Tax Changes for Individuals

Child and Dependent Care Credit Increase

Beginning in 2003, the following changes will be made to the child and dependent care credit.

• The credit amount can be as much as 35% (previously 30%) of your qualified expenses.
• The maximum adjusted gross income amount that for the 35% rate will be increased from $10,000 to $15,000.
• The limit on the amount of qualifying expenses will increased from $2,400 to $3,000 for one qualifying individual and from $4,800 to $6,000 for two or more qualifying individuals.

For details on this credit, see Publication 503, Child and Dependent Care Credit.

Earned Income Credit

For tax years after 2003, the IRS will disallow your EIC if the Federal Case Registry of Child Support Orders shows that you are the noncustodial parent of a child claimed as a qualifying child for EIC. If, as the noncustodial parent you are eligible to claim EIC with a qualifying child in a later year, you will not have to file Form 8862 because the IRS used math error authority to disallow your EIC. For more information about when the IRS disallows your EIC, see chapter 5 of Publication 596, Earned Income Credit.

Standard Deduction Increase for Married Persons

Beginning in 2005, the standard deduction for a single individual and a married individual filing a separate return will be the same. The standard deduction for a married couple filing a joint return will gradually increase until, in 2009, it is twice the amount of the standard deduction for a single individual.

15% Tax Bracket Will Expand for Married Persons Filing Jointly

Beginning in 2005, the 15% income tax rate bracket for a married couple filing a joint return will be gradually expanded until, in 2008, it is twice the size of the 15% bracket for a single filer.

Elimination of Limit on Itemized Deductions

Beginning in 2006, the overall limit on certain itemized deductions will gradually be eliminated.

Elimination of Phaseout of Personal Exemptions

Beginning in 2006, the phaseout of exemptions for taxpayers whose adjusted gross income is above certain threshold amounts will gradually be eliminated.

Estate and Gift Taxes

Increased Generation Skipping Transfer (GST) Exemption

The lifetime exemption amount for generation-skipping transfers is increased as follows. Year Exemption

2004 and 2005 .................... $1,500,000
2006, 2007, and 2008 .............. 2,000,000
2009 .............................. 3,500,000

Repeal of QFOBI Deduction

GST

The qualified family-owned business interest (QFOBI) deduction has been repealed beginning with the estates of decedents dying in 2004.

Repeal of Estate and Generation-Skipping Transfer Taxes

The estate and generation-skipping transfer taxes have been repealed for the estates of decedents dying and generation-skipping transfers made in 2010. New rules will go into effect at that time regarding the basis of assets transferred at death. The gift tax continues, but at reduced rates.

IRAs & Other Retirement Plans

Elective Deferrals Treated as Roth Contributions

plan years beginning after 2005, 401(k) and 403(b) plans can include a qualified Roth contribution program.

Deemed IRAs

For plan years beginning after 2002, a qualified retirement plan can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. If the separate account or annuity otherwise meets the requirements of an IRA, it will only be subject to IRA rules. An employee’s account can be treated as a traditional IRA or a Roth IRA.

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