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The Tax Prophet Newsletter   Issue # 8 February, 2004

In This Issue:
401(k) Plans
IRAs
College
Driving and Parking
Social Security Taxes
Estate Taxes
Standard Deduction
Kiddie Tax
Big Pensions
Classroom Expenses

Tax Breaks for 2004


Introduction President Bush’s tax approach is simple – lowering the tax burden for the super-rich will stimulate the economy, deficits be damned! For instance, it is reported the Walton heirs (owners of Walmart stock) will save about $100 million in taxes with the new 15% dividend rate. But what about the rest of us? Yes, there are small tax breaks for incomes across the spectrum, and 2004 promises goodies for everyone.

Note: These changes do not affect your 2003 return due April 15, 2004.



401(k) Plans

Employees can contribute up to $13,000 in pre-tax dollars to employer-sponsored retirement plans including 401(k), 403(b) and 457 accounts. For those over 50 years or older as of December 31, 2003 may save up to $16,000. Of course, those with 401(k) plans in Enron lost their savings so be careful with the investment choices offered. Make sure not all your eggs are in the company basket.

IRAs

The most that taxpayers can contribute for 2004:

(i) Traditional IRA – $3,000 or your taxable compensation, whichever is less. Those over age 50 may contribute another $500.

(ii) Roth IRA – $3,000 or your taxable compensation, whichever is less. Those over age 50 may contribute another $500.

(iii) Deductible IRA – Taxpayers with a modified adjusted gross income of less than $45,000 if single or $65,000 if married, can contribute $3,000; $3,500 if age 50 or over.

(iv) Simple IRA – The contribution limit for 2004 is $9,000; for ages 50 and over it is $10,500.


SEPs

Simplified Employee Pension plans for 2004 are limited to 20% of compensation up to $205,000 for a maximum of $41,000. This maximum amount also applies to Keoghs and profit-sharing plans.

College

Taxpayers can deduct up to $4,000 for out-of-pocket tuition and fees if their modified adjusted gross income is no more than $65,000 (single) or $130,000 (married-filing jointly). For earnings between $65,000 and $80,000 (single) or $130,000 and $160,000 (married), the deduction for tuition and fees is limited to $2,000. People with incomes in excess of these amounts can claim no deduction for this category.

Note: Students may be eligible to claim these benefits as long as they are not claimed as dependents.



Driving and Parking

The new rate when using your automobile for business is 37.5 cents per mile. This is an increase of 1.5 cents over 2003. For 2004, employers can provide workers with tax-free parking up to $195.00 per month – an increase of $5.00 over last year.



Social Security Taxes

The maximum pay subject to Social Security tax is $87,900 for 2004. This is an increase of $900 over last year so that workers will have to work longer before they can stop paying into this account.



Estate Taxes

The highest estate tax rate falls to 48% this year, from 49% last year. The most that can be passed on tax free to one’s heirs during or after their lifetime is $1.5 million. This lifetime exclusion amount is $500,000 greater than in 2003; however, the lifetime exclusion for gifts remains at $1 million. This $1 million gift tax exclusion is separate from the annual gift-tax exclusion. This year taxpayers may gift any number of people $11,000 per person (a married couple may gift $22,000) without incurring a gift tax affecting their lifetime gift tax exclusion of $1 million.

As the lifetime exemption increases, for married couples the traditional estate-planning concept of funding the first-to-die’s estate to the maximum exemption (now $1.5 million) needs rethinking. In many cases, it might be prudent to pass appreciated property to the surviving spouse since the property will receive a basis step-up to fair market value at the time of the second death, provided the estate of the surviving spouse at the time of death is below the estate tax exemption.



Standard Deduction

The standard deduction for married couples who do not itemize deductions in 2004 is $9,700 up $200 over 2003. For single filers the standard deduction is $4,850, an increase of $100 from 2003. The personal exemption rises to $3,050.



Kiddie Tax

The standard deduction for a dependent child younger than 14 years with unearned income rises to $800 in 2004, up $50 from 2003. In other words, in 2004 dependents pay nothing on their first $800 in unearned income; the next $800 will be taxed at the child’s marginal rate (probably 5%) and anything over $1,600 will be taxed at the parent’s rate. Thus, shifting investment income to children may result in several hundred dollars of tax savings.



Big Pensions

The maximum payout from a defined benefit pension plan increases $5,000 to a total of $165,000.



Classroom Expenses

The $250 deduction for out-of-pocket classroom expenses for teachers, valid regardless of whether they itemized deductions or not, expired in 2003, but pundits look for this deduction to be renewed this year.





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All contents copyright © 1995-2004 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.

The Tax Prophet Newsletter - Tax Problems To remove your email from the subscriber's list, please follow the instructions at the end of this newsletter.

The Tax Prophet Newsletter   Issue # 8 February, 2004

In This Issue:
401(k) Plans
IRAs
College
Driving and Parking
Social Security Taxes
Estate Taxes
Standard Deduction
Kiddie Tax
Big Pensions
Classroom Expenses

Tax Breaks for 2004


Introduction President Bush’s tax approach is simple – lowering the tax burden for the super-rich will stimulate the economy, deficits be damned! For instance, it is reported the Walton heirs (owners of Walmart stock) will save about $100 million in taxes with the new 15% dividend rate. But what about the rest of us? Yes, there are small tax breaks for incomes across the spectrum, and 2004 promises goodies for everyone.

Note: These changes do not affect your 2003 return due April 15, 2004.



401(k) Plans

Employees can contribute up to $13,000 in pre-tax dollars to employer-sponsored retirement plans including 401(k), 403(b) and 457 accounts. For those over 50 years or older as of December 31, 2003 may save up to $16,000. Of course, those with 401(k) plans in Enron lost their savings so be careful with the investment choices offered. Make sure not all your eggs are in the company basket.

IRAs

The most that taxpayers can contribute for 2004:

(i) Traditional IRA – $3,000 or your taxable compensation, whichever is less. Those over age 50 may contribute another $500.

(ii) Roth IRA – $3,000 or your taxable compensation, whichever is less. Those over age 50 may contribute another $500.

(iii) Deductible IRA – Taxpayers with a modified adjusted gross income of less than $45,000 if single or $65,000 if married, can contribute $3,000; $3,500 if age 50 or over.

(iv) Simple IRA – The contribution limit for 2004 is $9,000; for ages 50 and over it is $10,500.


SEPs

Simplified Employee Pension plans for 2004 are limited to 20% of compensation up to $205,000 for a maximum of $41,000. This maximum amount also applies to Keoghs and profit-sharing plans.

College

Taxpayers can deduct up to $4,000 for out-of-pocket tuition and fees if their modified adjusted gross income is no more than $65,000 (single) or $130,000 (married-filing jointly). For earnings between $65,000 and $80,000 (single) or $130,000 and $160,000 (married), the deduction for tuition and fees is limited to $2,000. People with incomes in excess of these amounts can claim no deduction for this category.

Note: Students may be eligible to claim these benefits as long as they are not claimed as dependents.



Driving and Parking

The new rate when using your automobile for business is 37.5 cents per mile. This is an increase of 1.5 cents over 2003. For 2004, employers can provide workers with tax-free parking up to $195.00 per month – an increase of $5.00 over last year.



Social Security Taxes

The maximum pay subject to Social Security tax is $87,900 for 2004. This is an increase of $900 over last year so that workers will have to work longer before they can stop paying into this account.



Estate Taxes

The highest estate tax rate falls to 48% this year, from 49% last year. The most that can be passed on tax free to one’s heirs during or after their lifetime is $1.5 million. This lifetime exclusion amount is $500,000 greater than in 2003; however, the lifetime exclusion for gifts remains at $1 million. This $1 million gift tax exclusion is separate from the annual gift-tax exclusion. This year taxpayers may gift any number of people $11,000 per person (a married couple may gift $22,000) without incurring a gift tax affecting their lifetime gift tax exclusion of $1 million.

As the lifetime exemption increases, for married couples the traditional estate-planning concept of funding the first-to-die’s estate to the maximum exemption (now $1.5 million) needs rethinking. In many cases, it might be prudent to pass appreciated property to the surviving spouse since the property will receive a basis step-up to fair market value at the time of the second death, provided the estate of the surviving spouse at the time of death is below the estate tax exemption.



Standard Deduction

The standard deduction for married couples who do not itemize deductions in 2004 is $9,700 up $200 over 2003. For single filers the standard deduction is $4,850, an increase of $100 from 2003. The personal exemption rises to $3,050.



Kiddie Tax

The standard deduction for a dependent child younger than 14 years with unearned income rises to $800 in 2004, up $50 from 2003. In other words, in 2004 dependents pay nothing on their first $800 in unearned income; the next $800 will be taxed at the child’s marginal rate (probably 5%) and anything over $1,600 will be taxed at the parent’s rate. Thus, shifting investment income to children may result in several hundred dollars of tax savings.



Big Pensions

The maximum payout from a defined benefit pension plan increases $5,000 to a total of $165,000.



Classroom Expenses

The $250 deduction for out-of-pocket classroom expenses for teachers, valid regardless of whether they itemized deductions or not, expired in 2003, but pundits look for this deduction to be renewed this year.





Home | Who We Are | What's New | Search | Contact Us | Subscribe

| [Tax Class] | [Hot Topics] | [Estate Planning] | [Employee Stock Options] | [Tax & Trust Scams] | [Foreign Taxes] | [Tax Columns] | [Tax Publications] | [Tax Hound] | [Interactive Apps] | [Cyber Surfing] |
All contents copyright © 1995-2004 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.