There are several important taxchanges that become effectivethis year. Make note of the followingchanges so that you can startyour income tax planning soon:
• Standard deductions. The standarddeduction has increased to $9700for married filers. If one of the marriedfilers is over age 65, the deductionincreases to $10,650. If both filers areover age 60, the deduction is $11,600.For single filers, the standard deductionis $4850. However, this deductionincreases to $6050 if you are over age 65.
• Personal exemptions. Personal exemptionsare now $3100 for you andeach of your dependents. Note: Whilethe income tax withholding tables havenot been changed for 2004, the incometax brackets are wider, based on 2.3%inflation in 2003.
• Long-term care. Long-term careinsurance premium deductibility increasesin 2004 as follows:
$3250 if you are age 71 or older
$2600 if you are age 61 to 70
$980 if you are age 51 to 60
$490 if you are age 41 to 50
$260 if you are age 40 or younger
These deductions are on a per personbasis. The limitation for distributions forlong-term care policies has increased to$230 per day.
• Medical insurance. Beginning in2004, you may be eligible to set up a taxadvantaged Health Savings Account(HSA). This plan allows you to make tax-deductiblecontributions in the amountof your health plan deductible to anaccount in your name that you control.The earnings on this account are notincludable as income, and distributionsfor medical expenses are not taxable. Toqualify, you must have a medical planwith a high deductible and a minimumof $2000 for family coverage and $1000for single coverage.
• Retirement plans. 401(k) investorscan contribute an additional $1000, for atotal of $13,000. If you are age 50 orolder, catch-up provisions allow you tocontribute a maximum of $16,000. Youcan contribute a maximum of $9000 intoa SIMPLE IRA; if you are age 50 or older,you can contribute an additional $1500.The maximum contribution for a definedcontribution plan has increased from$40,000 to $41,000. Contribution limitsfor Roth and traditional IRAs remainunchanged at $3000 and 3500 for peopleage 50 or older.
• Estate taxes. The estate tax exemptionis the amount you can leave someoneother than your spouse free ofestate taxes. The exemption limit hasbeen raised to $1,500,000 for 2004 and2005. The amount you can leave yourspouse continues to be unlimited.
There are other changes that maypresent planning opportunities for youthis year. Remember, the best way totake advantage of these income taxplanning opportunities is to get an earlystart and meet with your financial advisorin early 2004. The earlier you startplanning, the better.
Stewart H. Welch III, CFP®, AEP,founder of the Welch Group, hasbeen rated one of the nation's topfinancial advisors by Money andWorth. He welcomes questionsor comments from readers at800-709-7100 or www.welchgroup.com. Reprintedwith permission from the BirminghamPost Herald.