IRS Releases 2004 Inflation Adjustments and Tax Rate Tables

The IRS released inflation-adjusted items for 2004, including the tax rate tables for tax years beginning in 2004. The adjusted items include the standard deduction amounts, the personal exemption amounts, the adoption credit, the Hope and Lifetime Learning Credits, the low-income housing credit, the earned income credit, as well as other miscellaneous items.

Standard Deduction

The standard deduction amounts for 2004 are: $9,700 for married individuals filing jointly and surviving spouses; $7,150 for heads of household; $4,850 for unmarried individuals; and $4,850 for married individuals filing separately. The additional standard deduction amounts for taxpayers who are at least 65 years old or blind are $950 for each. These amounts are increased to $1,200 if the individual is also unmarried and not a surviving spouse. Finally, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $800 or the sum of $250 and the individual's earned income.

Overall Limitation on Itemized Deductions

For taxable years beginning in 2004, the applicable amount of adjusted gross income above which the amount of a taxpayer's otherwise allowable itemized deductions will begin to be phased out is $142,700 ($71,350 for a married individual filing separately).

Personal Exemption

The personal exemption amount for tax years beginning in 2004 is $3,100. For joint return filers and surviving spouses, the personal exemption amount begins to phase out when adjusted gross income reaches $214,050 and is completely phased out at $336,550. For heads of household, the phaseout begins at $178,350 and is complete at $300,850. For unmarried individuals (other than heads of households and surviving spouses), the phaseout begins at $142,700 and is complete at $265,200. For married individuals filing separately, the amounts are $107,025 and $168,275.

Kiddie Tax

For 2004, the amount used to reduce net unearned income on a child's return subject to the kiddie tax is $800 (which is the same amount as the standard deduction allowed to a taxpayer who can be claimed as a dependent by another taxpayer). The same $800 is also used for the determination of whether a parent may elect to include a child's gross income in the parent's gross income. In order for a parent to elect to include a child's income in his or her own gross income, the child's income in 2004 must be more than $800 but less than $8,000. The alternative minimum tax exemption for a child subject to the kiddie tax is the child's earned income plus $5,750.

Child Tax Credit

The value used in determining the amount of the child tax credit that may be refundable is $10,750.

Adoption Credit and Assistance Programs

For 2004, the maximum credit allowed for the adoption of a child is the amount of the qualified adoption expenses up to $10,390. The maximum credit allowed in the case of an adoption of a child with special needs is $10,390, regardless of the amount of expenses (if any) paid or incurred. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income in excess of $155,860, and is completely phased out for taxpayers with modified adjusted gross income of $195,860.

The maximum amount that an employer may exclude from an employee's gross income in connection with the adoption by the employee of a child with special needs is $10,390. The maximum amount that can be excluded from an employee's gross income for the amounts paid or expenses incurred by the employer for qualified adoption expenses furnished under an adoption assistance program in connection with other adoptions by the employee is $10,390. The amount excludable from the employee's gross income begins to phase out for taxpayers with modified adjusted gross income of $155,860, and is completely phased out for taxpayers with modified adjusted gross income of $195,860.

Hope and Lifetime Learning Credits

For purposes of the Hope and Lifetime Learning Credits, the modified gross income taken into account in determining the reduction of either credit is in excess of $42,000 ($85,000 in the case of a joint return). In addition, 100 percent of qualified tuition and related expenses not in excess of $1,000, and 50 percent of such expenses in excess of $1,000 are taken into account in determining the amount of the Hope Scholarship Credit.

Low-Income Housing Credit

For 2004, the amounts used to calculate the state housing credit ceiling for the low-income housing credit is the greater of: $1.80 multiplied by the state population; or $2,075,000.

Expensing of Depreciable Assets

For taxable years beginning in 2004, the aggregate cost of depreciable property a taxpayer can elect to expense cannot exceed $102,000. The $102,000 limitation is reduced on a dollar for dollar basis (but not below zero) to the extent that the total cost of eligible property placed in service during the year by the taxpayer exceeds $410,000.

Earned Income Credit

For 2004, the earned income amounts, i.e., the amounts of earned income at or above which the maximum amount of earned income is allowed, are: for taxpayers with one qualifying child, $7,660; for taxpayers with two or more qualifying children, $10,750; and for taxpayers with no qualifying children, $5,100. The maximum amount of the credit is $2,604 for taxpayers with one qualifying child; $4,300 for taxpayers with two or more qualifying children; and $390 for taxpayers with no qualifying children. The threshold phaseout amounts, i.e., the amounts of adjusted gross income (or, if greater, earned income) above which the maximum amount of the credit begins to phase out are: for taxpayers with one qualifying child, $14,040; for two or more children, $14,040; and for taxpayers with no children, $6,390. The amount at which the phaseout is complete, i.e., the completed phaseout amount, is $30,338 for one child; $34,458 for two or more children; and $11,490 for no children.

For married filing jointly taxpayers, the threshold phaseout amounts are: $15,040 for taxpayers with one qualifying child; $15,040 for taxpayers with two or more qualifying children; and $7,390 for taxpayers with no qualifying children. The completed threshold phaseout amount for married filing jointly taxpayers with one qualifying child is $31,338; two or more qualifying children is $35,458; and $12,490 for taxpayers with no qualifying children.

In addition, the earned income tax credit is denied if the aggregate amount of certain investment income exceeds $2,650 in 2004.

Qualified Transportation Fringe

The monthly limitation on the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $100. The monthly limitation on the exclusion for qualified parking is $195.

Interest on Education Loans

The $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified adjusted gross income exceeds $50,000 ($100,000 for joint returns), and is completely eliminated when modified adjusted gross income is $65,000 ($130,000 for joint returns).

Income from U.S. Savings Bonds

For 2004, the exclusion for income from U.S. savings bonds for taxpayers who pay qualified higher education expenses begins to phase out for taxpayers with modified adjusted gross income above $89,750 for joint returns and $59,850 for other returns. The exclusion is completely phased out at $119,750 for joint returns and $74,850 for other returns.

Long-Term Care Insurance Premiums

For 2004, the amount of long-term care premiums eligible to be deducted as medical care expenses is set at $260 for an individual age 40 or less at the close of the taxable year; $490 for an individual over age 40 but not over age 50; $980 for an individual over age 50 but not over age 60; $2,600 for an individual over age 60 but not over age 70; and $3,250 for an individual over age 70.

The dollar amount of the per diem limitation on periodic payments received under a qualified long-term care insurance contract or periodic payments that are treated as paid by reason of the death of a chronically ill individual is $230.

Medical Savings Accounts

A high-deductible health plan for self-only coverage is defined as one with an annual deductible of not less than $1,700 and not more than $2,600, and under which the annual out-of-pocket expenses (other than for premiums) do not exceed $3,450. A high-deductible health plan for family coverage is defined as one that has an annual deductible that is not less than $3,450, and not more than $5,150, and under which the annual out-of-pocket expenses (other than for premiums) do not exceed $6,300.

Annual Exclusion for Gifts

For 2004, the first $11,000 in gifts to any person is not included in the total amount of taxable gifts made during the year. The first $114,000 in gifts to a spouse who is not a U.S. citizen is not included in the total amount of taxable gifts. Recipients of gifts from foreign persons may have to report the gifts if the aggregate value of gifts received exceeds $12,097.

Miscellaneous Items

(1) For contracts entered into during calendar year 2004, a qualified funeral trust may not accept aggregate contributions by or for the benefit of an individual in excess of $8,000.

(2) For purposes of determining whether an individual's loss of citizenship had a principal purpose of avoiding tax, the thresholds are more than $124,000 in average annual net income tax and $622,000 or more in net worth.

(3) The aggregate decrease in the value of qualified real property under an election to use the special use valuation method cannot exceed $850,000.

(4) A federal tax lien is not valid against a purchaser of personal property in a casual sale for less than $1,180 or a mechanic's lienor that repaired or improved residential property for a price of no more than $5,890.

(5) The value of fuel, provisions, furniture, and other household personal effects exempt from levy may not exceed $7,040. The value of books and tools for the taxpayer's trade or business exempt from levy may not exceed $3,520.

(6) The dollar amount used to determine interest on estate tax payable in installments is $1,140,000.

(7) The attorney fee award limitation remains at $150 per hour for 2004.

(8) The $5, $25, and $50 guidelines for disregarding the value of insubstantial benefits received by a donor in return for a fully deductible charitable contribution are, in 2004, $8.20, $41, and $82, respectively.

2004 Tax Tables for Individuals

TABLE 1 – Married Filing Jointly & Surviving Spouses

If Taxable Income Is: The Tax Is:
--------------------- -----------
Not Over $14,300 10% of the taxable income

Over $14,300 but $1,430 plus 15% of
not over $58,100 excess over $14,300

Over $58,100 but $8,000 plus 25% of
not over $117,250 excess over $58,100

Over $117,250 but $22,787.50 plus 28% of
not over $178,650 excess over $117,250

Over $178,650 but $39,979.50 plus 33% of
not over $319,100 excess over $178,650

Over $319,100 $86,328 plus 35% of
excess over $319,100

TABLE 2 – Heads of Households

If Taxable Income Is: The Tax Is:
--------------------- -----------
Not Over $10,200 10% of the taxable income

Over $10,200 but $1,020 plus 15% of
not over $38,900 excess over $10,200

Over $38,900 but $5,325 plus 25% of
not over $100,500 the excess over $38,900

Over $100,500 but $20,725 plus 28% of
not over $162,700 the excess over $100,500

Over $162,700 but $38,141 plus 33% of
not over $319,100 the excess over $162,700

Over $319,100 $89,753 plus 35% of
the excess over $319,100

TABLE 3 – Single Individuals (not Surviving Spouses or Heads of Households)

If Taxable Income Is: The Tax Is:
--------------------- -----------
Not over $7,150 10% of the taxable income

Over $7,150 but $715 plus 15% of
not over $29,050 the excess over $7,150

Over $29,050 but $4,000 plus 25% of
not over $70,350 the excess over $29,050

Over $70,350 but $14,325 plus 28% of
not over $146,750 the excess over $70,350

Over $146,750 but $35,717 plus 33% of
not over $319,100 the excess over $146,750

Over $319,100 $92,592.50 plus 35% of
the excess over $319,100

TABLE 4 – Married Filing Separately

If Taxable Income Is: The Tax Is:
--------------------- -----------
Not Over $7,150 10% of the taxable income

Over $7,150 but $715 plus 15% of
not over $29,050 the excess over $7,150

Over $29,050 but $4,000 plus 25% of
not over $58,625 the excess over $29,050

Over $58,625 but $11,393.75 plus 28% of
not over $89,325 the excess over $58,625

Over $89,325 but $19,989.75 plus 33% of
not over $159,550 the excess over $89,325

Over $159,550 $43,164 plus 35% of
the excess over $159,550

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