Publication 553: 2003 Highlights of Tax Changes; 1. Tax Changes for Individuals

This is archived information that pertains only to the 2003 Tax Year. If you
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The following list highlights the changes to the tax rates that are effective for 2003. The tax tables and tax rate schedules that reflect the changes are included in your tax form instruction booklet.

The 10% tax rate bracket for most filing statuses is expanded. This means that more of your income will be taxed at 10% instead of a higher rate.
The 15% tax rate bracket for married taxpayers filing jointly and qualifying widow(er) is expanded.
The 27%, 30%, 35%, and 38.6% tax rates are reduced to 25%, 28%, 33%, and 35%, respectively.

For sales and other dispositions of property after May 5, 2003 (including installment payments received after that date), the maximum tax rates on net capital gain have changed as follows.

There is no change to the maximum tax rates that apply to collectibles gain, gain on qualified small business stock, and unrecaptured section 1250 gain.

Elimination of 18% rate. In 2006, the 20% rate was scheduled to be lowered to 18% for qualified 5-year gain from property with a holding period that began after 2000. The 18% rate and the 5-year holding period have been eliminated. Instead, the new 15% rate applies to gain that would have qualified for the 18% rate.

Taxpayers who owned certain assets on January 1, 2001, could have elected to treat those assets as sold and repurchased on the same date, if they paid tax for 2001 on any resulting gain. The purpose of the election was to make any future gain on the asset eligible for the 18% rate. That election is irrevocable. Thus, if you made the election, you may not amend your 2001 income tax return to get a refund of the tax you paid on the resulting gain.

More information. For more information, see Capital Gain Tax Rates in chapter 4 of Publication 550, Investment Income and Expenses.

Beginning in 2003, qualified dividends are subject to the 5% or 15% maximum tax rate that applies to net capital gain. Qualified dividends should be shown in box 1b of the Forms 1099–DIV or similar statements you receive. Before 2003, all ordinary dividends were taxed at the higher rates that applied to ordinary income.

If you have qualified dividends, you must figure your tax by completing either Schedule D (Form 1040) or the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions.

For more information, see Qualified Dividends in chapter 1 of Publication 550, Investment Income and Expenses.

Investment interest deducted. If you claim a deduction for investment interest, you must reduce the amount of your qualified dividends that are eligible for the 5% or 15% tax rate by the amount of qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. For more information, see chapter 3 of Publication 550.

The standard deduction for people who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2003 than it was for 2002. 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 person. The 2003 Standard Deduction Tables are shown in Publication 501, Exemptions, Standard Deduction, and Filing Information.

Married persons. In addition to the general increase in the standard deduction allowed for all filing statuses, the standard deduction for married persons filing a joint return has increased to double the amount allowed to a single person. Also, the standard deduction for a married person filing separately has increased to the same amount allowed to a single person.

If your adjusted gross income is above a certain amount, you lose all or part of your itemized deductions. In 2003, this amount is increased to $139,500 ($69,750 if married filing separately). In 2002, the amount was $137,300 ($68,650 if married filing separately). For more information and a worksheet to figure the amount you can deduct, see the instructions for line 28 of Schedule A (Form 1040).

The amount you can deduct for each exemption increased from $3,000 in 2002 to $3,050 in 2003.

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 2003, the phaseout begins at $104,625 for married persons filing separately, $139,500 for single individuals, $174,400 for heads of household, and $209,250 for married persons filing jointly. If your adjusted gross income is above the amount for your filing status, use the Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the amount you can deduct for exemptions.

Beginning in 2003, the exemption amounts for figuring the alternative minimum tax (AMT) increased. The amount depends on your filing status.

See the instructions for Form 6251 for more information on the alternative minimum tax.

Under an education savings bond program, you may be able to exclude from income some or all of the interest earned on the bonds if you meet certain conditions. For 2003, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $87,750 and $117,750. You cannot take the deduction if your MAGI is $117,750 or more. For 2002, the limits that applied to you were $86,400 and $116,400.

For all other filing statuses, your interest exclusion is phased out if your MAGI is between $58,500 and $73,500. You cannot take a deduction if your MAGI is $73,500 or more. For 2002, the limits that applied to you were $57,600 and $72,600. For more information, see chapter 10 in Publication 970, Tax Benefits for Education.

Beginning in 2003, the following changes apply to the Hope and lifetime learning (education) credits. For more complete information, see chapters 2 and 3 in Publication 970, Tax Benefits for Education.

Income limits for credit reduction increased. If you are married and filing a joint return, the amount of your education credit for 2003 is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $83,000 and $103,000. You cannot claim an education credit if your MAGI is $103,000 or more. This is an increase from the 2002 limits of $82,000 and $102,000. The limits for other filing statuses did not change.

Lifetime learning credit. Beginning in 2003, the amount of qualified education expenses you can take into account in figuring the lifetime learning credit increases from $5,000 to $10,000. The credit will equal 20% of these qualified expenses, with the maximum credit being $2,000.

The following paragraphs explain the changes to the credit for 2003. For details, see Publication 596, Earned Income Credit.

Earned income amount is more. The maximum amount of income you can earn and still get the credit has increased. You may be able to take the credit if:

You have more than one qualifying child and you earned less than $33,692 ($34,692 if married filing jointly),
You have one qualifying child and you earned less than $29,666 ($30,666 if married filing jointly), or
You do not have a qualifying child and you earned less than $11,230 ($12,230 if married filing jointly).

Your adjusted gross income also must be less than the amount in the above list that applies to you.

Investment income amount is more. The maximum amount of investment income you can have and still get the credit has increased to $2,600.

Beginning in 2003, the following changes apply to the child and dependent care credit. For details, see Publication 503, Child and Dependent Care Expenses.

Credit percentage. The credit can be as much as 35% (increased from 30% in 2002) of your qualified expenses.

Income that qualifies for the highest percentage. The maximum adjusted gross income amount that qualifies for the highest credit percentage increased to $15,000. Previously, this amount was $10,000.

Dollar limit. The limit on the amount of qualifying expenses increased to $3,000 for one qualifying individual and to $6,000 for two or more qualifying individuals. Previously, these amounts were $2,400 and $4,800, respectively.

Earned income amount for nonworking spouse. If your spouse is either a full-time student or not able to care for himself or herself, the amount of income he or she is treated as having earned increased to $250 a month if there is one qualifying person and to $500 a month if there are two or more qualifying persons. Previously, these amounts were $200 and $400, respectively.

For 2003, the maximum child tax credit increased to $1,000 for each qualifying child. But you must reduce your credit by any advance payment you received in 2003. For details, see Publication 972, Child Tax Credit.

Beginning in 2003, the maximum adoption credit increased to $10,160. Also, the exclusion from income of benefits under your employer's adoption assistance program increased to $10,160. You will be allowed these amounts for the adoption of a child with special needs regardless of whether you have qualifying expenses. See Publication 968, Tax Benefits for Adoption, for more information.

You may be able to claim a new credit for health insurance premiums you paid in 2003 if:

The credit is available to eligible individuals for qualifying payments made for each month in 2003. For more information, see Health Coverage Tax Credit in Publication 502, Medical and Dental Expenses, and Form 8885, Health Coverage Tax Credit.

The Military Family Tax Relief Act of 2003 and the Servicemembers Civil Relief Act provide the following tax benefits for members of the Armed Forces and their families. For more information, see Publication 3, Armed Forces' Tax Guide.

Death gratuity payments. The death gratuity paid to a survivor of a member of the Armed Forces who died after September 10, 2001, increased to $12,000 and is nontaxable. Previously, the death gratuity was $6,000 and only $3,000 of it was nontaxable. You may be able to claim a refund if you paid tax on a death gratuity you received because of a death that occurred after September 10, 2001.

Military base realignment and closure benefit. A military base realignment and closure benefit generally is nontaxable if paid to you after November 10, 2003.

Dependent-care assistance program. Benefits you received after 2002 under a dependent-care assistance program are nontaxable.

Extension of deadlines expanded to include contingency operations. The extension of the deadline for filing a return for members of the Armed Forces serving in a combat zone now also applies to members of the Armed Forces serving in a contingency operation.

Deferring payment of income tax. As a member of the Armed Forces, you may be able to defer (delay) payment of income tax that becomes due before or during your military service for up to 180 days after termination or release from service.

Sale of a home. If you have been a member of the uniformed services or Foreign Service, you now may be able to exclude from income a gain from selling your main home, even if you did not live in it for the required 2 years during the 5-year period ending on the date of sale. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty as a member of the uniformed services or Foreign Service of the United States.

Claiming a refund for a prior year home sale. This choice applies to any sale of a main home after May 6, 1997, so you may be able to claim a refund if you paid tax on a gain from a sale after that date. Generally, you must file a claim for credit or refund within 3 years from the date you filed your original return or within 2 years from the date you paid the tax, whichever is later. However, the deadline to file this claim for 1997, 1998, 1999, or 2000 has been extended to November 10, 2004.

More information. For details, see Publication 523, Selling Your Home.

Student at U.S. military academy. Beginning in 2003, the 10% additional tax on taxable distributions from a Coverdell education savings account (ESA) or qualified tuition program (QTP) does not apply to distributions made on account of the attendance of the designated beneficiary at a U.S. military academy. This applies to students at the U.S. Military Academy, the U.S. Naval Academy, the U.S. Air Force Academy, the U.S. Coast Guard Academy, and the U.S. Merchant Marine Academy. This exception applies only to the amount of the distribution that does not exceed the costs of advanced education (as defined in title 10 of the U.S. Code) attributable to such attendance. For more information about the additional tax on distributions, see chapters 7 (Coverdell ESA) and 8 (QTP) in Publication 970, Tax Benefits for Education.

Armed Forces reservists. Beginning in 2003, if you are a member of a reserve component of the Armed Forces of the United States, you may be able to deduct some of your reserve-related travel costs as an adjustment to gross income rather than as an itemized deduction. For more information, see Armed Forces Reservists Traveling More Than 100 Miles From Home in chapter 6 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Three tax relief provisions are extended to astronauts who die in the line of duty after 2002 (including the crew of the space shuttle Columbia) and their survivors. These provisions are discussed on the following pages of Publication 3920, Tax Relief for Victims of Terrorist Attacks.

However, the above discussions should be modified for astronauts. The following paragraphs explain these modifications. Read these paragraphs in conjunction with the corresponding discussions in Publication 3920.

Tax forgiveness (pages 2–8). The following paragraphs modify the tax forgiveness rules for astronauts who die in the line of duty after 2002.

Years eligible for tax forgiveness (page 2). For astronauts who die in the line of duty, income tax is forgiven for the year of death and the previous year. For the crew of the space shuttle Columbia, income tax is forgiven for 2002 and 2003.

Worksheet A (page 3) and Worksheet B (page 4). Use Worksheet A or B in Publication 3920 to figure the income tax to be forgiven. When filling out columns (A) and (B) of Worksheet A or B for a crew member of the space shuttle Columbia, enter the amounts for 2002 and 2003, respectively. Leave column (C) blank.

Line 2 of Worksheet A and line 3 of Worksheet B require an entry for the decedent's total tax. The total tax lines for 2002 and 2003 returns are listed in the following table.

Form	2002	2003
1040	Line 61	Line 60
1040A	Line 38	File Form 1040
1040EZ	Line 10
TeleFile Tax Record	Line K
1040NR	Line 57	Line 56
1040NR–EZ	Line 17	File Form 1040NR

Nonqualifying income (page 5). For an astronaut, the second bullet should read “Amounts that would not have been payable but for an action taken after the date the astronaut died.”

How to complete the returns (page 7). Write “Astronaut killed in the line of duty” across the top of page 1 of each return.

Designated private delivery services (page 8). Two private delivery services have been added to the list. They are:

FedEx International Priority.
FedEx International First.

Death benefits (page 9). Beginning in 2003, payments received by an individual or an estate from the employer of an astronaut as a result of death in the line of duty are not included in income as explained in Publication 3920.

Estate tax reduction (page 10). For decedents dying in 2003, Form 706 , United States Estate (and Generation- Skipping Transfers) Tax Return (revised August 2003) must be filed by the executor for the estate of every U.S. citizen or resident whose gross estate, plus adjusted taxable gifts and specific exemption, is more than $1,000,000. However, rather than using the Unified Rate Schedule in the August 2003 instructions for Form 706, the executor can choose to compute the tax on the astronaut's estate using the rate schedule on page 25 of the November 2001 revision of the instructions for Form 706. If the executor makes this choice, he or she must write “Section 2201” at the top of page 1 of the return.

Business-related mileage. For 2003, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck is decreased from 36 ½ cents a mile to 36 cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical- and move-related mileage. For 2003, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is decreased from 13 cents a mile to 12 cents a mile. See Transportation under What Medical Expenses Are Deductible in Publication 502, Medical and Dental Expenses, or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.

Beginning in 2003, the self-employed health insurance deduction percentage increases to 100%. For more information, see chapter 7 in Publication 535, Business Expenses.

50% special depreciation allowance. For “qualified property” you acquired after May 5, 2003, and before January 1, 2005, you can take a special depreciation allowance that is equal to 50% of the property's depreciable basis. However, instead of claiming the 50% special allowance, you can elect to claim the 30% special allowance or elect not to claim any special allowance. See chapter 3 in Publication 946, How To Depreciate Property.

Note.

If you acquire qualified property in a like-kind exchange or involuntary conversion, the carried-over basis of the acquired property is eligible for a special depreciation allowance. See the discussion on like-kind exchanges and involuntary conversions under How Much Can You Deduct? in chapter 3 of Publication 946.

Increased section 179 limits. The maximum section 179 deduction you can elect for property you placed in service in 2003 increased from $24,000 to $100,000 for qualified section 179 property ($135,000 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 $400,000 (increased from $200,000). See chapter 2 of Publication 946.

Off-the-shelf computer software. The definition of section 179 property has been expanded to include off-the-shelf computer software placed in service after 2002. This is computer software that is readily available for purchase by the general public, is subject to a nonexclusive license, and has not been substantially modified. It includes any program designed to cause a computer to perform a desired function. However, a database or similar item is not considered computer software unless it is in the public domain and is incidental to the operation of otherwise qualifying software. See Eligible Property in chapter 2 of Publication 946.

Revocation of section 179 election. A section 179 deduction election (or any specification made in the election) made after 2002 can be revoked without IRS approval by filing an amended return. However, once made, the revocation is irrevocable.

Exclusion of qualified nonpersonal use trucks and vans from definition of passenger automobile. A truck or van placed in service after July 6, 2003, that is a “qualified nonpersonal use vehicle” is not considered to be a passenger automobile (and is therefore not subject to the passenger automobile limits). A truck or van is a qualified nonpersonal use vehicle only if it has been specially modified such that it is not likely to be used more than a de minimis amount for personal purposes. For example, a van that has only a front bench for seating, in which permanent shelving has been installed, that constantly carries merchandise or equipment, and that has been specially painted with advertising or the company's name, is a vehicle not likely to be used more than a de minimis amount for personal purposes. See Passenger Automobiles in chapter 5 of Publication 946.

Depreciation limits on passenger automobiles. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can take for a passenger automobile (that is not a truck or van or an electric vehicle) that you use in your business and first place in service in 2003 is:

$7,660 if acquired before May 6, 2003, and you claim the 30% special allowance;
$10,710 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
$3,060 if you elect not to claim any special allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

The limits are reduced if the business use of the vehicle is less than 100%.

Depreciation limits on trucks or vans. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can take for a truck or van (such as a minivan or a sport utility vehicle) built on a truck chassis that you use in your business and first place in service in 2003 is:

$7,960 if acquired before May 6, 2003, and you claim the 30% special allowance;
$11,010 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
$3,360 if you elect not to claim any special allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

The limits are reduced if the business use of the vehicle is less than 100%.

Depreciation limits on electric vehicles. The total depreciation deduction (including the section 179 deduction and the special depreciation allowance) you can take for an electric vehicle that you use in your business and first place in service in 2003 is:

$22,880 if acquired before May 6, 2003, and you claim the 30% special allowance;
$32,030 if acquired after May 5, 2003, and you claim the 50% or 30% special allowance; or
$9,080 if you elect not to claim any special allowance for the vehicle, the vehicle is not qualified property, or the vehicle is qualified Liberty Zone property.

The limits are reduced if the business use of the vehicle is less than 100%.

More information. See Maximum Depreciation Deduction in chapter 5 of Publication 946.

The self-employment tax rate on net earnings remains the same for 2003. 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 2003 increased to $87,000. All net earnings of at least $400 are subject to the Medicare part.

The pilot program for Archer MSAs ended December 31, 2003. You can participate in an Archer MSA after 2003 only if:

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 if you are married filing jointly). The tuition and fees deduction is explained in chapter 6 of Publication 970, Tax Benefits for Education.

Beginning in 2004, a distribution from a QTP established and maintained by an eligible educational institution (generally private colleges and universities) can be excluded from income if the amount distributed is not more than qualified education expenses. For more information on tax-free QTP distributions, see chapter 8 in Publication 970, Tax Benefits for Education.

Generally, you can deduct only 50% of your business-related meal expenses while traveling away from your tax home for business purposes. 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 increases to 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.

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) which allows you to pay or be reimbursed for certain medical expenses. This account must be used in conjunction with a high deductible health plan (HDHP), discussed later.

The HSA can be established using a qualified trustee or custodian that is different from the HDHP provider. Contributions to an HSA must be made in cash or through a cafeteria plan. Contributions of stock or property are not allowed.

What are the benefits of an HSA? You may enjoy several benefits from having an HSA.

You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
Contributions made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
The contributions remain in your account from year to year until you use them.
The interest or other earnings on the assets in the account are tax free.
Distributions may be tax free if you pay qualified medical expenses. See Qualified Medical Expenses, later.
An HSA is “portable” so it stays with you if you change employers or leave the work force.

You have an HDHP.
You have no other health insurance coverage except what is permitted under Other health insurance, later.
You are not entitled to Medicare benefits.
You cannot be claimed as a dependent on someone else's 2004 tax return.

High deductible health plan (HDHP). An HDHP has:

A higher annual deductible than typical health plans, and
A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses.

Limits. The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2004.

Type of Coverage	Minimum Annual Deductible	Maximum Annual Deductible and Other Out-of-Pocket Expenses *
Self-only	$1,000	$5,000
Family	$2,000	$10,000

* This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies.

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 an HDHP.

Example.

Mr. Orville has family health insurance coverage 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 2004. 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 an HDHP because the deductible for Mrs. Orville is below 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 an HDHP. 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.

Plans in which substantially all of the coverage is through the above listed items are not HDHPs. For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan is not an HDHP for purposes of establishing an HSA.

The amount you, your family members, or your employer can contribute to your HSA depends on the type of HDHP coverage you have and your age.

For 2004, if you have self-only coverage, you 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 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). See Rules for married people (discussed later). You must have an HSA all year to contribute the full amount.

For each full month you did not have an HDHP, you must reduce the amount you can contribute by one-twelfth. You must also reduce the amount you can contribute to an HSA by any (a) amounts contributed to your Archer MSA (including employer contributions) and (b) employer contributions to your HSA that were excluded from income.

Example.

In 2004, you have an HDHP for your family for the entire months of July through December (6 months). The annual deductible of your HDHP is $4,000. You can contribute up to $2,000 ($4,000 ÷ 12 months × 6 months) to your HSA for the year. If your annual deductible is $6,000 and you are under the age of 55 at the end of 2004, you can contribute up to $2,575 ($5,150 ÷ 12 months × 6 months) to your HSA for the year.

Note. If you have more than one HSA in 2004, your total contributions to all the HSAs cannot be more than the limits above.

Rules for married people. If either spouse has family coverage, both spouses are treated as having family coverage. If both spouses have family coverage, 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.

If both spouses are age 55 or older by the end of 2004, each spouse can contribute an additional amount to his or her HSA. Therefore, if both spouses were age 55 or older by the end of the year, the total contributions to the HSAs when both spouses have family coverage cannot be more than $6,150.

Example.

Mr. Auburn and his wife both have family coverage under separate HDHPs. Mr. Auburn is 58 years old and Mrs. Auburn is 53. Mr. Auburn has a $3,000 deductible under his HDHP and Mrs. Auburn has a $2,000 deductible under her HDHP. Mr. and Mrs. Auburn are both treated as being covered under the HDHP with the $2,000 deductible. Mr. Auburn can contribute $1,500 to an HSA (½ the deductible of $2,000 + $500 additional contribution for people age 55 or older) and Mrs. Auburn can contribute $1,000 to an HSA (unless Mr. and Mrs. Auburn agree to a different division).

Medicare eligible individuals. Beginning with the first month you are entitled to benefits under Medicare (month you turn age 65), you cannot contribute to an HSA.

Example.

You turned age 65 in July 2004 and became eligible for Medicare benefits. You had self-only coverage under an HDHP with an annual deductible of $1,000. You cannot contribute to an HSA after June 2004. Your monthly contribution limit is $125 ($1,000/12 + $500/12 for the additional contribution for people age 55 or older). You can make contributions for January through June totaling $750 ($125 × 6), but cannot make any contributions for July through December.

No permission or authorization from the IRS is necessary to establish an HSA. When you set up an HSA, you will need to work with a trustee. A trustee can be a bank, a life insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from the HDHP provider.

Rollovers. You can roll over amounts from Archer MSAs and other HSAs into an HSA. Rollover contributions do not need to be in cash. Rollovers are not subject to the annual contribution limits. Rollovers from an IRA, a health reimbursement arrangement, or a flexible spending arrangement are not allowed.

You can make tax-free withdrawals from your HSA to pay or be reimbursed for qualified medical expenses you incur after the HSA has been established (discussed later). If you make withdrawals for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 10% tax as well. You do not have to make withdrawals from your HSA each year.

You will generally pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that are not reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA.

Qualified medical expenses. Qualified medical expenses are those that qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. Qualified medical expenses must be incurred after the HSA has been established.

Special rules for insurance premiums. Generally, you cannot treat insurance premiums as qualified medical expenses for HSAs. You can, however, treat premiums for long-term care coverage, health care coverage while you receive unemployment benefits, or health care continuation coverage required under any federal law as qualified medical expenses for HSAs. If you are age 65 or older, you can treat insurance premiums (other than premiums for a Medicare supplemental policy, such as Medigap) as qualified medical expenses for HSAs.

The Internal Revenue Service issued further guidance on setting up an HSA in Notice 2004–2. The notice can be found in Internal Revenue Bulletin 2004–2.

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 2004 Standard Deduction Tables are shown in Publication 505, Tax Withholding and Estimated Tax.

The amount you can deduct for each exemption increases 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 a dependent child.

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.

Business-related mileage. For 2004, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck increases from 36 cents a mile to 37½ cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical- and move-related mileage. For 2004, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is increased from 12 cents a mile to 14 cents a mile. See Transportation under What Medical Expenses Are Deductible in Publication 502, Medical and Dental Expenses, or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.

Extension of acquisition date. Property will meet the “acquisition date test” for purposes of qualifying for the 30% special depreciation allowance (see chapter 3 of Publication 946, How To Depreciate Property) 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 place in service in 2004 is increased from $100,000 to $102,000 for qualified 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). See chapter 2 of Publication 946.

Wage limits. For social security tax, the maximum amount of 2004 wages subject to the tax increases to $87,900. For Medicare tax, all covered 2004 wages are subject to the tax. For information about these taxes, see Circular E (Publication 15), Employer's Tax Guide.

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 increases to $87,900. All net earnings of at least $400 are subject to the Medicare part.

Extension of time to claim the 30% special depreciation allowance. You still may be eligible to claim the 30% special depreciation allowance for a tax year that included September 11, 2001, if you meet the following requirements.

You timely filed your tax return for that tax year.
You did not claim the 30% special depreciation allowance (or special Liberty Zone depreciation allowance) for qualified property (or qualified Liberty Zone property) placed in service during that tax year.
You did not make an election not to claim the special allowance.

If you have not filed your tax return for the first tax year following your tax year that included September 11, 2001, and you owned the property as of the first day of that tax year, file Form 3115, Application for Change in Accounting Method, with your timely filed tax return for that year.

If you filed your tax return for the first tax year following your tax year that included September 11, 2001, before July 22, 2003, you owned the property as of the first day of that tax year, and the second succeeding tax year after your tax year that included September 11, 2001, ends before August 1, 2004, file Form 3115 with your timely filed tax return for that second succeeding tax year.

Write “Automatic Change Filed Under Rev. Proc. 2003-50” on the appropriate line of Form 3115. For more information, see Revenue Procedure 2003–50 in Internal Revenue Bulletin 2003–29.

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