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It’s that time of the year again when the Service announces the numbers you need to know for 2004. At this time only a few numbers have not been announced, including the depreciation limits for automobiles placed in service in 2004. Presumably, the Service will wait until the second-half of the year as it did in 2003.
Tax rates -- The 15 percent/25 percent/28 percent/33 percent/35 percent brackets begin at the following taxable incomes (according to filing status):
$14,300/$58,100/$117,250/$178,650/$319,100 (Married, filing jointly);
$7,150/$29,050/$58,625/$79,325/$159,550 (Married, filing separately);
$7,150/$29,050/$70,350/$146,750/$159,550 (Single individual);
$10,200/$38,900/$100,500/$162,700/$319,100 (Head of Household); and
$0/$1,950/$4,600/$7,000/$9,550 (Trust or Estate).
Standard deduction -- The 2004 standard deduction amounts are $4,850(single individual), $9,700 (married, filing jointly and surviving spouse), $7,150 (head of household), and $4,850 (married, filing separately). For a taxpayer (and spouse) who is elderly (age 65 or over) or blind, the additional standard deduction is $1,200 ($2,400 for a taxpayer who is both elderly and blind); in the case of a married taxpayer, the additional standard deduction is $950 ($1,900 for a taxpayer who is both elderly and blind). If an individual may be claimed as a dependent on another taxpayer's return, the basic standard deduction is limited. For dependents with earned income (but total income less than the basic standard deduction), a slightly increased standard deduction (of up to $250) is available. In 2004, a dependent's basic standard deduction is limited to the lesser of: (i) the basic standard deduction for single taxpayers ($4,850); or (ii) the greater of (a) $800 or (b) the dependent's earned income plus $250.
Personal exemption -- The 2004 exemption amount will be $3,100. Exemption amounts claimed on a tax return are subject to a phaseout as the taxpayer's AGI exceeds a threshold amount (§151(d)(3)). Specifically, all exemption amounts claimed on a return are reduced by two percent for each $2,500 (or fraction thereof) of AGI in excess of the appropriate threshold amount ($1,250 for a married individual filing separately). As a result, exemption deductions are completely eliminated when AGI exceeds the AGI threshold amount. After adjustment for inflation, the AGI threshold amounts for 2004 are $142,700 (single individual), $214,050 (married, filing jointly and surviving spouse), $178,350 (head of household), and $107,025 (married, filing separately); this means that the exemption is fully phased out at AGI of $265,200 (single individual), $336,550 (married, filing jointly and surviving spouse), $300,850 (head of household), and $165,275 (married, filing separately).
Itemized deductions -- Total itemized deductions otherwise allowable are reduced by three percent of a taxpayer's AGI in excess of specified threshold amounts. This overall limitation applies to itemized deductions after all other floors have been applied. After application of the three-percent floor, the "net itemized deductions" remain. For 2004, the threshold amount is $142,700 for all taxpayers except a married individual filing separately, where the threshold is $71,350.
Kiddie tax -- The "net unearned income" of a minor child is taxed at the parents' marginal tax rate. For 2004, net unearned income is computed as unearned income less $800 less the greater of: (i) $800 of the standard deduction (or $800 of itemized deductions); or (ii) the amount of allowable deductions that are directly connected with the production of the unearned income. Alternatively, parents may include the unearned income of a minor child on his or her return if the child has gross income (exclusively from interest and dividends) between $800 and $8,000, and the tax on a child's first $1,600 of unearned income will be the lesser of $80 ($800 X 10 percent) or 10 percent of unearned income exceeding $800. If the child has unearned income in excess of $1,600, it will be taxed at the parent's highest marginal tax rate. Minor children with unearned income have a reduced alternative minimum tax (AMT) exemption amount equal to the child's earned income plus $5,750 (but no more than the $40,250 AMT exemption for single taxpayers in 2004).
Tax credits -- The child tax credit provisions allow taxpayers to take a tax credit based on the number of eligible dependent children. The child tax credit is $1,000 per child in 2004. The available credit begins to phase out for higher-income taxpayers when AGI reaches $110,000 for married couples filing a joint return, $55,000 for married couples filing separately, and $75,000 for all other taxpayers. For lower-income taxpayers, the child tax credit is refundable to the extent of 10 percent of the taxpayer's earned income in excess of $10,750 in 2004.
The earned income tax credit (EITC) is determined by multiplying a maximum amount of earned income by a specified credit percentage (based on the number of qualifying children). The credit is reduced by a specified percentage of income over an inflation-adjusted phaseout amount. For married taxpayers filing a joint return, the phaseout base amount is increased by $1,000. The income used for this phaseout is the greater of a taxpayer's AGI or earned income. Finally, "investment" income in excess of a specified inflation-adjusted target disqualifies an individual from the EITC. In 2004, the disqualified income amount will be $2,650. The earned income base amounts and phaseout information for 2004 are represented in the table below
Married, filing jointly
|
# Qualifying Children |
Income
Base
Amount |
Credit
Percentage |
Maximum
credit |
Phase
out base |
Phase out
percentage |
Ends at
Income of |
|
No children |
$5,100 |
7.65 |
$390 |
$7,390 |
7.65 |
$12,490 |
|
One child |
$7,660 |
34.00 |
$2,604 |
$15,040 |
15.98 |
$31,338 |
|
Two or more |
$10,750 |
40.00 |
$4,300 |
$15,040 |
21.06 |
$35,458 |
Other taxpayers
|
# Qualifying Children |
Income Base Amount |
Credit Percentage |
Maximum credit |
Phase out base |
Phase out percentage |
Ends at Income of |
|
No children |
$5,100 |
7.65 |
$390 |
$6,390 |
7.65 |
$11,490 |
|
One child |
$7,660 |
34.00 |
$2,604 |
$14,040 |
15.98 |
$30,338 |
|
Two or more |
$10,750 |
40.00 |
$4,300 |
$14,040 |
21.06 |
$34,458 |
If a taxpayer incurs expenses related to the adoption of a qualified child (for example, adoption fees, attorney and court costs, social service review costs, and transportation costs), an adoption expenses credit is available. The tax credit covers the first $10,390 of adoption expenses paid by a taxpayer. The available credit is phased out ratably over a range of $40,000 for taxpayers whose modified AGI exceeds $155,860 in 2004.
Educational savings bonds -- Interest income earned on a qualified U.S. Series EE savings bond used to finance the higher education of the taxpayer, spouse, or dependents is excluded from gross income. No exclusion is allowed to married individuals filing separate returns.
If the principal and interest amounts received do not exceed the qualified higher-education expenses, all interest is excludable subject to an inflation-adjusted modified AGI phaseout. If the principal and interest amounts received exceed the qualified higher-education expenses, only a pro rata portion of the interest will qualify for the exclusion (the ratio of qualified higher-education expenses to total principal and interest received). When modified AGI exceeds the AGI base, the exclusion is completely phased out. The AGI base amounts for 2004 are $89,750 (married, filing jointly), phased out over $30,000 of MAGI, and $59,850 (other eligible taxpayers), phased out over $15,000 of MAGI.
Education credits -- The maximum HOPE Scholarship credit in 2004 is $1,500 (100 percent of the first $1,000 of qualifying expenses and 50 percent of the next $1,000). In 2004, the lifetime learning credit is 20 percent of the first $10,000 of qualifying expenses. The qualifying expense limit is not subject to an annual inflation adjustment. Both education credits are subject to a phaseout for modified AGI in excess of the AGI base; in 2004 the AGI base is $85,000 (married, filing jointly) or $42,000 (all other taxpayers).
Qualified transportation fringe benefits -- To encourage the use of mass transit for commuting to and from work, certain employee benefits, called “qualified transportation fringe benefits,” are excluded from income. These benefits consist of expenses related to transportation from the employee's residence to work in a commuter highway vehicle; a transit pass; and qualified parking. In 2004, the first two categories are limited to $100 a month; the third category has a separate monthly limit of $195.
Medical -- Medical savings accounts (MSAs) are available to a limited number of eligible individuals. Currently, an individual is eligible for an MSA if he or she is self-employed or elects to be covered under a "high-deductible" plan of a small employer (an employer who, on average, employs 50 or fewer workers). For 2004, a "high-deductible" plan is a health plan with the following deductibles and limitations on out-of-pocket expenses: (i) an annual deductible not less than $1,700 and $2,600 and maximum out-of-pocket expenses for covered benefits not exceeding $3,450 (individual coverage); and (ii) an annual deductible not less than $3,450 and $5,150 for family coverage and maximum out-of-pocket expenses for covered benefits not exceeding $6,300. The amount that can be contributed to an MSA is a function of the "deductible" of the "high-deductible" health plan. For individual coverage, the annual contribution limit is 65 percent of the deductible; for family coverage, contributions are limited to 75 percent of the deductible. As a result, the contribution range for 2004 is $1,105-$1,690 (individual coverage) and $2,588-$3,863 (family coverage). Long-term-care insurance premiums that do not exceed specified dollar limits based on the insured's age qualify as a medical expense. In 2004 the limits are $260 (40 or less); $490 (41 through 50); $980 (51 through 60); $2,600 (61 through 70); and $3,250 (over 70).
Section 179 -- JGTRRA increased the maximum amount that can be expensed to $100,000 in 2003 and increased the acquisition-cost ceiling (above which the expense amount is phased out) to $400,000. In 2004, the maximum §179 expense election will be $102,000 and this amount will be subject to a phaseout once property placed in service exceeds $410,000.
Social Security -- The taxable wage base in 2004 is $87,900. |
