2004 Tax Laws:
Know What the Changes Mean to You
Extension of tax benefits and new
tax breaks may impact your tax return
Because this year’s tax laws include extensions of several
tax breaks that were set to expire this year, as well as the introduction
of new tax breaks, it’s important to pay close attention to
the tax code’s details and timing in order to maximize savings.
Here are the highlights of this year’s tax changes impacting
the majority of taxpayers.
The Working Families Tax Relief Act of 2004 extends many deductions
and credits that were set to be reduced or expire after 2004. The
Act includes a number of provisions that directly affect working
families.
For example, Marriage Penalty Relief has been extended
through 2010. The provision allows married taxpayers filing joint
returns to continue taking advantage of the increased standard deduction,
which is twice the single deduction. The deduction, $9,700 for 2004
and $10,000 for 2005, is particularly beneficial for married couples
who don’t own a home or don’t have enough deductions
to itemize.
Child-Related Benefits
The Child Tax Credit, which was scheduled to be
reduced to $700 per qualified child in 2005, is now set to continue
as a credit of up to $1,000 for each dependent child under 17 through
2010. In addition, the refundable portion of the credit has been
raised from 10 percent to 15 percent of the taxpayer’s earned
income. That means taxpayers with a credit amount that exceeds their
tax liability may qualify for a refund.
To claim any child-related benefit - such as the child tax credit,
dependency exemption, earned income tax credit, dependent care credit
or head of household filing status - it’s important to understand
the new Uniform Definition of a Child which takes
effect in 2005. The rules will change and some taxpayers will lose
benefits while others will gain. In general, a “qualifying
child” is now defined as:
- having the same principal residence as the taxpayer
(for more than half of the year)
- having a specified relationship with the taxpayer
(a son, daughter, adopted child, stepchild, or a descendant of
any of them)
- having not yet reached a specified age (varies
among benefits)
Military families will benefit
in the way the child tax credit is calculated. Specifically, combat
pay, which is tax-free income and had been excluded from the definition
of earned income, is now included when calculating the refundable
child tax credit. In addition, for 2004 and 2005, military households
can elect to include or exclude combat pay when calculating the Earned
Income Tax Credit (EITC), depending on which approach is most beneficial.
Deduction for Teachers
Another positive development is the two-year extension of the Deduction
for Educator Expenses, which was scheduled to expire after
2003. This provision allows a deduction of up to a $250 to teachers
who purchased classroom supplies for children to fill in where education
funding fell short. The deduction is available for 2004 and 2005.
Expanded Tax Bracket
Lower-income families benefit from the extension of the expanded 10
percent tax rate bracket. In 2003, the 10 percent bracket
was expanded to include the first $7,000 (up from $6,000) in taxable
income for single filers and $14,000 (up from $12,000) for married
couples filing joint returns. The expansion means that more income
is taxed at a lower rate (10% instead of 15%). The expanded bracket
was scheduled to return to the pre-2003 Act levels in 2005. The new
law keeps the 10 percent bracket at the expanded levels and will adjust
it for inflation through 2010.
AMT Exemption Expansion
The Alternative Minimum Tax (AMT) is an extra tax some have to pay
in addition to their regular income tax. Originally, it was meant
to ensure wealthy taxpayers didn’t abuse tax shelters. Over
the years, however, as inflation and incomes have risen, the brackets
and exemptions of the AMT haven’t kept pace, and the AMT has
ended up hitting many middle-income people for whom it was never intended.
The good news for these taxpayers is that the expanded AMT
exemption amount will stay in place for tax years 2004 and
2005. As a result, fewer taxpayers will be hit by the AMT or, if subject
to AMT, will have a lower AMT burden.
Saving on Medical Expenses
Although passed by the 2003 Medicare Act, Health Savings Accounts
(HSAs) became available in 2004. HSAs are tax-free savings accounts
for future medical expenses. These accounts can only be used by taxpayers
who have high-deductible health insurance plans (those with at least
a $1,000 individual deductible or a $2,000 family deductible and do
not pay benefits other than for preventive care before the deductible
is met).
Contributions to HSAs are tax deductible, even if a taxpayer doesn’t
itemize. Employers may also make tax-free contributions to HSAs on
behalf of employees. The total allowable contribution (for 2004) is
the lower of the annual deductible or $2,600 ($5,150 for family coverage).
Individuals with medical savings accounts (MSAs) can either retain
them or roll their account balances into a new HSA. This portability
is welcome news for those changing jobs.
New Sales Tax Deduction
The President also signed the American Jobs Creation Act which allows
taxpayers who itemize deductions to choose between a state and local
Sales Tax Deduction or a deduction of their state
income tax. The biggest winners here are those taxpayers residing
in states with no personal income tax: Texas, Washington, Nevada,
Alaska, Florida, South Dakota, and Wyoming.
The IRS is compiling optional tables outlining the sales tax deductions
available by jurisdiction if taxpayers haven’t saved their receipts.
Sales taxes paid on “big-ticket” items, including cars
and boats, may be added to the IRS table amount, but only up to the
amount paid at the general sales tax rate.
Being informed about changes in the tax law is the first step to lowering
your tax bill. For additional guidance on how to maximize your 2004
tax savings, consult your tax professional or financial planner.
|
