Changes to the Tax Code for Your 2004 and 2005 Taxes
The following changes apply to your 2004 tax returns, which must be filed by April 15th, 2005.
- More people now qualify to file their taxes on Form 1040EZ or 1040A (the "short forms"). People who make less than $100,000 in total income can now file their taxes using Form 1040-EZ or 1040-A. Previously, you had to use Form 1040 (the "long form") if you had income over $50,000.
This change makes it easier for more people to prepare their own taxes. These forms are easier to fill out, and take less time to prepare than the 1040.
- The standard mileage rate for 2004 has increased to 37.5 cents per mile for business mileage. Rates also increased for medical mileage (14 cents per mile) and for moving expenses (also 14 cents per mile).
You can claim mileage if you drive your car for business purposes and have other business expenses that your employer did not reimburse you for.
- The maximum amount you can contribute to a 401(k) plan, or other salary reduction retirement plan, has increased to $13,000.
- You can now deduct contributions to a Health Savings Account (HSA). You do not need to itemize in order to claim this deduction. Health Savings Accounts are a new form of health insurance, similar to the Archer Medical Savings Accounts. Amounts you set aside in your health savings account grow tax-free and can be withdrawn tax-free for medical expenses.
- The maximum deduction for buying a clean-fuel vehicle has been left intact. The clean-fuel vehicle deduction was scheduled to be reduced by 25% for 2004. If you are self-employed and bought a clean-fuel vehicle for your business, you can claim this deduction on your Schedule C. If you bought an electric vehicle for personal use, such as one of the new hybrid cars, you instead can take a tax credit.
- If you are a teacher, you can continue to deduct up to $250 in expenses for your classroom as an "Educator Expense," on Form 1040, Page 1, Line 23, or Form 1040A, line 16. This deduction was set to expire, but has been extended until 2005.
- You can choose to include combat pay for calculating your Earned Income Credit, even if you choose to exclude combat pay from your taxable income.
- You can choose to deduct sales tax you paid as an itemized deduction. If you are eligible to itemize, you can deduct the higher of your state and local income taxes, or sales taxes you paid. You will need to keep excellent records of your purchases, just in case the IRS audits your tax return.
- If someone else pays your student loans, you may still be able to deduct the interest paid on your tax return. The student loan interest deduction is claimed on Form 1040, page 1, line 26. You do not need to itemize in order to claim this deduction.
- The tuition and fees deduction has increased to $4,000. The Tuition and Fees Deduction is one of three tax-benefits for education expenses. The tuition deduction is found on Form 1040, page 1, line 27. You do not need to itemize in order to claim this deduction.
- The income limits for claiming the Hope and Lifetime Learning tax credits have increased. The Hope Credit and Lifetime Learning Credits are the other two tax-benefits for education expenses. You are eligible to claim these credits if you had college expenses and your income was under $52,000.
- The adoption tax credit has increased to $10,390. The adoption credit is based on expenses you paid to adopt a child. The adoption credit is calculated on Form 8839 and reported on Form 1040, page 2, line 52.
- The Standard Deduction is now:
- $4,850 for Single or Married Filing Separately individuals,
- $9,700 for Married Filing Jointly and Qualifying Widow, and
- $7,150 for Head of Household.
- The maximum amount of wages subject to Social Security tax is now $87,900.
Looking Ahead to 2005
(for tax returns due by April 15, 2006):
- The Standard Mileage Rate for business miles will be 40 cents per mile.
- The limit for 401(k) contributions will be $14,000.
- The limit for IRA contributions will be $4,000.
- The definition of a "child" will change. There will be a single, uniform definition of a child. This will impact people who claim Dependents, who file as Head of Household, who claim the Earned Income Credit, the Child Tax Credit, and the Child and Dependent Care Credit.