Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year’s return. The credit is phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified AGI exceeding the following amounts: $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other taxpayers. A portion of the credit may be refundable.
Credit for Adoption Expenses: For 2004, adoption credit limitation is $10,390 of aggregate expenditures for each child, except credit for an adoption of a child with special needs is deemed to be $10,390 regardless of the amount of expenses. The credit ratably phases out for taxpayers whose income is between $155,860 and $195,860.
Hope Credit and Lifetime Learning Credit: The maximum HOPE credit is $1,500 (100% on the first $1,000, plus 50% of the next $1,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer’s spouse, or a dependent) who is enrolled on at least a half-time basis. The credit is available for only the first two years of the student’s post-secondary education.
The Lifetime Learning credit maximum in 2004 is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to acquire or improve job skills. As with the HOPE credit, eligible students include the taxpayer, the taxpayer’s spouse or a dependent.
For 2004, both the HOPE credit and the Lifetime Learning credit are phased out at modified AGI levels between $85,000 and $105,000 for joint filers, and between $42,000 and $52,000 for single taxpayers.
Coverdell Education Savings Account: Beginning in 2004, the aggregate annual contribution limit to a Coverdell education savings account is $2,000 per designated beneficiary of the account. The limit is phased out for individual contributors with modified AGI between $95,000 and $110,000 and joint filers with modified AGI between $190,000 and $220,000. The contributions to the account are nondeductible but the earnings grow tax-free.
Student Loan Interest: You may be eligible for an above-the-line deduction for student loan interest paid on any “qualified education loan”. The maximum deduction is $2,500 in 2004. The deduction is phased out at a modified AGI level between $100,000 and $130,000 for joint filers in 2004, and between $50,000 and $65,000 for individual taxpayers.
Qualified Higher Education Expenses: For 2004, you also may be eligible to deduct qualified tuition and related expenses as an above-the-line deduction. In 2004, a taxpayer with modified AGI of not more than $65,000 ($130,000 for a married couple filing jointly) who is not claimed as a dependent on another person’s return is entitled to a maximum deduction of $4,000. For taxpayers with modified AGI of $65,000 or more but not more than $80,000 ($130,000/$160,000 for a married couple filing jointly), the maximum deduction is $2,000.
Rules in effect to coordinate education provisions, such as the qualified higher education expense deduction, the HOPE and Lifetime Learning credits, Coverdell education savings accounts, and qualified tuition plans, to prevent double benefits.
Source: BNA

NEW JERSEY DEVELOPMENTS

The unemployment insurance taxable wage base increases to $24,900 in 2005 (same for Temporary Disability Insurance). The unemployment insurance weekly benefit rate for temporary disability insurance increase to $470.
Under the unemployment compensation law, employers are required to pay a $3 surcharge for each employee to cover medical malpractice costs, effective June 2004 (retroactive to 2003). The $3 surcharge is an annual assessment to be remitted to the unemployment compensation fund for newly established Medical Malpractice Liability Insurance Premium Assistance Fund. Employers have the option of treating the surcharge as a payroll deduction to each covered employee. For more information, call the state’s Division of Accounting at (609) 292-7397.
Source: Research Recommendation

MAIL CALL

Pyramid Effect of Employer Paid FICA
Q. Since my business has grown, I recently changed from being a self-employed to a corporate structure. Now I have to pay FICA out of my paychecks. Can I have my company pay this for me?
A. Yes, but you’ll gain no tax benefit for this technique. That’s because the FICA tax payment made by your company will be treated as additional taxable compensation paid to you. In other words, you’ll face a pyramid effect because the tax on the tax is also compensation.
NOTE: The FICA withholding tax rate is 7.65% on wages above that amount. Your company must match the FICA tax amounts withheld from your wages.

IRAs Aren’t Protected From Creditors
Q. I shifted money from my 401(K) into a regular IRA. Is this money protected from creditors by the federal government?
A. No. Unlike 401(k) plans and other qualified plans, IRA’s aren’t afforded any protection from creditors under federal law. Individual states typically offer some level of protection, but it can vary widely. For instance, certain states only protect IRA contributions that are tax deductible and a few jurisdictions (New Mexico, Washington, DC and Wyoming) have no provisions.
TIP: If this is a primary concern, you might roll over the IRA funds into a qualified plan where you currently work.

Deducting Spouse’s Travel Expenses
Q. Business owners can’t deduct the expenses of spouses who accompany them on a business trip. However, what if I hire my spouse temporarily as an employee and deduct the expenses that way?
A. That would work, if you meet certain requirements. To qualify for deductions, your spouse must (1) be a bona fide business employee of the company (2) be traveling for bona fide business purpose and (3) incur expenses that are normally deductible as business expenses.
TIP: It strengthens your position if your spouse is a regular employee of the company rather than someone hired to assist you only when you take business trips.
Source: Research Recommendations

Avoid Tax On Up To $500,000 In Gains

With a simple election on your tax return, you can exclude from taxable income up to $250,000 of gain from your home sale (up to $500,000 if you’re married and file a joint return). To qualify for this tax exclusion, you must have owned your home and used it as your principal residence for at least two of the five years prior to sale (this is called the “ownership” and “use” test).
Best of all, this is not a one-time opportunity; you can keep reaping high tax-free home-sale gains on each sale. Your only limitation: The exclusion doesn’t apply if you sold another principal residence within the past two years. So, theoretically, you could qualify for the home-sale exclusion every two years.
Full exclusion: the fine print
Joint return hurdles. If you file a joint return, you can claim the maximum exclusion if (1) either spouse meets the two-year ownership test, (2) each spouse meets the two year use test, and (3) neither spouse has used the home sale exclusion within the past two years. This is particularly important if you’ve recently divorced or remarried.
The ‘Use” test. To meet the “use” requirement, you must physically occupy the home for two years. But short absences won’t count against you. On the other hand, you’re not able to count longer absences, such as one year sabbatical by a college professor, as time you’ve lived in your principal residence.
What’s a “principal” residence? Remember, you can earn the tax exclusion only on your principal residence. If you own two homes and live in both during the year, the home where you stay for most of the year is generally treated as your “principal” residence.
You can “own” and “use” in different years. The law says you must own and use the home for any two of the previous five years. But those two years don’t need to be consecutive. You can meet the “use” and “ownership” requirements in different tax years.
For instance, if you own an apartment that’s going condo, you can rent out the place and sell it as your principal residence, even if you don’t live there anymore. If you lived in the apartment for 3 years before the conversion and if you remain the legal owner for the next 2 years, you still qualify.
Recapturing depreciation. If you’ve used the home for rental or business use-including using a portion of the residence as a home office-you must recapture depreciation deductions attributable to regular excess depreciation taken over straight line depreciation.
Source: Research Recommendations

 Caution  Do not adopt any of our recommendations without consulting a tax professional

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