2004 was a busy year for the tax writers in Washington. On Oct. 4, the president signed into law The Working Families Tax Relief Act of 2004. And on the heels of those tax changes, the president signed into law The American Jobs Creation Act of 2004 on Oct. 22. And let's not forget the passage (in late 2003) of the new laws allowing Health Savings Accounts as a tax-favored way to allow for payment of qualified medical expenses for those taxpayers covered by high-deductible health insurance plans. And we won't even mention the many other tax changes that took place in 2003 and 2002, which continue to "phase in" over the years.
So here is a brief summary of some of the major changes that will impact the preparation of your 2004 individual income taxes. Make sure not to overlook any of them.
Standard Deduction: Increases to $9,700 for joint filers, $4,850 for single and married/separate filers, and $7,150 for head of household filers. Not only that, the additional standard deduction for those age 65 or older or who are blind moves up to $950 for married and married/separate filers and increases to $1,200 for single and head of household filers. Remember that your standard deduction is what Uncle Sam gives you just for being you. You can use the standard deduction or itemize your deductions, whichever provides you with the greatest tax relief.
Personal Exemptions: Increases to $3,100 each for yourself, your spouse, and qualified dependents.
Mileage Rates: The business mileage rate is 37.5 cents per mile for 2004. For medical, moving, and charitable travel, the rate is 14 cents per mile. In 2005, the business rate increases to 40.5 cents per mile. The medical and moving rate also increases to 15 cents per mile in 2005, while the charitable rate remains at 14 cents per mile.
IRA Contributions: The maximum IRA contribution for 2004 (either traditional or Roth) is $3,000. And, if you're age 50 or older, the additional catch-up contribution amounts to $500. For 2005, the maximum IRA contribution amount will increase to $4,000 per year, while the catch-up contribution will remain at $500.
401(k) and 403(b) Plans: The maximum contribution for 2004 amounts to $13,000 with a catch-up contribution for employees age 50 or older of an additional $3,000. In 2005, the maximum contribution amounts to $14,000, and the additional catch-up amount increases to $4,000.
Health Savings Accounts: You might have missed this law change that took effect in 2004. But you might want to take a closer look at it for 2005, since it's a very powerful tax reduction vehicle. An HSA allows qualified taxpayers to put away, tax-free, up to $2,600 (single) and $5,150 (families) to be used to pay for qualified medical expenses. And, if you're over age 55, those limits move up to $3,100 and $5,650 respectively. It's not too late to open your HSA plan for 2004, since the contribution for 2004 can be made by April 15, 2005. But there are other qualifications that must be met in order to secure this deduction.
Charitable Contributions of Cars: The old law has been changed significantly. Because of the abuse found by the IRS regarding this deduction, the clamps have been screwed down tightly in the new law. A bit of an overreaction in my opinion, but they are changes that you need to be aware of if you're planning a charitable contribution of a car, boat, or plane in 2005.
Child Tax Credit: This credit was scheduled to drop in future years, but the new legislation retained the credit amount as $1,000 per qualifying child through 2010.
Sales Tax Deduction: This is a brand new deduction for 2004 and will allow many taxpayers to reduce their taxes significantly, especially those taxpayers residing in states that don't impose a state income tax. In effect, you can elect to deduct the greater of your sales taxes or your state income taxes as an itemized deduction on your Schedule A. Obviously, for those living in no income tax states, this is a no-brainer. For those of you living in states with a moderate state tax rate, the deduction will be a bit harder to compute. The IRS has issued sales tax tables to be used in computing your sales tax deduction. And, to those table results, you can also add "big ticket" items such as a car, boat, plane, motor home, etc. So, if you itemize your deductions, make sure to check out the possibility for forgoing your state tax deduction in place of a sales tax deduction, especially if you did purchase a "big-ticket" item in 2004. And, for those of you out there who meticulously keep every receipt for everything that you purchased during the year, feel free to ignore the IRS tables and simply deduct the amount of sales taxes that you actually paid to your state (which will likely be much larger than allowed by the table).
SUV Depreciation Deduction: Trucks and vans with a gross vehicle weight greater than 6,000 pounds and used more than 50% for business were allowed a maximum first-year depreciation deduction of up to $102,000. And that's true for vehicles placed in service on or before Oct. 22. But for vehicles placed in service after Oct. 22, the maximum first year depreciation deduction was reduced to $25,000.
Again, these are just a few of the changes taking place for the 2004 and future tax years. There are others that might impact you personally. Make sure that you know about all of them before even attempting to prepare your 2004 tax return. Paying taxes is painful enough. Don't pay more than your legal obligation.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors . You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.