Topics — Tax Year 2003
Topics — Tax Years 2004 and Later
Electric and clean-fuel
vehicles
Exemption amount
Health Savings Account
Meal expenses
Qualified tuition programs
Retirement savings
plans
Standard deduction
Standard mileage rates
Tuition and fees
deduction
Tax Year 2003
Adoption Benefits
Beginning in 2003, the maximum adoption credit
increases to $10,160. Also, the exclusion from income
of benefits under your employer's adoption assistance
program increases 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.
Publication
968, Tax Benefits for Adoption, has more
information.
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Astronauts Who Die in the Line of Duty
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.
- Pages 2-8: Tax Forgiveness
- Page 9: Death Benefits
- Page 10: Estate Tax Reduction
However, the above discussions need to be modified
for astronauts. The following paragraphs explain these
modifications. Please 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 |
File Form 1040 |
| TeleFile Tax Record |
Line K |
File Form 1040 |
| 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
Transfer) 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, 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.
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Alternative Minimum Tax
Exemption amounts. Beginning in 2003, the
exemption amounts for figuring the alternative minimum
tax (AMT) increased. The amount depends on your filing
status.
| If your filing status is: |
Then your exemption amount increased to: |
| Married filing jointly or qualifying
widow(er) |
$58,000 |
| Single or head of household |
$40,250 |
| Married filing separately |
$29,000 |
Personal Credits Still Allowed Against
Alternative Minimum Tax. The provision that allows
certain nonrefundable personal credits to reduce both
your regular tax and any alternative minimum tax (AMT)
has been extended and continues to be in effect for
2003. This provision, as it applies to the alternative
minimum tax, was originally scheduled to expire after
2001. Without the extension, these credits could not
have been used to reduce ACT in 2003.
More information. The instructions
for Form 6251 have more information on the
alternative minimum tax.
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Lower Maximum Tax Rates on Certain Capital Gains
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.
-
The 20% and 10% tax rates have been lowered to
15% and 5%, respectively.
-
The 8% tax rate for qualified 5-year gain has
been eliminated. Instead, the new 5% rate
applies to gain that would have qualified for
the new 8% rate.
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 your paid on the resulting gain.
Note: Fiscal year 2002-2003 filers should
see Announcement
2003-56 for special rules for filing Schedule D
(Form 1040), Capital Gains and Losses, and Form 6251,
Alternative Minimum Tax—Individuals. 12-SEP-2003
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Dividends Taxed At Capital Gain Rate
Beginning in 2003, qualified dividends are subject
to the same 5% or 15% maximum tax rate that applies to
net capital gain. They should be shown in box 1b of
the Forms 1099–DIV or similar statements you
receive. Before 2003, all dividends were taxed at the
higher tax 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 instructions
for Form 1040 or the instructions
for Form 1040A.
Investment interest deducted. If
you claim a deduction for investment interest, you may
have to reduce the amount of your qualified dividends
that are eligible for the 5% or 15% tax rate. Reduce
it by the amount of qualified dividends you choose to
include in investment income when figuring the limit
on your investment interest deduction.
More information. Publication
550, Investment Income and Expenses, has more
information on dividends and treatment of investment
expenses.
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Child and Dependent Care Credit
Beginning in 2003, the following changes apply to
the child and dependent care credit.
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 has
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.
More information. Publication
503, Child and Dependent Care Expenses, has more
information.
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Child Tax Credit
For 2003, the maximum child tax credit is increased
to $1,000 for each qualifying child. But you must
reduce your credit by any advance payment you received
in 2003.
Advance child tax credit payment. You must
reduce your 2003 child tax credits by any advance
child tax credit payment you received in 2003. The
amount of your advance payment is shown on Notice
1319. This notice was mailed to you in 2003. If you do
not have this notice, you can check the amount of your
advance payment on our
web site or call us at 1-800-829-1040. If you
received an advance payment but did not have a
qualifying child for 2003, you do not have to pay back
the amount you received. Do not enter the amount of
your advance payment on your return. If you filed a
joint return for 2002, but for 2003 you are not filing
a joint return (or a joint return with the same
spouse), you are considered to have received one-half
of the advance payment.
More information. For details, see Publication
972, Child Tax Credit.
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Earned Income Credit (EIC)
The maximum amount of income you can earn and still
get the earned income credit increased. The amount
depends on your filing status and number of children.
The maximum amount of investment income you can have
and still be eligible for the credit has increased to
$2,600.
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Education Credits
Beginning in 2003, the following changes apply to
the Hope and lifetime learning (education) credits.
Income limits for credit reduction increased.
If you are married and filing a joint return, the
amount of your Hope or lifetime learning 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.
More information. Chapters 2 and 3 in Publication
970, Tax Benefits for Education, have more
information.
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Education Savings Bond Exclusion
For 2003, the amount of your interest exclusion
will be 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. Chapter
10 in Publication
970, Tax Benefits for Education, has more
information.
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Exemption Amount
The amount you can deduct for each exemption has
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.
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Free Electronic Filing
The Internal Revenue Service has arranged for
qualified persons to electronically file their 2003
individual federal tax return for free. Please visit
our electronic
filing home page for more information on free
electronic filing and a list of qualified tax service
providers.
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Health Coverage Tax Credit
You may be able to claim a new credit for health
insurance premiums you paid in 2003 if:
- You are a worker whose job was displaced by
foreign trade, or
- You receive a pension from the Pension Benefit
Guaranty Corporation.
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.
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Limit on Itemized Deductions
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).
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Medical Savings Accounts (MSAs) Program Expires
The pilot program for Medical Savings Accounts is
scheduled to end December 31, 2003. You can
participate in an Archer MSA after 2003 only if:
- You were an active Medical Savings Account
participant before January 1, 2004, or
- You become an active Medical Savings Account
participant after 2003 because you are covered by
a High Deductible Health Plan of an Medical
Savings Account participating employer.
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Military Family Tax Relief
The Military Family Tax Relief Act of 2003 provides
the following tax relief for members of the Armed
Forces and their families. More information can be
found in 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 all nontaxable.
Previously, the death gratuity was $6,000 and only
$3,000 of it was nontaxable. So 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. Publication
3, Armed Forces' Tax Guide, has a complete list of
items that are excludable from gross income.
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.
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.
Example. David bought and moved into a home
in 1995. He lived in it as his main home for 2 ½
years. For the next 6 years, he did not live in it
because he was on qualified official extended duty
with the Army. He then sold the home at a gain in
2003. To meet the 2-year use test, David chooses to
suspend the 5-year test period for the 6 years he was
on qualifying official extended duty. This means he
can disregard those 6 years. Therefore, David's 5-year
test period consists of the 5 years before he went on
qualifying official extended duty. He meets the
ownership and use tests because he owned and lived in
the home for 2 ½ years during this test period.
Claiming a refund
for a prior year home sale. This change 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 a claim based on this
rule for 1997, 1998, 1999, or 2000 has been extended
to November 10, 2004.
More information on selling your home can be found
in Publication
523, Selling Your Home.
Student at U.S. Military Academy May Be Exempt
From Additional Tax on Coverdell ESA or Qualified
Tuition Program (QTP) Distribution
For 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 extent that the amount of the distribution does
not exceed the costs of advanced education (as defined
in title 10 of the U.S. Code) attributable to such
attendance.
Chapters 7 (Coverdell Education Savings Account (ESA))
and 8 (Qualified Tuition Program (QTP)) in Publication
970, Tax Benefits for Education, have more
information about the additional tax on distributions.
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.
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.
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Retirement Savings Plans
The following paragraphs highlight changes that
affect individual retirement arrangements (IRAs) and
pension plans.
Traditional individual retirement arrangements
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.
Deemed individual retirement arrangements.
A qualified employer plan (retirement plan) can
maintain a separate account or annuity under the plan
(a deemed individual retirement arrangement) to
receive voluntary employee contributions. An
employee's account can be treated as a traditional
individual retirement arrangement or a Roth individual
retirement arrangement.
Limit on elective deferrals.
The maximum amount of elective deferrals under a
salary reduction agreement that could be contributed
to a qualified plan increased to $12,000 ($14,000 If
you were age 50 or over). However, for SIMPLE plans,
the amount increased to $8,000 ($9,000 if you were age
50 or over).
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Self-Employed Health Insurance Deduction
Beginning in 2003, the self-employed health
insurance deduction percentage increases to 100%.
Chapter 7 of Publication
535, Business Expenses, has more information.
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Social Security and Medicare Taxes
The maximum wages subject to social security tax
(6.2%) increased to $87,000. All wages are subject to
Medicare tax (1.45%).
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Standard Deduction
The standard deduction for taxpayers who do not
itemize deductions on Schedule A (Form 1040) has
increased. The amount depends on your filing status,
whether you are 65 or older or blind, and whether an
exemption for you can be claimed by another person.
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.
The basic standard deduction amounts for 2003 are:
- Head of household — $7,000
- Married taxpayers filing jointly and qualifying
widow(er)s — $9,500
- Married taxpayers filing separately — $4,750
- Single — $4,750
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Standard Mileage Rates
The allowable deductions for the standard mileage
rate have decreased as follows:
- Business miles. The standard mileage rate
for the cost of operating your car decreased to 36
cents a mile for all business miles driven. Publication
463, Travel, Entertainment, Gift, and Car Expenses,
has more information about car expenses and use of
the standard mileage rate.
- Medical reasons. The standard mileage
rate allowed for use of your car for medical
reasons decreased to 12 cents a mile. Publication
502, Medical and Dental Expenses, has
information on deductible mileage related to
medical expenses.
- Moving. The standard mileage rate allowed
for determining moving expenses decreased to 12
cents a mile. Publication
521, Moving Expenses, has information on
deductible mileage related to a move.
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2003 Tax Rates
The 2003
Tax Rate Schedules have been revised to reflect
the following changes:
- The tax rate brackets of 27%, 30%, 35%, and
38.6%, have been reduced to 25%, 28%, 33%, and
35%, respectively.
- The 15% rate bracket for married taxpayers
filing jointly and qualifying widow(er)s has
expanded to twice that of single filers.
- The maximum taxable income subject to the 10%
tax rate has increased to $7,000 for single
taxpayers and married taxpayers filing separately
($14,000 for married taxpayers filing jointly and
qualifying widow(er)s).
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Tax Years 2004 and later
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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