Deduction Changes for 2003

When Congress modified the tax code in 2002, they made a few changes to the deductions you could take on your 2002 return, but you will now see many changes affecting deductions take effect on your 2003 return, or later.

The personal exemption deduction for each taxpayer and dependent increased from $3,000 for 2002 to $3,050 for 2003.

The standard deductions for 2003 became:

• Single filers—$4,750
• Married couples filing joint returns, qualifying widow(ers)—$7,950
• Head of household filers—$7,000
• Married couples filing separate returns—$3,975

The amount of interest you can deduct for payments on student loans is still $2,500 for 2003, but the deduction is no longer limited to interest that you’re required to pay during the first 60 months. All interest payments, including voluntary payments, are deductible now.

The income limits that apply to the eligibility for the student loan interest deduction increased for 2003. You’re eligible to take the deduction if your adjusted gross income is $130,000 or less (for married couples filing joint returns), or $65,000 for all other filers.

Students and others who pay for college or other post-secondary education will be happy to learn of this new deduction. Qualified persons may now deduct up to $3,000 in expenses for tuition and fees, regardless of whether deductions are itemized. Income limits will apply: only taxpayers whose modified adjusted gross income is at or below $130,000 (if married) or $65,000 (all others) may claim the deduction, and married persons filing separate returns are not eligible at all.

A new teaching expenses deduction applies to elementary and secondary school teachers, counselors, principals and aides. Qualified persons may now deduct up to $250 in classroom expenses for books, supplies and computer software and equipment regardless of whether deductions are itemized.

The amount you can contribute to an IRA goes up to $3,000 for 2003. If you’ll be age 50 or older by the end of the year, your maximum is $3,500 instead of $3,000.

If you are already covered by a retirement plan at work, the income levels at which your eligibility for deducting contributions to IRAs increased by $1,000 for 2003. If you’re covered by a retirement plan at work you can now take an IRA deduction if your modified adjusted gross income is less than $70,000 (married filing jointly) or $50,000 (single or head of household).

Additional Depreciation Expense Deduction Law changes early in 2002 brought a new depreciation deduction for those of you with businesses, rental properties and other income-producing activities in which you use equipment or other property. If the property was purchased on or after May 5, 2003, you can claim a bonus 50% of depreciation. This is in addition to, not instead of, the Section 179 deduction!

The bonus depreciation deduction generally applies to assets with depreciable lives of 20 years or less. Also, it doesn’t apply to buildings or most automobiles.

Example:

On May 15, 2003, you bought a lathe and starting using it in your business right away. The lathe cost $150,000. You choose to take the $100,000 Section 179 deduction for this item, and you also want to take the 50% extra depreciation deduction. Here’s how it works: you take the $100,000 off of the $150,000, leaving a cost of $50,000. Your 50% depreciation deduction is $25,000 ($50,000 x 50%). Use the remaining cost of $25,000 to figure your normal depreciation deduction for 2003. So, you get to take the Section 179 deduction, the bonus depreciation deduction, and the normal depreciation deduction all in the first year!

The maximum amount that you’re able to contribute to your Keogh or other defined contribution plans increased to $12,000 for 2003. Future increases in the limit will be in $1,000 increments per year until it reaches a maximum of $15,000 per year for 2006. Each year thereafter, the limit will be adjusted for inflation in $500 increments.

Contributions to SIMPLE retirement plans, a simplified version of retirement plans specifically designed for small businesses, may now be made up to a maximum of $8,000 for 2003, then steadily increases by $1,000 each year thereafter until reaching a maximum of $10,000 in 2005, after which the limit will be adjusted for inflation in $500 increments.

If you use your car or truck for business purposes, you’ll be pleased to learn that the optional standard mileage rate for the cost of operating your car, van, panel truck, or pickup has been decreased from 36-1/2 cents per mile in 2001 to 36 cents per mile for 2002.

The optional standard mileage rate for the cost of using your vehicle for purposes of a household move has been decreased from 13 cents per mile in 2002 to 12 cents per mile for 2003.

If you worked abroad and earned business or employment income from foreign sources, the amount of foreign-earned income that you can exclude from taxable income increased by $2,000 for 2002 and thereafter. The 2003 limit is $80,000.

The deduction for health insurance premiums for self-employed persons is now at 70% for 2002. It increases to 100% in 2003. This percentage represents the portion of your premiums that you’re able to deduct on the front page of Form 1040 … without application of the usual medical expenses deduction limitations that apply on Schedule A.