, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale.
Retirement Plans / Individual Retirement Arrangements
The elective deferral limit for 401(k), 403(b) and most 457 plan participants rose to $13,000 ($16,000 for 403(b) participants for whom the 15-year rule applies). For SIMPLE plans, the limit rose to $9,000.
The catch-up contribution limit for persons age 50 or older rose to $3,000 for 401(k), 403(b) and 457 plans and to $1,500 for SIMPLE plans.
The $10,000 phaseout range for IRA deductions for those covered by a pension plan begins at income of $45,000 ($65,000 if married filing jointly or a qualifying widow(er). It still begins at zero for married persons filing separately.
Sales Tax Deduction
For 2004 and 2005, taxpayers who itemize have the choice of deducting state and local income or sales taxes. An optional state sales tax table may be used in lieu of receipts for sales taxes paid. Sales taxes paid on a motor vehicle may be added to the table result, but only up to the amount paid at the general sales tax rate. Sales taxes on a boat, plane, home, or home building materials may be added if taxed at the general sales tax rate. See IRS Publication 600, Optional State Sales Tax Tables, for more information.
The basic standard deduction for married taxpayers filing jointly and qualifying widow(er)s has increased to $9,700 (twice that of single filers). The standard deduction for married taxpayers filing separately has increased to $4,850 (the same as that of single taxpayers).
Standard Mileage Rates
For 2004, the rate for operating your car (including vans, pickups or panel trucks) increased to 37.5 cents a mile for all business miles driven. The standard mileage rate for computing deductible medical or moving expenses, or when giving services to a charitable organization, increased to 14 cents a mile.
Beginning Jan. 1, 2005, the standard mileage rates for the use of a car will be 40.5 cents a mile for all business miles driven, 15 cents a mile when computing deductible medical or moving expenses, and 14 cents a mile when giving services to a charitable organization.
For more information, see IRS Publication 553, Highlights of 2004 Tax Changes, and the instruction book for Form 1040. Both are available on this Web site or by calling toll free 1-800-TAX-FORM (1-800-829-3676).