More tax relief is on the way.
Each year, the government adjusts tax brackets to account for inflation. That means some key 2004 provisions, from income thresholds to the size of the standard deduction, will change. While most of the adjustments won’t be large because inflation has remained low, an early look at the 2004 numbers can be helpful in year-end and long-term tax planning.
The Internal Revenue Service isn’t expected to release the 2004 tax brackets until late this year. But three private-sector tax specialists have forecast what the new brackets will be, based on a key inflation report released last week. Such predictions have been accurate in the past.
Under the projected new brackets, a married couple filing jointly and reporting total taxable income of $100,000 next year would pay $145 less in federal income taxes for 2004 solely because of inflation-indexing, says George Jones, senior federal tax analyst at CCH Inc., a provider of tax information and software.
The bracket estimates were provided by CCH and RIA in New York, another provider of tax-law information and software, as well as James C. Young, an associate professor of accounting at Northern Illinois University in DeKalb. (See attached tables for the new federal income-tax brackets.)
Their projections show the basic standard deduction for a married couple filing jointly will rise next year to $9,700 from $9,500 this year. For most singles, the basic standard deduction will rise to $4,850 from $4,750. Nearly two out of three returns typically claim the standard deduction each year, instead of itemizing deductions.
The personal-exemption amount is projected to rise to $3,100 in 2004 from $3,050 for 2003.
Inflation adjustments also will mean that several hidden, or "stealth," taxes will begin at higher income levels for millions of people. Among these are limits on itemized deductions and a phase-out of the personal exemption deduction for taxpayers whose income exceeds a certain level. These provisions effectively raise how much you pay in taxes without changing the official statutory rates.
The personal exemption phase-out, often known by its acronym "Pep," will start for joint returns when adjusted gross income exceeds $214,050. That’s up from $209,250 this year. For most singles, Pep will begin next year at $142,700, up from $139,500.
The limit on itemized deductions generally will begin next year once a taxpayer’s income exceeds $142,700. That’s up from $139,500 this year. This limit is often known in Washington circles as Pease, after a former House member.
For those married and filing separately, Pease begins at $71,350 next year. Some items won’t change, including the $11,000-a-year gift tax exemption.
The projections were based on an inflation report released by the U.S. Labor Department. Although inflation accelerated again in August, the consumer-price index for all urban consumers rose a mild 2.2 percent for the 12 months through August.
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