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Have you ever had a problem communicating with the IRS? Here is one taxpayer's reply after the IRS denied his deduction. |
Tax Years 2004 and laterEarned Income Credit Amounts IncreasedEarned 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: 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 earned income credit has increased to $2,650. Top of PageIncome Limits Increased for Reduction of Education Savings Bond ExclusionFor 2004, 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 $89,750 and $119,750. You cannot take the deduction if your MAGI is $119,750 or more. For 2003, the limits that applied to you were $87,750 and $117,750. For all other filing statuses, your interest exclusion is phased out if your MAGI is between $59,850 and $74,850. You cannot take a deduction if your MAGI is $74,850 or more. For 2003, the limits that applied to you were $58,500 and $73,500. The Education Savings Bond exclusion is explained in chapter 10 of IRS Publication 970, Tax Benefits for Education. Top of PageEducator Expenses Deduction ExtendedIf you were an eligible educator in 2004, you can deduct as an adjustment to income up to $250 of qualified expenses you paid in 2004. This provision was scheduled to expire after 2003. However, the Working Families Tax Relief Act of 2004 extended it through 2005. The educator expense deduction is explained in Publication 529, Miscellaneous Deductions. Top of PageElectric and Clean-Fuel VehiclesFor 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. Top of PageExemption Amount IncreasedThe 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: 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. Qualifying for a Health Savings AccountTo qualify for a Health Savings Account, you must meet the following requirements. 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: Limits. The following table shows the limits for High Deductible Health Plans for 2004.
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. Amount of ContributionThe 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 ContributeYou can make contributions to your Health Savings Account for 2004 until April 15, 2005. Setting Up a Health Savings AccountNo 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). Income Limits Increased for Hope and Lifetime Learning CreditsFor 2004, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $42,000 and $52,000 ($85,000 and $105,000 if you file a joint return). You cannot claim an education credit if your MAGI is $52,000 or more ($105,000 or more if you file a joint return). This is an increase from the 2003 limits of $41,000 and $51,000 ($83,000 and $103,000 if filing a joint return). The Hope and Lifetime Learning credits are explained in chapters 2 and 3 of Publication 970, Tax Benefits for Education. Meal Expenses When Subject to "Hours of Service" LimitsGenerally, 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. Distributions From Privately-Sponsored Qualified Tuition Programs (QTPs) May Be Tax FreeBeginning in 2004, a distribution from a qualified tuition program (QTP) 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. The amount that may be excluded is limited to your qualified education expenses. Tax-free qualified tuition program distributions are discussed in Publication 970, Tax Benefits for Education. Retirement Savings PlansThe 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). Standard Deduction Amount IncreasedThe 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: The full 2004 Standard Deduction Tables are shown in the 2004 instructions for Form 1040 and Form 1040A. Standard Mileage RatesFor tax years beginning in 2004, the allowable deductions for the standard mileage rate are as follows: Student Loan CancellationsBeginning in 2004, student loan repayments provided to you under certain federal and state repayment programs are tax free. Whether or not the repayment qualifies depends in part on the nature of your employment and the type of lender who made you the loan. Beginning in 2004, student loan repayment assistance you receive from the National Health Service Corps (NHSC) Loan Repayment Program and state programs eligible under the Public Health Service Act are tax free. The student loan cancellation program is explained in chapter 5 of Publication 970, Tax Benefits for Education. Student Loan Interest DeductionFinal regulations, issued May 7, 2004, changed the rules for deducting student loan interest. The changes apply to interest due and paid after December 31, 1997, on qualified student loans. Longer period allowed for loan disbursement.The 60-day safe harbor for disbursing loan proceeds used to pay qualified education expenses has been increased to 90 days before and 90 days after the academic period to which the expenses relate. Interest paid by a third party may be deductible.The person legally obligated to make interest payments on a student loan may be able to deduct interest payments on that loan made by someone else (third party). The student loan interest deduction is explained in chapter 4 of Publication 970, Tax Benefits for Education. Tuition and Fees DeductionBeginning 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 for married filing jointly). The tuition and fees deduction is explained in chapter 6 of Publication 970, Tax Benefits for Education. | |||||||||||||||||||||||||||||||||
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