Important 2004 Tax Changes

The tax laws of the United States are constantly evolving. Listed below are some of the changes approved by Congress which you should be aware of. For more information on these changes you can reference the IRS’s Publication 553, rev. Jan.2004.

Individuals

Health Savings Accounts (HSAs)
Beginning in 2004, individuals covered under high-deductible health plans (HDHP) may deduct contributions (subject to limits) to HSAs on Form 1040. Employer contributions to an HSA may be excluded from the taxpayer’s income, and the earnings within the account are not taxed. Distributions from HSAs receive tax-free treatment provided they are used to pay for medical expenses for the taxpayer and his/her family.

Tuition and Fees Deduction
For tax year 2004, the limitation on the tuition and fees deduction increases from $3,000 to $4,000, so long as modified adjusted gross income is not above $65,000 ($130,000 for married filing jointly). There is a $2,000 tuition and fees deduction limit when modified AGI is between $65,000 and $80,000 ($130,000 and $160,000 for married filing jointly).

M-3 would beSpecial Note: Educator expenses as an adjustment to income will expire in 2004, unless Congress extends the provision. These expenses can still be claimed as an itemized deduction subject to the 2% adjusted gross income limit.

Retirement Plans

Traditional IRAs
If you are covered by a retirement plan at your job, your deduction for a traditional IRA is phased out for modified adjusted gross income levels between $65,000 and $75,000 (married filing jointly and qualified widow); $45,000 and $55,000 (single and head of household); or $10,000 (married filing separately).

Elective Deferrals
The limitation for elective deferral plans (401(k), etc.) has increased from $12,000 in 2003 to $13,000 in 2004. In addition, the limit on catch-up contributions for taxpayers ages 50 or older by the end of the year has increased from $2,000 in 2003 to $3,000 in 2004.
SIMPLE Plans
The limitation for SIMPLE plan contributions has increased from $8,000 in 2003 to $9,000 in 2004. Also, the limit on catch-up contributions for taxpayers ages 50 or older by the end of the year has increased from $1,000 in 2003 to $1,500 in 2004.

Qualified Plans (Keoghs) and SEP Plans
In 2004, the maximum contribution that can be made to a Qualified Plan or SEP Plan has been increased by $1,000 to $41,000. Also, the compensation limit for these plans has been increased by $5,000 to $205,000.

Businesses

Schedules K-1 (Forms 1065 and 1120S)
The IRS has tentative plans to completely redesign Schedules K-1 (Forms 1065 and 1120S) for 2004. These forms would be reduced to one page. This redesign is expected to make the forms and related instructions easier to understand, simplify the filing process, and reduce the taxpayer burden.

Net Income (Loss) Reconciliation for Corporations
The IRS plans to issue a new form, Schedule M-3, Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 million or more, with the stated purpose being “to increase the transparency of corporate tax return filings.” The new Schedule  used by certain
taxpayers filing Form 1120 for tax years ending on or after 12/31/04. Corporations required to complete Schedule M-3 would not be required to complete Schedule M-1. The IRS plans to extend use of the Schedule M-3 to 1065 and 1120S returns the following year.
Section 179 Expense
The maximum amount you can elect to expense under section 179 has increased from $100,000 in 2003 to $102,000 in 2004. Also, this limitation is phased out by the amount the total cost of Section 179 property exceeds $410,000 (was $400,000 in 2003).
Like-Kind Exchanges
New regulations have been released for exchanges occurring after 2/27/04. They cover computations for basis and depreciation, automobile limits, and an election out of the regulation.
Estates and Gift Taxes
For decedents dying in 2004, the applicable exclusion amount for estates increases to $1.5 million (up from $1 million). In addition, the maximum estate and gift tax rate is reduced to 48% (down from 49%); the state death tax credit is reduced to 25% (down from 50%); and the generation-skipping transfer (GST) exemption increases to $1.5 million (up from $1.12 million). For decedents dying after 2003, the qualified family-owned business interest deduction (QFOBI) has been repealed.
 
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