Hendricks & Gillespie CPA

December 19, 2004

The following tax law changes have been announced and will take effect beginning in 2004. We hope this will be a handy reference guide for you during this year.

New Social Security Wage Base

The Social Security Administration recently announced the new Social Security wage base for 2004 will be $87,900, up from $87,000 in 2003. When applied to a salary of $87,900 or more in 2004, an employee and his employer will each pay $55.80 more in Social Security tax in 2004 than in 2003. A self-employed worker will pay $111.60 more in Social Security tax. The combined Social Security/Medicare rate of 7.65% remains unchanged for 2004. The maximum wages for the two different components of the social security tax are as follows:

Maximum Taxable Social Security Wages (6.2%) $87,900

Maximum Taxable Medicare Wages (1.45%) Unlimited

For self-employed persons the combined rates will also remain unchanged for 2004 at 15.3%. However, the self-employment income base has increased as described below:

Maximum self-employment earnings taxed at 12.4% $87,900

Maximum self-employment earnings taxed at 2.9% Unlimited

Federal Unemployment Tax

The maximum amount of wages subject to the Federal unemployment tax will remain unchanged at $7,000 for 2004. This tax, which the employer pays, applies to the first $7,000 of each employee’s wages at a rate of 0.8%. The 0.8% rate is only applicable if state unemployment taxes are paid timely; otherwise, the Federal unemployment tax is computed at a higher rate up to a maximum of 6.2%.

New Standard Mileage Rates

The Internal Revenue Service recently announced an increase in the standard mileage rate to 37.5 cents per mile beginning in 2004. This mileage rate applies to reimbursements to employees and for persons claiming standard automobile deductions for tax purposes.

In addition, the IRS also announced that the standard mileage rates applicable to charitable deductions would remain unchanged for 2004, and that the standard mileage rates for medical and moving deductions would increase for 2004. These rates are as follows:

In order to maintain eligibility for full benefits, certain Social Security recipients are limited in the amount of compensation they may earn. If Social Security recipients under full retirement age exceed this limitation, $1 in benefits will be lost for every $2 in excess above the earnings limitation. The earnings limitation has been eliminated for recipients who have reached full retirement age. For retirees born in 1937, full retirement age is 65; for those born in 1938 it is 65 years and two months. Full retirement age will gradually increase to 67 for those born in 1960 or later. A modified limit applies to the year an individual reaches full retirement age. For earnings in the months prior to reaching full retirement age, $1 in benefits will be lost for every $3 above the limit.

Workers age 66 and over do not forfeit benefits regardless of their 2004 earnings.

In order to become eligible to receive full Social Security benefits (other than as a surviving spouse or dependent), an individual must accumulate 40 quarters of coverage. The Social Security Administration recently announced an increase in the amount of earnings necessary to obtain one quarter of coverage. The new amount for 2004 is $900. Thus, an individual earning $900 in 2004 will receive one quarter of credit. An individual earning $3,600 or more in 2004 will accumulate four credited quarters.

Increase in 401(k) Plan Deferral Limit and Other Retirement Plan Dollar Limits

The IRS has announced the cost of living adjustments of various qualified plan dollar limits for 2004. These limits are as follows:

401(k) elective deferrals – The limit on the exclusion for elective deferrals has increased to $13,000 in 2004, up from $12,000 in 2003.

SIMPLE salary deferrals – The maximum amount of compensation an employee may elect to defer under a SIMPLE plan increases from $8,000 in 2003 to $9,000 in 2004.

Defined benefit plans – The dollar limitation on the annual benefit under defined benefit plans increases from $160,000 in 2003 to $165,000 in 2004.

Defined contribution plans – Annual additions to a defined contribution plan increases from $40,000 in 2003 to $41,000 in 2004.

Annual compensation limit – The maximum amount of annual compensation that can be taken into account for various qualified plans purposes increases to $205,000 in 2004 from $200,000 in 2003.

"Catch-up" contributions for persons 50 or older—The additional IRA contributions allowable for people who are over 50 remains unchanged. The most that can be contributed to both traditional and Roth IRAs for 2004 for an individual over age 50 is the lesser of $3,500 or compensation that must be included in income for the year. Also, additional contributions can be made to SIMPLE IRAs and 401(k) elective deferrals if no other contributions can be made for the participant to the plan for the year because of limits or restrictions, such as the regular annual limit.

The self-employed health insurance deduction will remain a maximum of 100% of health insurance expenses in 2004.

During 2003, an additional deduction of $3,000, was allowed for tuition and related expenses paid for enrollment or attendance by the taxpayer or the taxpayer's spouse or dependent to any accredited post-secondary institution. The deduction amount will increase in 2004 to $4,000. The deduction will generally be available to taxpayers with adjusted gross income below $65,000 ($130,000 for married filing jointly). This deduction must be coordinated with educational credits.

During 2002, legislation was passed that allowed an additional 30 percent first year depreciation for certain business assets. The additional depreciation is allowed on qualifying assets placed in service after September 10, 2001 and before September 11, 2004 . In general, the additional allowance will be available for new assets with a tax (MACRS) depreciation life of 20 years or less. The additional depreciation allowance will be allowed in full for alternative minimum depreciation as well.

In 2003, the bonus depreciation deduction increased to 50 percent for post-May 5, 2003 acquisitions. This new law increases the additional first-year depreciation allowance percentage from 30 percent to 50 percent. To qualify for the higher percentage, the property must be acquired after May 5, 2003 , and placed in service before January 1, 2005 .

During 2002, legislation was passed that allowed an additional credit of up to $1,000 for contributions to an elective deferral plan (such as a 401k plan) or individual retirement accounts. The credit will vary from 10% to 50% depending upon adjusted gross income. The maximum amount of contributions on which the credit may be calculated is $2,000. No credit will be allowed for joint filers with adjusted gross income of $50,000, $37,500 for those filing as head of household, and $25,000 for those filing single or married filing separately.

Quickbooks will discontinue technical support and tax table updates for Quickbooks 2001 as of April 2004. All versions prior to 2001 are presently unsupported by Quickbooks. If you are currently using any of these versions, we recommend that you upgrade to the most current version, Quickbooks 2004, available as of December 2003. You will have to upgrade if you will use Quickbooks to prepare payrolls in 2004.

We welcome you to call us with any questions you may have in the administration of your payroll or any other questions you may have. We hope that the year 2004 will be a prosperous year for you and your business.