Topics — Tax Year 2003

• Adoption benefits
• Alternative minimum tax
• Astronauts
• Capital gains maximum tax rates
• Child and dependent care credit
• Child tax credit
• Dividends — maximum tax rate
• Earned income credit (EIC)
• Education credits
• Education Savings Bond exclusion
• Exemption amount
• Free electronic filing
• Health coverage tax credit
• Hope credit
• Lifetime learning credit
• Limit on itemized deductions
• Medical Savings Accounts program
• Military benefits
• Retirement savings plans
• Self-employed health insurance deduction
• Social Security and Medicare Taxes
• Standard deduction
• Standard mileage rates
• Tax rates for 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.

1. Pages 2-8: Tax Forgiveness
2. Page 9: Death Benefits
3. 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.

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.

• $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.

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.

Health Coverage Tax Credit

You may be able to claim a new credit for health insurance premiums you paid in 2003 if:

1. You are a worker whose job was displaced by foreign trade, or
2. 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:

1. You were an active Medical Savings Account participant before January 1, 2004, or
2. 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

1. The tax rate brackets of 27%, 30%, 35%, and 38.6%, have been reduced to 25%, 28%, 33%, and 35%, respectively.
2. The 15% rate bracket for married taxpayers filing jointly and qualifying widow(er)s has expanded to twice that of single filers.
3. 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.

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.

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:

1. A higher annual deductible than typical health plans, and
2. 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.

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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Page last updated -- 29-Dec-2003