The Cutting Edge™ - November 2003
Public Policy
Tax PlanningBy John Satagaj, WMMA Legislative Counsel (email@jsatlaw.com)
Truth be told, I am sitting here waiting for Congress to provide me the answer to the question of whether it will give you some additional tax relief and perhaps encourage some of your customers to stay put here in the U.S. I am talking about the replacement tax breaks for the repeal of the Extraterritorial Income exclusion. WMMA, through the coalition to which it belongs – the Small Business Legislative Council - has been working real hard for Congress to help domestic production manufacturers with income tax relief and other items such as more direct expensing relief. It is looking good, but you never know in Washington. In the meantime, deadlines wait for no man, so let me take the opportunity to note some tax planning tips for 2004 that you can count on while we are waiting for Congress to make up its mind.
The InternalRevenue Service has released the optional standard mileage rates to use for 2004 in computing the deductible costs of operating an automobile for business, charitable, medical or moving purposes. To reduce a recordkeeping burden, the IRS also announced that taxpayers who use no more than four vehicles at the same time for business purposes may use the standard mileage rate, starting in 2004. Currently, those using more than one vehicle at a time cannot use the standard rate at all, leaving them to track the actual expenses for each vehicle.
Beginning January 1, 2004, the standard mileage rates for the use of a car (including vans, pickups, or panel trucks) will be:
- 37.5 cents a mile for all business miles driven, up from 36 cents a mile in 2003;
- 14 cents a mile when computing deductible medical or moving expenses, up from 12 cents a mile in 2003; and
- 14 cents a mile when giving services to a charitable organization.
The Internal Revenue Service has announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2004. Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost?of?living increases. Many of the pension plan limitations will change for 2004. For most of the limitations, the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Furthermore, several limitations, set by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to increase at the beginning of 2004.
Effective January 1, 2004, the limitation on the annual benefit under a defined benefit plan is increased from $160,000 to $165,000. For participants who separated from service before January 1, 2004, the limitation for defined benefit plans is computed by multiplying the participant's compensation limitation, as adjusted through 2003, by 1.0220.
The limitation for defined contribution plans is increased from $40,000 to $41,000. The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as this dollar limitation. These dollar amounts and the adjusted amounts are as follows: the annual compensation limit is increased from $200,000 to $205,000. The dollar limitation concerning the definition of key employee in a top-heavy plan remains unchanged at $130,000. The limitation used in the definition of highly compensated employee remains unchanged at $90,000. The compensation amount regarding simplified employee pensions (SEPs) remains unchanged at $450. The compensation amounts of the Income Tax Regulations concerning the definition of "control employee" for fringe benefit valuation purposes remains unchanged at $80,000.
The Code, as amended by the Economic Growth and Tax Relief Act of 2001 (EGTRRA), specifies the applicable dollar amount for a particular year for certain limitations. These applicable dollar amounts are as follows: the limitation on the exclusion for elective deferrals is increased from $12,000 to $13,000; the limitation regarding SIMPLE retirement accounts is increased from $8,000 to $9,000; and, the dollar limitation for catch-up contributions to an applicable employer plan for individuals aged 50 or over is increased from $2,000 to $3,000 or from $1,000 to $1,500, depending on the nature of the plan.
The Social Security Administration (SSA) has announced the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $87,900 for 2004 from $87,000 in 2003. Of the estimated 156 million workers who will pay Social Security taxes in 2004, about 9.2 million will pay higher taxes as a result of the increase in the taxable maximum in 2004.
Monthly Social Security and Supplemental Security Income benefits for more than 51 million Americans will increase 2.1 percent in 2004. Social Security and Supplemental Security Income benefits increase automatically each year based on the rise in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year. This year's increase in the CPI-W was 2.1 percent. The 2.1 percent Cost-of-Living Adjustment (COLA) will begin with benefits that 47 million Social Security beneficiaries receive in January 2004. Increased pay-ments to seven million Supplemental Security Income beneficiaries will begin on December 31.
The retirement earnings test exempt amount, if the individual is under full retirement age in 2003, was $11,520/year ($960/month). In 2004 it will be $11,640/year ($970/month): One dollar in benefits will be withheld for every $2 in earnings above the limit. If the individual reaches full retirement age in 2003 it was $30,720/year ($2,560/month). In 2004 it will be $31,080/year ($2,590/month). For these individuals, the rule applies only to earnings for months prior to attaining full retirement age and one dollar in benefits will be withheld for every $3 in earnings above the limit. There is no limit on earnings beginning the month an individual attains full retirement age.
For last month’s
article, “Health Care Costs and Solutions,” click here.
