Tax Credits
Retirement Savings Contribution Credit - up to $1,000
Child Tax Credit - up to $1,000 for each dependent child.
Advance Child Credit
Higher Education Tax Credits - HOPE or Lifetime Learning Credit
IRA and other Savings Plans
Education IRA - up to $2,000 per year per child tax-deferred earnings
Roth IRA - earnings and distributions tax-free
Traditional IRA - double the maximum deduction if married
SIMPLE IRA - New contribution limits
Flexibility - flexible IRA withdrawal rules
Portability - moving your retirement assets
Minimum Required Distribution at age 70½
IRA Recharacterization - what does it mean?
401(k), 403(b) and 457 Plans - New contribution limits
Student Loans and State Tuition Plans
Deductions - deduct up to $3,000 interest
State Tuition Plans - tax-free
Deductions
Standard Automobile Mileage Rates - for 2004
The IRS Wants to Help
Taxpayer Advocate Service - Phone for assistance.
- Tax Bracket Changes
- The 10% bracket has been extended up to higher incomes. At the new top of the range a single taxpayer saves $50; a couple filing jointly saves $100.
- The higher brackets enjoy lower rates:
The 27% bracket is now 25%
The 30% bracket is now 28%
The 35% bracket is now 33%
The 38.6% bracket is now 35%- The expanded 10% bracket rules are good for 2003 and 2004.
The reduced upper tax brackets are to remain effective through 2010.
Congress may change the rules at any time.- The "Marriage Penalty" has been relieved.
- The standard deduction for a couple filing jointly has been increased to $9.500, which is double the deduction for a single taxpayer. It had been only $7,950 previously.
- The 15% tax bracket has been extended up to higher incomes for marrieds.
- The Marriage Pentalty relief is in the law for 2003 and 2004. Congress may change the rules at any time.
- Child Tax Credit increased from $600 to $1,000 per child. The credit begins to phase out for singles with adjusted gross income (AGI) of $75,000; marrieds at $110,000. This is also in the law for 2003 and 2004. Congress may change the rules at any time.
- Qualifying Dividends and Capital Gains are taxed at 15%, a lower rate. Taxpayers in the 10% and 15% brackets are taxed at only 5%, and beginning in 2008 are to pay no dividend or capital gains tax. The reduced rates are to be in effect through 2010. Congress may change the rules at any time.
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Retirement Savings Contribution Credit - up to $1,000
If you made contributions to a qualified retirement plan, a Roth or Traditional IRA,
a 501(c)(18) plan, or made elctive deferrals to a 401(k), 403(b), 457, SEP, or SIMPLE plan, you may have a tax credit.
You must not be under age 18 or a student at the end of the tax year.
Adjusted Gross
IncomeHead of
HouseholdMarried
Filing JointlyCredit
RateMaximum
Credit0-$15,000 0-$22,500 0-$30,000 50% $1,000 $15,001-$16,250 $22,501-$24,375 $30,001-$32,500 20% $400 $16,251-$25,000 $24,376-$37,500 $32,501-$50,000 10% $200 over $25,000 over $37,500 over $50,000 0% $0 Go back to the list of Tax Tips
Take Credit For Higher Education
HOPE Credit
for undergraduates.
Up to $1,500 per student per year.
HOPE Credit applies only for the first two years of post-secondary education - such as college or vocational school. It does not apply to graduate and professional level programs.
You're allowed 100% of the first $1,000 of qualified tuition and related fees paid during the tax year plus 50% of the next $1,000-for a maximum credit of $1,500 per eligible student per year. The student must be enrolled at least half-time.
This applies to expenses paid after 12/31/97 for academic periods beginning after that date.
The HOPE Credit is not allowed for a student convicted of a felony drug offense. See qualifications below.
Lifetime Learning Credit
for graduate or undergraduate study.
Up to $1,000 per year.The Lifetime Learning Credit applies to graduate level and professional degree courses, as well as undergraduate courses, including instruction to acquire or improve job skills.
If you qualify, your credit equals 20% of the post-secondary tuition and fees you pay during the year - limited to a maximum credit of $1,000 per year.
Note: in the year 2003 the maximum Lifetime Learning Credit will increase to $2,000 per year.
The Lifetime Learning Credit can be used for an unlimited number of years - starting with expenses paid after 6/30/98 for academic periods beginning after that date. See qualifications below.
Qualifications for either credit:
You must pay post-secondary tuition and fees for yourself, your spouse, or your dependent. The credit may be claimed by the parent or the student, but not both. However, if the student is claimed as a dependent the student may not claim the credit.These credits are phased out for Modified Adjusted Gross Income (MAGI) above $40,000 ($80,000 for married filing jointly) and eliminated completely for Modified AGI over $50,000 ($100,000 for married filing jointly). If the taxpayer is married, the credit may be claimed only on a joint return.
You can't take both credits at once.
You cannot claim both the HOPE and Lifetime Learning Credits for the same student in the same year.Go back to the list of Tax Tips
The Education IRA (Coverdell Education Savings Account)
You can contribute up to $2,000 a year per child until the child turns 18. This is a non-deductible contribution. Eligibility to contribute is phased out between adjusted gross income (AGI) of $95,000 to $110,000 for single taxpayers; $190,000 to $220,000 for married filing jointly. See Publication 17.Your earnings will grow tax-deferred, just as they would from any other IRA. Later, withdrawals can be made tax-free to the extent that they are not more than the child's qualified education expenses including tuition, books, room, and board.
Special rules for traditional IRAs.
If you use the funds to pay for qualified higher education expenses for yourself, your spouse, child, or grandchild, you can make an early withdrawal from your IRA without paying the usual 10% additional tax on early withdrawals.Go back to the list of Tax Tips
Student Loan Interest Deduction - up to $3,000
Even if you don't itemize deductions you may be able to deduct up to $3,000.
This deduction phases out for taxpayers with a Modified Adjusted Gross Income (MAGI) of $50,000 to $65,000 if single, or $100,000 to $130,000 if married filing jointly.
State Tuition Plans - withdrawals tax-free.
Qualified State Tuition Plan (529 plan) withdrawals are tax-free providing the withdrawals pay for qualified education expenses.
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The Child Tax Credit-Up To $1,000 Per Child
This is a full, dollar-for-dollar credit that can cut your federal income tax
by up to $1,000 per qualifying child.
One child can mean up to a $1,000 credit. Two children, up to $2,000. And so on.Who qualifies for the $1,000 credit?
Your dependent child or descendant, stepchild, or foster child for whom you can claim a dependency exemption. The child must be under 17 on December 31, and must be a U.S. citizen or resident.Do you have three or more children?
For three or more qualifying children special rules apply. If your Child Tax Credit was limited you may be entitled to an additional Child Tax Credit. For more information see Form 8812.Are there income restrictions? Your total Child Tax Credit is reduced by $50 for each $1,000 that your Modified Adjusted Gross Income exceeds $110,000 for joint filers; $75,000 if single, head of household, or qualifying widow(er); or $55,000 if married filing separately.
How do you claim this credit? Figure your credit using the worksheet in Form 1040 or 1040A instructions. Then enter it on Line 49 of your Form 1040. For more information see Publication 17, Your Federal Income Tax, Child Tax Credit, Claiming The Credit.
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Advance Child Credit for 2003
During the summer of 2003 nearly 24 million taxpayers received an Advance Child Tax Credit of up to $400 per child, because the credit was increased to $1,000 per child from $600 per child. People got part of their Child Tax Credit in advance this summer, so they must subtract that amount when figuring the credit when they complete their 2003 taxes.
Taxpayers should have kept their IRS letter (Notice 1319) that notified them of the amount of the credit they were to receive. Forgot the advance payment amount? Check IRS.gov under the “Individuals” section for the online tool, “Where’s My Advance Child Tax Credit?”
Also, taxpayers who do not receive an Advance Child Tax Credit check by Dec. 31 may claim the increased credit on their 2003 tax return.
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You Don't Pay Tax On A Roth IRA.
You don't pay tax on the gains, dividends, or interest that build up in a Roth IRA. The main feature of the Roth IRA is that you don't pay income tax when you withdraw the money. But generally, you must be 59 ½ and the withdrawal of savings and gains must not be made until after the fifth year, beginning with the year of your first contribution. However, you may be able to withdraw without penalty for a qualified purpose. See Publication 590.
A contribution to a Roth IRA is not deductible from income tax. But it is an excellent choice for building up funds for retirement, tax-free. You may also choose a Roth IRA if you don't qualify for a deduction in a traditional IRA. Participation in an employer's retirement plan does not affect your eligibility for a Roth IRA.
Maximum Contribution Limits
(double if married filing jointly):
Year Maximum
ContributionIf Age 50
or Older2003-4 $3,000 $3,500 2005 $4,000 $4,500 2006-7 $4,000 $5,000 2008 $5,000 $6,000 You may be able to convert funds to a Roth IRA from a traditional IRA to save taxes on future interest. The taxable amount withdrawn from your traditional IRA must be reported as taxable income for the year you convert it. However, you don't pay the 10% additional tax on the early withdrawal. This conversion is not allowed if your Modified Adjusted Gross Income (MAGI) is over $100,000, or your filing status is married filing separately.
Notes:
- You can still roll over money from an employer's qualified retirement plan to a traditional IRA but you cannot roll it over directly to a Roth IRA.
- The maximum Roth IRA contribution is allowed for individuals of any age with taxable compensation (earned income), but phases out with increased Modified Adjusted Gross Income (MAGI). The maximum contribution phase-out applies to MAGI from $150,000 to $160,000 for married filing jointly; or $95,000 to $110,000 for a single taxpayer, head of household, or married filing separately (if you did not live with your spouse at any time during the year). For married individuals filing separately, who lived together during the year, the phase-out is from $0 to $10,000.
- A Roth IRA - unlike a traditional IRA - has no rule requiring minimum distributions after the taxpayer reaches age 70 ½.
- Total contributions to all traditional and Roth IRAs, other than employer contributions, cannot exceed the maximum contribution amount listed above per taxpayer per year.
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Traditional IRAs are your choice for immediate tax savings.
Traditional IRAs allow you to deduct the contribution the year you contribute. This is a good IRA choice if your tax bracket at redemption will be lower than at the time of the contribution. If you are covered by an employer's retirement plan, deductibilty is determined by your modified adjusted gross income (MAGI). See Notes below.
Maximum Contribution Limits
(double if married filing jointly):Deduction begins to phase-out for"active
participants"in a retirement plan (see Notes)Year Maximum
ContributionIf Age 50
or OlderYear MAGI - Single
TaxpayerMAGI - Married
filing jointly2003 $3,000 $3,500 2003 $40,000 $60,000 2004 $3,000 $3,500 2004 $45,000 $65,000 2005 $4,000 $4,500 2005 $50,000 $70,000 2006 $4,000 $5,000 2006 $50,000 $75,000 2007 $4,000 $5,000 2007 $50,000 $80,000 2008 $5,000 $6,000 Taxes on the contribution and its earnings are deferred until withdrawal - usually after retirement. Then you generally are taxed on the amount withdrawn at your retirement tax rate. A 10% tax penalty applies to withdrawals before age 59 ½ unless for a qualified purpose. See Publication 590.
But at age 70 ½ you may not contribute further, and must begin yearly withdrawals.
See the table for the minimum required redemption, based on your life expectancy and that of your wife or other beneficiary.
Notes:
- Total contributions to all traditional and Roth IRAs, other than employer contributions, cannot exceed the maximum contribution amount listed above per taxpayer per year.
- You can still roll over money from an employer's qualified retirement plan to a traditional IRA.
- For the years shown above, the phase-out range is $10,000. MAGI is defined as Adjusted Gross Income (AGI) but modified (changed) by figuring it without taking into account any IRA deduction, student loan interest deduction, or certain other exclusions. See IRS Publication 590.
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IRA Flexibility
You can withdraw up to $10,000 from a traditional or Roth IRA to buy a first home.
You won't be charged the 10% additional tax on early withdrawal if you use the money within 120 days to buy, build, or rebuild a first home. To qualify, the purchase may be for you or your spouse, or either one's children, grandchildren, parents, or grandparents.You can also withdraw funds from a traditional or Roth IRA for certain educational expenses.
You won't be charged the 10% additional tax on early withdrawal if the amount does not exceed the allowable qualified higher education expenses for you or your spouse, or either one's children or grandchildren.For traditional IRAs the taxable portion of these withdrawals must still be reported as income for the year.
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You can move money from one tax-deferred retirement account to another when you change jobs. Assets in a 401(k), 403(b), 457, or a Keogh plan can be rolled over into a 401(k), 403(b) or a traditional IRA.
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You may correct certain contributions to Traditional or Roth IRAs into the other type.
The IRA must be transferred directly from trustee to trustee.
The IRS calls these recharacterized contributions. Report them on Form 8606.Go back to the list of Tax Tips
Contribution Limits for SIMPLE IRA Plans
Tax
YearMaximum
ContributionIf Age 50
or Older2003 $8,000 $9,000 2004 $9,000 $10,500 2005 $10,000 $12,000 2006 $10,000 $12,500 Go back to the list of Tax Tips
Contribution Limits for 401(k), 403(b) and 457 Plans
Tax
YearMaximum
ContributionIf Age 50
or Older2003 $12,000 $14,000 2004 $13,000 $16,000 2005 $14,000 $18,000 2006 $15,000 $20,000 Go back to the list of Tax Tips
Minimum Required Distribution Beginning at Age 70½
(Applies to Traditional IRAs, 401(k), 403(b), 457, Keogh, profit sharing,
and other tax-deferred retirement plans, but not to Roth IRAs).The amount of the Minimum Required Distribution (MRD) each year is your total tax-deferred savings plan balance on Dec 31 of the previous year, divided by the divisor for your age on your birthday during the tax year.
Age Divisor Age Divisor Age Divisor Age Divisor 70 26.2 82 16.0 94 8.3 106 3.8 71 25.3 83 15.3 95 7.8 107 3.6 72 24.4 84 14.5 96 7.3 108 3.3 73 23.5 85 13.8 97 6.9 109 3.1 74 22.7 86 13.1 98 6.5 110 2.8 75 21.8 87 12.4 99 6.1 111 2.6 76 20.9 88 11.8 100 5.7 112 2.4 77 20.1 89 11.1 101 5.3 113 2.2 78 19.2 90 10.5 102 5.0 114 2.0 79 18.4 91 9.9 103 4.7 older 2.8 80 17.6 92 9.4 104 4.4 81 16.8 93 8.8 105 4.1
Tip: If your spouse is more than 10 years younger than you,
Publication 590 offers a more favorable divisor table.Go back to the list of Tax Tips
Standard Automobile Mileage Rates
Beginning Jan. 1, 2004, the standard mileage rates for the use of a car (including vans, pickups, or panel trucks) will be:
- 37.5 cents a mile for all business miles driven, up from 36 cents a mile in 2003;
- 14 cents a mile when computing deductible medical or moving expenses, up from 12 cents a mile in 2003; and
- 14 cents a mile when giving services to a charitable organization.
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Anyone may telephone for assistance with tax problems.
The IRS provides a Taxpayer Advocate Service -
Phone (877) 777-4478 toll free or TTY/TTD: 1-800-829-4059.Call, write or visit the local taxpayer advocate office for your state. A list of Taxpayer Advocate Service offices may be found in Publication 1546, The Taxpayer Advocate Service of the IRS, which may be downloaded and printed.
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2/1/04