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March 6, 2005 - Tax Law 2004 1040 Highlights

Despite calls for simplifying the tax laws, they have actually been made much more complicated in the last few years. This filing season is no different. To help, we have put together this brief listing of the key changes for this filing season:

Qualified tuition program (QTP) distributions. QTPs are special tax-preferred vehicles that allow you to set aside money for qualified higher education expenses. For the first time on your 2004 return, you may be able to exclude from income distributions from a private QTP if the distributions are not more than your qualified higher education expenses.

IRA deduction. Those of you who are active participants in an employer-sponsored retirement plan can have higher levels of modified adjusted gross income (AGI) before you start losing out on the ability to make an above-the-line deduction (meaning you can take it even if you don't itemize) for contributions to a traditional individual retirement account or IRA, as more commonly known. Modified AGI is your gross income less above-the-line deductions computed in a special way. The deduction phaseout range is modified AGI of $65,000 to $75,000 for joint return filers and $45,000 to $55,000 for single taxpayers.

Tuition and fees deduction . This above-the-line deduction for higher-education expenses is expanded. You may be able to deduct up to $4,000 if your modified AGI is not more than $65,000 ($130,000 for joint returns), or deduct up to $2,000 if your AGI is higher than that limit but not more than $80,000 ($160,000 for joint returns). Here, if you don't qualify for either category, there is no partial deduction. For example, if you exceed the $160,000 figure on a joint return by even $1, you get no deduction.

Health savings account (HSA) deduction. Under new rules, eligible individuals (those with high-deductible health plans) may make deductible contributions to a health savings account. Qualifying contributions to HSAs are deductible above-the-line.

Fees and costs of discrimination suits. There is a new above-the-line deduction for attorney fees and costs of discrimination suits paid after Oct. 22, 2004.

Education credits. Eligible individuals may claim an income tax credit for the cost of higher education expenses for themselves, spouses, and dependents. For 2004, the modified-AGI-based phaseout range for the education credits is higher: $42,000-$52,000 ($85,000-$105,000 for joint filers).

Adoption credit. The maximum adoption credit is higher ($10,390), and phases out when modified AGI exceeds $155,860.

Earned income tax credit (EITC). The maximum credit is higher and the AGI-based phaseout figures are revised. There is a new nontaxable combat pay election, which allows eligible individuals to treat otherwise tax-free combat pay as earned income for purposes of the EITC.

Additional child tax credit. The credit limit based on earned income is increased to 15% of your earned income that exceeds $10,750. If you were a member of the U.S. Armed Forces who served in a combat zone, your nontaxable combat pay counts as earned income when figuring this credit limit.

Expanded eligibility for Schedule C-EZ (Schedule C-EZ ). Eligible small businesses may file simplified Schedule C-EZ (Profit or Loss from Business) instead of the longer and more involved Schedule C. For 2004, the maximum amount of business expenses you can have and qualify to file Schedule C-EZ is doubled to $5,000.

Depreciation and expensing. For those engaged in a trade or business, new rules apply to the depreciation of vehicles acquired by trade-in; expensing of heavy SUVs placed in service after Oct. 22, 2004 is limited to $25,000; and an additional 50% (electively, 30%) first-year depreciation allowance applies to most new depreciable personal property placed in service during 2004, as well as some software.

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