Changes to 2004 Federal, Wisconsin Tax Returns

The accounting firm of Wegner LLP is pleased to provide this update of tax changes for 2004. This article hits only the high spots. Your particular situation may require the counsel of a tax professional.

By John Gillis, CPA

In the past three months, President Bush signed two significant tax bills: The Working Families Tax Relief Act of 2004 and The American Jobs Creation Act of 2004, which substantially modified the Internal Revenue Code. This article can only address the most salient changes from 2003 to 2004.

Federal Form 1040:
Line 23. Educator expenses – This deduction was extended for 2004. If you were an eligible educator in 2004, you can deduct up to $250 of qualified expenses for books and other classroom supplies that you paid in 2004. If you and your spouse file jointly and both of you are eligible educators, the maximum deduction is $500.

Line 24. Deductibility of certain business expenses of reservists, performing artists, and fee-basis government officials are now deductible. The following expenses are deductible when arriving at adjusted gross income and are reported on new line 24: (1) certain business expenses of National Guard and reserve members who traveled more than 100 miles from home to perform services as a National Guard or reserve member; (2) performing arts-related expenses for a qualified performing artist; and (3) business expenses of certain state or local government officials.

Line 25. IRA deductions – The adjusted gross income (AGI) phaseout ranges for making deductible contributions to regular IRAs by taxpayers who are active participants in an employer-sponsored retirement plan are higher for 2004. The phase-out range is $65,000 to $75,000 for joint return filers and $45,000 to $55,000 for single taxpayers.

Line 27. Tuition and fees deduction – Taxpayers may be able to deduct up to $4,000 on Line 27 if their AGI is not more than $65,000 ($130,000 if married filing jointly), or deduct up to $2,000 if their AGI is higher than that limit but not more than $80,000 ($160,000 if married filing jointly).

Line 35. Expenses for unlawful discrimination claims – Taxpayers may be able to take a deduction on line 35 of Form 1040 for attorney fees and court costs paid after October 22, 2004, for actions settled or decided after that date involving a claim of unlawful discrimination, a claim against the U.S. government, or a claim made under section 1862(b)(3)(A) of the Social Security Act, but only up to the amount included in gross income in 2004 from such claim.

Line 38. Health savings account (HSA) deduction – Eligible taxpayers can take a deduction, if contributions (other than employer contributions) were made to their HSAs for 2004, on Line 38 and by attaching Form 8889.

Line 39. Standard deduction - For 2004, the standard deduction is $4,850, for single filers, $4,850 for married persons filing separately, $9,700 for joint filers and qualifying widow(er)s, and $7,150 for heads of household.

Line 41. Personal exemption - The exemption amount for 2004 is $3,100. Exemptions phase out if adjusted gross income exceeds: $142,700 for single filers, $107,025 for married persons filing separately, $214,050 for joint filers and qualifying widow(er)s, and $178,350 for heads of household.

Line 49. Education credits - Availability of the Hope Credit and Lifetime Learning Credit phases out ratably for taxpayers with modified AGI of $42,000 to $52,000 ($85,000 to $105,000 for joint return filers).

Line 52. Adoption credit - The maximum adoption credit is higher ($10,390) and phases out when modified AGI exceeds $155,860.

Line 57. Self-employment tax - The maximum amount of self-employment income subject to FICA tax is $87,900. There is no ceiling on the Medicare tax wage base.

Line 65. Earned income credit (EIC) - For 2004, taxpayers may be able to take the EIC if: (1) a child lived with them and they earned less than $34,458 ($35,458 if married filing jointly), or (2) a child didn’t live with them and they earned less than $11,490 ($12,490 if married filing jointly).

Line 66. Excess Social Security and RRTA tax withheld - The maximum Social Security (OASDI) tax for 2004 is $5,450 (computed on the first $87,900 of wages) for purposes of the credit for excess tax withheld.

Line 67. Child tax credit expanded - For 2004 and thereafter, the child tax credit refundability percentage is increased to 15% of earned income that exceeds $10,750 (other rules may apply for taxpayers with three or more qualifying children).

Schedule A Itemized Deductions
Line 5. Sales tax deduction - For tax years beginning in 2004 and 2005, taxpayers can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A of Form 1040. Generally, taxpayers can use either their actual expenses or the Optional State Sales Tax Tables to figure their state and local general sales tax deduction. The 2004 instructions to Schedule A say the State Sales Tax Tables are in IRS Publication 600. If the State Sales Tax Tables are used, taxpayers can add to the table amount any state and local general sales tax they paid on motor vehicles, boats, and any other item not specified in Publication 600, which has not yet been released.

Line 20. Unreimbursed employee business expenses - For 2004, the standard mileage rate for business travel is 37.5¢ cents a mile.

Line 28. Total itemized deductions - Adjusted gross income over $142,700 ($71,350 if married filing separately) triggers a reduction in itemized deductions.

Changes to Wisconsin tax returns

For 2003, the Wisconsin return contains new income adjustments, credits and a new taxpayer donation for breast cancer research.

Subtraction for Costs Related to Organ Donation
An individual may subtract up to $10,000 from federal AGI to arrive at Wisconsin taxable income to recover travel expenses and lost wages resulting from the donation of one or more of his or his dependent’s organs for the purpose of human transplantation.

Subtraction for Certain Military Pay Received by Reservists
An individual may subtract any amount of basic, special and incentive pay from federal AGI to arrive at Wisconsin taxable income if that pay is: 1) received from the federal government; 2) received after being called into active service by the U.S. Defense Department; and 3) paid to the person for his or her period of active duty.

Subtraction for College Savings Expanded
The subtraction for up to $3,000 of the amount paid into a Wisconsin college savings account will now include amounts paid if the beneficiary is the claimant’s great-grandchild, niece, or nephew. Previously the beneficiary had to be either the claimant’s child or grandchild.

Addition of Educator Expenses Deducted on The Federal 1040 Return
For 2004, Wisconsin now requires educators to add back any deduction taken on their on Line 23 of their Federal 1040 return for classroom expenses to arrive at Wisconsin taxable income.

Dairy Investment and Angel Investment Credits
These new credits are available for investments in dairy farms and qualifying new businesses. Great care should be taken in reading the state’s rules concerning eligibility and computation of these credits.

Donations to Breast Cancer Research Program
Taxpayers may reduce their tax refund or increase their tax liability by making a voluntary contribution for breast cancer research. These funds will be ultimately channeled to research programs at the University of Wisconsin and the Medical College of Wisconsin.

Posted November 19, 2004