Tax Law Changes for 2004 & Later
2004 Changes for Individuals
2004 Changes for Businesses
2004 Changes for IRAs and Other Retirement Plans
2004 Changes in Estate & Trusts
2004 Tax Law Changes Related to Excise Taxes
Tax Law Changes for Individuals
Electric and Clean-Fuel Vehicles
For vehicles placed in service in 2004, the maximum clean-fuel
vehicle deduction and qualified electric vehicle credit are scheduled
to be reduced by 25%, as compared to 2003. However, at the time this
article was written, Congress was considering legislation that would
repeal the reduction for 2004. Please check What's Hot in Tax Forms, Pubs, and Other Tax Products later in 2004 to find out if this legislation was enacted.
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Exemption Amount Increased
The amount you can deduct for each exemption has increased from $3,050 in 2003 to $3,100 in 2004.
You lose all or part of the benefit of your exemptions if your
adjusted gross income is above a certain amount. The amount at which
the phaseout begins depends on your filing status. For 2004, the
phaseout begins at:
- $107,025 for married persons filing separately,
- $142,700 for single individuals,
- $178,350 for heads of household, and
- $214,050 for married persons filing jointly and qualifying widow(er)s with dependent children.
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Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a tax-exempt trust or custodial
account that you set up with a U.S. financial institution (such as a
bank or an insurance company) in which you can save money exclusively
for future medical expenses. This account must be used in conjunction
with a High Deductible Health Plan (High Deductible Health Plan),
discussed later.
Important Note. If you currently have an Archer Medical Savings Account (MSA), you can roll it into a Health Savings Account tax-free.
What are the benefits of a Health Savings Account?
You may enjoy several benefits from having a Health Savings Account.
- The interest or other earnings on the assets in the account are tax free.
- You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
- Distributions may be tax-free if you pay qualified medical expenses.
- The contributions remain in your account from year to year until you use them.
- A Health Savings Account is "portable" so it stays with you if you change employers or leave the work force.
Qualifying for a Health Savings Account
To qualify for a Health Savings Account, you must meet the following requirements.
- You are an employee (or the spouse of an employee) of an employer
who maintains an individual or family High Deductible Health Plan for
you (or your spouse).
- You are a self-employed person (or the spouse of a self-employed
person) who maintains an individual or family High Deductible Health
Plan.
- You have no other health insurance or Medicare coverage except what is permitted under Other health insurance, later.
High Deductible Health Plan (High Deductible Health Plan)
To be eligible for a Health Savings Account, you must have a High Deductible Health Plan. A High Deductible Health Plan has:
- A higher annual deductible than typical health plans, and
- A maximum limit on the sum of the deductible and the annual
out-of-pocket medical expenses that you must pay for covered expenses.
Limits. The following table shows the limits for High Deductible Health Plans for 2004.
| Type of coverage |
Minimum annual deductible |
Sum of maximum annual deductible and annual out-of-pocket expenses * |
| Self-only |
$1,000 |
$5,000 |
| Family |
$2,000 |
$10,000 |
| * This limit does not apply if the plan uses a network of providers. |
Family plans that do not meet the high deductible rules.
There are some family plans that have deductibles for both the family
as a whole and for individual family members. Under these plans, if you
meet the individual deductible for one family member, you do not have
to meet the higher annual deductible amount for the family. If either
the deductible for the family as a whole or the deductible for an
individual family member is below the minimum annual deductible for
that year, the plan does not qualify as a High Deductible Health Plan.
Example. Mr. Orville has health
insurance with company A in 2004. The annual deductible for the family
plan is $3,500. This plan also has an individual deductible of $1,500
for each family member. Mr. Orville's wife had $2,200 of covered
medical expenses. They had no other medical expenses for 2003. The plan
paid $700 to Mr. Orville because Mrs. Orville met the individual
deductible of $1,500, even though the Orvilles did not meet the $3,500
annual deductible for the family plan. The plan does not qualify as a
High Deductible Health Plan because Mrs. Orville paid only $800 which
was less than the minimum deductible amount.
Other health insurance. You (or your spouse if you file
jointly) generally cannot have any other health plan that is not a High
Deductible Health Plan. However, this rule does not apply if the other
health plan(s) only covers the following items.
- Accidents.
- Disability.
- Dental care.
- Vision care.
- Long-term care.
- Benefits related to workers' compensation laws, tort liabilities, or ownership or use of property.
- A specific disease or illness.
- A fixed amount per day (or other period) of hospitalization.
Amount of Contribution
The amount you or your employer can contribute to your Health
Savings Account depends on the nature of your coverage and your age.
If you have self-only coverage, you (or your employer) can
contribute up to the amount of your annual health plan deductible, but
not more than $2,600 ($3,100 if you are age 55 or older). If you have
family coverage, you (or your employer) can contribute up to the amount
of your annual health plan deductible, but not more than $5,150 ($5,650
if you are age 55 or older). You must have the insurance all year to
contribute the full amount.
For each full month you did not have a High Deductible Health Plan,
you must reduce the amount you can contribute by one-twelfth.
Example. You have a High
Deductible Health Plan for your family for the entire months of July
through December 2003 (6 months). The annual deductible is $4,000. You
can contribute up to $2,000 ($4,000 � 12 months � 6 months) to your
Health Savings Account for the year.
Tip. If you and your spouse each have a family plan, you are
treated as having family coverage with the lower annual deductible of
the two health plans. The contribution limit is split equally between
you unless you agree on a different division.
Note. You must reduce the limits above by any amount contributed to a Medical Savings Account or other Health Savings Account.
Medicare eligible individuals. Beginning with the first month you are entitled to benefits under Medicare, you cannot contribute to a Health Savings Account.
When To Contribute
You can make contributions to your Health Savings Account for 2004 until April 15, 2005.
Setting Up a Health Savings Account
No permission or authorization from the Internal Revenue Service is
necessary to establish a Health Savings Account. When you set up a
Health Savings Account, you will need to work with a trustee. A trustee
can be a bank, insurance company, or anyone already approved by the
Internal Revenue Service to be a trustee of individual retirement
arrangements. Your employer may already have some information on Health
Savings Account trustees in your area. The Internal Revenue Service
intends to issue further guidance on setting up a Health Savings
Account. This guidance will be published as Notice 2004-2
in the January 12, 2004, issue of the Internal Revenue Bulletin (2004-2).
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Meal Expenses When Subject to "Hours of Service" Limits
Generally, you can deduct only 50% of your business-re-lated meal
expenses while traveling away from your tax home for business purposes.
Also, you can generally deduct only 50% of certain reimbursements you
make to your employees for meal expenses they incur while traveling
away from home on business. You can deduct a higher percentage if the
meals take place during or incident to any period subject to the
Department of Transportation's "hours of service" limits. (These limits
apply to workers who are under certain federal regulations.) The
percentage allowed is 70% for 2004.
Business meal expenses are covered in chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses. Reimbursements for employee meal expenses are covered in chapter 13 of Publication 535, Business Expenses.
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Distributions From Privately-Sponsored Qualified Tuition Programs (QTPs) May Be Tax Free
Beginning in 2004, a distribution from a FTP established and
maintained by an eligible educational institution (generally private
colleges and universities) can be excluded from income if the amount
distributed is used to pay qualified education expenses. Tax-free
qualified tuition program distributions are discussed in Publication 970, Tax Benefits for Education.
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Retirement Savings Plans
The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans.
Traditional individual retirement arrangement income limits.
If you have a traditional individual retirement arrangement and are
covered by a retirement plan at work, the amount of income you can have
and not be affected by the deduction phaseout increases. The amounts
vary depending on filing status.
Limit on elective deferrals. The maximum amount of elective
deferrals under a salary reduction agreement that can be contributed to
a qualified plan increases to $13,000 ($16,000 if you are age 50 or
over). However, for SIMPLE plans, the amount increases to $9,000
($10,500 if you are age 50 or over).
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Standard Deduction Amount Increased
The standard deduction for taxpayers who do not itemize deductions
on Schedule A of Form 1040 is, in most cases, higher for 2004 than it
was for 2003. The amount depends on your filing status, whether you are
65 or older or blind, and whether an exemption can be claimed for you
by another taxpayer.
The basic standard deduction amounts for 2004 are:
- Head of household � $7,150
- Married taxpayers filing jointly and qualifying widow(er)s � $9,700
- Married taxpayers filing separately � $4,850
- Single � $4,850
The full 2004 Standard Deduction Tables will be shown in the January 2004 version of Publication 505, Tax Withholding and Estimated Tax.
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Standard Mileage Rates
For tax years beginning in 2004, the allowable deductions for the standard mileage rate are as follows:
- Business miles. The standard mileage rate for the cost of operating your car increases to 37.5 cents a mile for all business miles driven.
- Medical reasons. The standard mileage rate allowed for use of your car for medical reasons is 14 cents a mile.
- Moving. The standard mileage rate for determining moving expenses is 14 cents a mile.
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Tuition and Fees Deduction
Beginning in 2004, the amount of qualified education expenses you
can take into account in figuring your tuition and fees deduction
increases from $3,000 to $4,000 if your modified adjusted gross income
(MAGI) is not more than $65,000 ($130,000 if you are married filing
jointly).
If your MAGI is more than $65,000 ($130,000), but not more than
$80,000 ($160,000 if you are married filing jointly), your maximum
tuition and fees deduction will be $2,000.
No tuition and fees deduction will be allowed if your MAGI is more than $80,000 ($160,000).
The tuition and fees deduction is explained in chapter 6 of Publication 970, Tax Benefits for Education.
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Tax Law Changes for Businesses
Depreciation and Section 179 Expense
Extension of acquisition date . Property will meet
the �acquisition date test� for purposes of qualifying for the 30%
special depreciation allowance if the property is acquired before
January 1, 2005 (extended from September 11, 2004).
Increased section 179 limits . The maximum section
179 deduction you can elect for property you placed in service in 2004
is increased from $100,000 to $102,000 for quali�fied section 179
property ($137,000 for qualified zone property, qualified renewal
property, or qualified New York Liberty Zone property). This limit is
reduced by the amount by which the cost of section 179 property placed
in service during the tax year exceeds $410,000 (increased from
$400,000).
More information. Publication 946, How to Depreciate Property , has more information on these rules.
Termination of Special Depreciation Rules for Property Used on Indian Reservations
The special depreciation rules that apply to qualified Indian
reservation property are scheduled to expire for property placed in
service after 2004.
Caution : At the time this article was written,
Congress was considering legislation that would apply the special rules
for property placed in service in 2005. Please check What�s Hot in Tax Forms, Pubs, and Other Tax Products to find out if this legislation was enacted.
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Electric and Clean-Fuel Vehicles
For vehicles placed in service in 2004, the maximum clean-fuel
vehicle deduction and qualified electric vehicle credit are scheduled
to be reduced by 25%, as compared to 2003.
Caution : At the time this article was written,
Congress was considering legislation that would repeal the reduction
for 2004. Please check What�s Hot in Tax Forms, Pubs, and Other Tax Products to find out if this legislation was enacted.
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Environmental Cleanup (Remediation) Costs
Beginning in 2004, environmental cleanup (remediation) costs must be
capitalized. You cannot choose to deduct environmental cleanup costs
paid or incurred after Decem�ber 31, 2003, as a current business
expense. Chapter 8 of Publication 535, Business Expenses, covers information on environmental cleanup costs.
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Indian Employment Credit
The Indian employment credit is scheduled to expire for tax years beginning after 2004.
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Meal Expense Deduction
Generally, you can deduct only 50% of your business-re-lated meal
expenses while traveling away from your tax home for business purposes.
Also, you can generally de�duct only 50% of certain reimbursements you
make to your employees for meal expenses they incur while traveling
away from home on business. You can deduct a higher percentage if the
meals take place during or incident to any period subject to the
Department of Transportation�s �hours of service� limits. (These limits
apply to workers who are under certain federal regulations.) The
percentage is 70% for 2004.
Business meal expenses are covered in chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expense. Reimbursements for employee meal expenses are covered in chapter 13 of Publication 535, Business Expenses.
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New York Liberty Zone Business Employee Credit Scheduled To Expire
The New York Liberty Zone business employee credit is scheduled to
expire for wages paid to qualified employees for work performed after
2003.
Caution : At the time this article was written,
Congress was considering legisla�tion that would allow this credit with
respect to work per�formed by qualified employees during 2004. Please
check What�s Hot in Tax Forms, Pubs, and Other Tax Products to find out if this legislation was enacted.
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Issuance of Qualified Zone Academy Bonds Scheduled To Expire
State and local governments issue qualified zone acad�emy bonds to
raise funds for the use of certain eligible public schools. The
national qualified academy zone bond limit for 2003 was $400 million,
but is zero for 2004 (exclud�ing any carryover limitation).
Caution : At the time this article was written,
Congress was considering legisla�tion that would establish a national
limitation amount for 2004. Please check What�s Hot in Tax Forms, Pubs, and Other Tax Products to find out if this legislation was enacted.
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Self-Employment Tax
The self-employment tax rate on net earnings remains the same for
2004. This rate, 15.3%, is a total of 12.4% for social security
(old-age, survivors, and disability insurance) and 2.9% for Medicare
(hospital insurance).
The maximum amount subject to the social security part for tax years
beginning in 2004 has increased to $87,900. All net earnings of at
least $400 are subject to the Medicare part.
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Social Security and Medicare Taxes
For 2004, the employer and employee will continue to pay:
- 6.2% each for social security tax (old-age, survivors, and disability insurance), and
- 1.45% each for Medicare tax (hospital insurance).
Wage limits. For social security tax, the maximum amount of
2004 wages subject to the tax has increased to $87,900. For Medicare
tax, all covered 2004 wages are subject to the tax. Circular E (Publication 15), Employer's Tax Guide, has more information about these taxes.
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Standard Mileage Rate
For 2004, the standard mileage rate for the cost of operating your
car, van, pickup, or panel truck is increased to 37.5 cents a mile for
all business miles.
Standard mileage rate available for small fleets. Beginning
in 2004, the business standard mileage rate may be used for as many as
four vehicles that you own or lease and use simultaneously.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
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Work Opportunity Credit and Welfare-to-Work Credit Scheduled to Expire
The work opportunity credit and the welfare-to-work credit are
scheduled to expire for wages paid to individuals who began working for
you after 2003.
Caution : At the time this article was written,
Congress was considering legisla�tion that would allow these credits
with respect to employ�ees who began work for you in 2004. Please
check What�s Hot in Tax Forms, Pubs, and Other Tax Products to find out if this legislation was enacted.
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Individual Retirement Accounts
Modified AGI Limit for Traditional IRA Contributions Increased
For 2004, if you are covered by a retirement plan at work, your
deduction for contributions to a traditional IRA will be reduced
(phased out) if your modified adjusted gross in�come (AGI) is:
- More than $65,000 but less than $75,000 for a married couple filing a joint return or a qualifying widow(er),
- More than $45,000 but less than $55,000 for a single individual or head of household, or
- Less than $10,000 for a married individual filing a separate return.
For all filing statuses other than married filing separately, the
upper and lower limits of the phaseout range will increase by $5,000.
Chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs), has more information.
New Method for Figuring Net Income On Returned or Recharacterized IRA Contributions
There is a new method for figuring the net income on IRA
contributions made after 2003 that are returned to you or
recharacterized. For more information, see How Do You Recharacterize a Contribution? or Contributions Returned Before Due Date of Return in chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs).
For figuring the net income on IRA contributions made during 2002
and 2003 that were returned to you or recharacterized, you can use the
method described in Publication 590, the method permitted by Notice
2000�39, or the method in the proposed regulations.
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Changes for IRAs and Other Retirement Plans
403(b) Plan Changes
Increase in the limit on elective deferrals.
For 2004, the limit on elective deferrals is increased from
$12,000 to $13,000. The limit on elective deferrals will increase by
$1,000 each year through 2006.
Increase in the limit on annual additions.
For 2004, the limit on annual additions has increased to the lesser
of $41,000, or your includible compensation for your most recent year
of service. In 2003, your limit on annual additions was the lesser of
$40,000 or your includible compensation for your most recent year of
service.
Catch-up contributions.
If you are age 50 or older by the end of 2004, you may be permitted
to make additional catch-up contributions of up to $3,000 to your
403(b) plan.
More information.
Publication 571, Tax-Sheltered Annuity Plans (403(b)) Plans, has more information.
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Qualified Plans
Limits on Contributions and Benefits. For years
ending after 2003, the maximum annual benefit for a participant under a
defined benefit plan increases to the lesser of the following amounts.
- 100% of the participant's average compensation for his or her highest 3 consecutive calendar years.
- $165,000 (subject to cost-of-living increases after 2004).
For years beginning after 2003, a defined contribution plan's
maximum annual contributions and other additions (excluding earnings)
to the account of a participant increases to the lesser of the
following amounts.
- 100% of the compensation actually paid to the participant.
- $41,000 (subject to cost-of-living increases after 2004).
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Simplified Employee Pensions (SEPs)
Deduction Limit Increased
The maximum deduction for contributions to a SEP remains unchanged
at 25% of the compensation paid or accrued during the year to your
eligible employees participating in the plan. However, for years
beginning after 2003, the maximum combined deduction for a
participant's elective deferrals and other SEP contributions increases
to $41,000.
Contribution Limit Increased
For years beginning after 2003, the annual limit on the amount of
employer contributions to a SEP increases to the lesser of the
following amounts.
- 25% of an eligible employee's compensation.
- $41,000 (subject to cost of living adjustments after 2004).
Compensation Limit
For years beginning after 2003, the maximum amount of an employee's
compensation you can consider when figuring SEP contributions
(including elective deferrals) and the deduction for contributions
increases to $205,000.
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Thrift Savings Plan
Catch-up contributions. Beginning in 2003, participants in
the TSP who are age 50 or over at the end of the year generally will be
able to make catch-up contributions to the plan. For 2004, the maximum
is increased to $3,000.
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Changes in Estate & Trusts
Reduction of Credit for State Death Taxes
For estates of decedents dying in 2004, the credit allowed for state
death taxes will be limited to 25% of the amount that would otherwise
be allowed.
For estates of decedents dying after 2004, the state death tax credit will be replaced with a deduction for state death taxes.
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Repeal of Qualified Family-Owned Business Interest Deduction
The qualified family-owned business interest (QFOBI) deduction has
been repealed for the estates of decedents dying after December 31,
2003.
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Tax Law Changes Related to Excise Taxes
Air Transportation Taxes
For amounts paid in 2004, the tax on the use of international air
travel facilities will be $13.70 per person for flights that begin or
end in the United States, or $6.90 per person for domestic segments
that begin or end in Alaska or Hawaii (applies only to departures).
Publication 510, Excise Taxes for 2004, has more information on air transportation taxes.
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