Tax Law Changes for Individuals

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 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 phase out begins depends on your filing status. For 2004, the phase out 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:

A higher annual deductible than typical health plans, and
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.

Type of coverage	Minimum annual deductible	Sum of maximum annual deductible and annual out-of-pocket expenses *
Self-only	$1,000	$5,000
Family	$2,000	$10,000
* This limit does not apply if the plan uses a network of providers.

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.

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.

For more information on Business meal expenses, Travel, Entertainment, Gift, and Car Expenses Reimbursements for employee meal expenses contact us at 212-876-2341

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.

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).

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

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.

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 can be explain in detail by contacting us at 212-876-2341