Charitable Contributions of Patents and Other Intellectual Property

If you donate a patent or other intellectual property to a qualified organization after June 3, 2004, your deduction is limited to the basis of the property or the fair market value of the property, whichever is less. Intellectual property means any of the following:

• Patents.
• Copyrights (other than a copyright described in Internal Revenue Code sections 1221(a)(3) or 1231(b)(1)(C).
• Trademarks.
• Trade names.
• Trade secrets.
• Know-how.
• Software (other than software described in Internal Revenue Code section 197(e)(3)(A)(i).
• Other similar property or applications or registrations of such property.

Additional deduction based on income.

You also may be able to claim additional charitable contribution deductions in the year of the contribution and years following, based on the income, if any, from the donated property.

The following table shows the percentage of the organization's income from the property that you can deduct for each of your tax years ending on or after the date of the contribution. In the table, "tax year 1," for example, means your first tax year ending on or after the date of the contribution. However, you can take the additional deduction only to the extent the total of the amounts figured using this table are more than the amount of the deduction claimed for the original donation of the property.

After the legal life of the patent or other intellectual property ends or after the 10th anniversary of the donation, no additional deduction is allowed.

The additional deductions cannot be taken for patents or other intellectual property donated to certain private foundations.

Reporting requirements.

You are required to inform the organization at the time of the donation that you intend to treat the donation as a contribution subject to the provisions discussed above. The organization is required to file an information return showing the income from the property, with a copy to you.

More information.

The IRS expects to issue more guidance on these rules early in 2005. To find out if that guidance has been issued, check the Internal Revenue Bulletin.

Charitable Contributions of Property over $500,000

If you claim a deduction of more than $500,000 for a contribution of property made after June 3, 2004, you must attach a qualified appraisal of the property to your return. If you do not attach the appraisal, you cannot deduct your contributions. This does not apply to contributions of cash, inventory, publicly traded stock, or intellectual property. Previously, the appraisal was required for your records but did not have to be attached to your return.

Beginning in 2004, you may be able to include nontaxable combat pay in earned income when figuring the amount of dependent care benefits you can exclude or deduct from income. Before 2004, earned income included taxable earned income only. You should figure your exclusion or deduction both ways and make the election if it gives you a greater tax benefit. For details, see Publication 503, Child and Dependent Care Expenses.

Earned income amount is more.

The maximum amount of income you can earn and still get the credit has increased. You may be able to take the credit if:

• You have more than one qualifying child and you earned less than $34,458 ($35,458 if married filing jointly),
• You have one qualifying child and you earned less than $30,338 ($31,338 if married filing jointly), or
• You do not have a qualifying child and you earned less than $11,490 ($12,490 if married filing jointly).

Your adjusted gross income also must be less than the amount in the above list that applies to you.

Investment income amount is more.

The maximum amount of investment income you can have and still get the earned income credit has increased to $2,650.

For 2004, the amount of your interest exclusion will be phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (MAGI) is between $89,750 and $119,750. You cannot take the deduction if your MAGI is $119,750 or more. For 2003, the limits that applied to you were $87,750 and $117,750.

For all other filing statuses, your interest exclusion is phased out if your MAGI is between $59,850 and $74,850. You cannot take a deduction if your MAGI is $74,850 or more. For 2003, the limits that applied to you were $58,500 and $73,500.

The Education Savings Bond exclusion is explained in chapter 10 of IRS Publication 970, Tax Benefits for Education.

If you were an eligible educator in 2004, you can deduct as an adjustment to income up to $250 of qualified expenses you paid in 2004. This provision was scheduled to expire after 2003. However, the Working Families Tax Relief Act of 2004 extended it through 2005.

The educator expense deduction is explained in Publication 529, Miscellaneous Deductions.

You can claim the maximum clean-fuel vehicle deduction or the qualified electric vehicle credit, as appropriate, for vehicles or other clean-fuel property placed in service in 2004. The scheduled 25% reduction of these tax benefits has been eliminated.

The electric vehicle credit is generally 10% of the cost of the vehicle reduced by certain amounts. The credit is limited to $4,000 for each qualifying vehicle placed in service in 2004.

The amount you can deduct for each exemption has increased from $3,050 in 2003 to $3,100 in 2004.

You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2004, the phaseout begins at:

• $107,025 for married persons filing separately,
• $142,700 for single individuals,
• $178,350 for heads of household, and
• $214,050 for married persons filing jointly and qualifying widow(er)s with dependent children.

A Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses. This account must be used in conjunction with a High Deductible Health Plan (High Deductible Health Plan), discussed later.

  Important Note. If you currently have an Archer Medical Savings Account (MSA), you can roll it into a Health Savings Account tax-free.

What are the benefits of a Health Savings Account?

You may enjoy several benefits from having a Health Savings Account.

• The interest or other earnings on the assets in the account are tax free.
• You can claim a tax deduction for contributions you make even if you do not itemize your deductions on Form 1040.
• Distributions may be tax-free if you pay qualified medical expenses.
• The contributions remain in your account from year to year until you use them.
• A Health Savings Account is "portable" so it stays with you if you change employers or leave the work force.

Qualifying for a Health Savings Account

To qualify for a Health Savings Account, you must meet the following requirements.

• You are an employee (or the spouse of an employee) of an employer who maintains an individual or family High Deductible Health Plan for you (or your spouse).
• You are a self-employed person (or the spouse of a self-employed person) who maintains an individual or family High Deductible Health Plan.
• You have no other health insurance or Medicare coverage except what is permitted under Other health insurance, later.

High Deductible Health Plan (High Deductible Health Plan)

To be eligible for a Health Savings Account, you must have a High Deductible Health Plan. A High Deductible Health Plan has:

1. A higher annual deductible than typical health plans, and
2. A maximum limit on the sum of the deductible and the annual out-of-pocket medical expenses that you must pay for covered expenses.

Limits. The following table shows the limits for High Deductible Health Plans for 2004.

Family plans that do not meet the high deductible rules. There are some family plans that have deductibles for both the family as a whole and for individual family members. Under these plans, if you meet the individual deductible for one family member, you do not have to meet the higher annual deductible amount for the family. If either the deductible for the family as a whole or the deductible for an individual family member is below the minimum annual deductible for that year, the plan does not qualify as a High Deductible Health Plan.

     Example. Mr. Orville has health insurance with company A in 2004. The annual deductible for the family plan is $3,500. This plan also has an individual deductible of $1,500 for each family member. Mr. Orville's wife had $2,200 of covered medical expenses. They had no other medical expenses for 2003. The plan paid $700 to Mr. Orville because Mrs. Orville met the individual deductible of $1,500, even though the Orvilles did not meet the $3,500 annual deductible for the family plan. The plan does not qualify as a High Deductible Health Plan because Mrs. Orville paid only $800 which was less than the minimum deductible amount.

Other health insurance. You (or your spouse if you file jointly) generally cannot have any other health plan that is not a High Deductible Health Plan. However, this rule does not apply if the other health plan(s) only covers the following items.

• Accidents.
• Disability.
• Dental care.
• Vision care.
• Long-term care.
• Benefits related to workers' compensation laws, tort liabilities, or ownership or use of property.
• A specific disease or illness.
• A fixed amount per day (or other period) of hospitalization.

Amount of Contribution

The amount you or your employer can contribute to your Health Savings Account depends on the nature of your coverage and your age.

If you have self-only coverage, you (or your employer) can contribute up to the amount of your annual health plan deductible, but not more than $2,600 ($3,100 if you are age 55 or older). If you have family coverage, you (or your employer) can contribute up to the amount of your annual health plan deductible, but not more than $5,150 ($5,650 if you are age 55 or older). You must have the insurance all year to contribute the full amount.

For each full month you did not have a High Deductible Health Plan, you must reduce the amount you can contribute by one-twelfth.

     Example. You have a High Deductible Health Plan for your family for the entire months of July through December 2003 (6 months). The annual deductible is $4,000. You can contribute up to $2,000 ($4,000 ÷ 12 months × 6 months) to your Health Savings Account for the year.

Tip. If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans. The contribution limit is split equally between you unless you agree on a different division.

Note. You must reduce the limits above by any amount contributed to a Medical Savings Account or other Health Savings Account.

Medicare eligible individuals. Beginning with the first month you are entitled to benefits under Medicare, you cannot contribute to a Health Savings Account.

When To Contribute

You can make contributions to your Health Savings Account for 2004 until April 15, 2005.

Setting Up a Health Savings Account

No permission or authorization from the Internal Revenue Service is necessary to establish a Health Savings Account. When you set up a Health Savings Account, you will need to work with a trustee. A trustee can be a bank, insurance company, or anyone already approved by the Internal Revenue Service to be a trustee of individual retirement arrangements. Your employer may already have some information on Health Savings Account trustees in your area. The Internal Revenue Service intends to issue further guidance on setting up a Health Savings Account. This guidance has been published as Notice 2004-2 in the January 12, 2004, issue of the Internal Revenue Bulletin (2004-2). 

For 2004, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (MAGI) is between $42,000 and $52,000 ($85,000 and $105,000 if you file a joint return). You cannot claim an education credit if your MAGI is $52,000 or more ($105,000 or more if you file a joint return). This is an increase from the 2003 limits of $41,000 and $51,000 ($83,000 and $103,000 if filing a joint return).

The Hope and Lifetime Learning credits are explained in chapters 2 and 3 of Publication 970, Tax Benefits for Education.

For 2004, the amount of taxable investment income a child under age 14 can have without it being subject to tax at the parent's rate has increased to $1,600 from $1,500.

Generally, you can deduct only 50% of your business-re-lated meal expenses while traveling away from your tax home for business purposes. Also, you can generally deduct only 50% of certain reimbursements you make to your employees for meal expenses they incur while traveling away from home on business. You can deduct a higher percentage if the meals take place during or incident to any period subject to the Department of Transportation's "hours of service" limits. (These limits apply to workers who are under certain federal regulations.) The percentage allowed is 70% for 2004.

Business meal expenses are covered in chapter 1 of Publication 463, Travel, Entertainment, Gift, and Car Expenses. Reimbursements for employee meal expenses are covered in chapter 13 of Publication 535, Business Expenses.

Beginning in 2004, a distribution from a qualified tuition program (QTP) established and maintained by an eligible educational institution (generally private colleges and universities) can be excluded from income if the amount distributed is used to pay qualified education expenses. The amount that may be excluded is limited to your qualified education expenses. Tax-free qualified tuition program distributions are discussed in Publication 970, Tax Benefits for Education.

The following paragraphs highlight changes that affect individual retirement arrangements (IRAs) and pension plans.

Traditional individual retirement arrangement income limits. If you have a traditional individual retirement arrangement and are covered by a retirement plan at work, the amount of income you can have and not be affected by the deduction phaseout increases. The amounts vary depending on filing status.

Limit on elective deferrals. The maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $13,000 ($16,000 if you are age 50 or over). However, for SIMPLE plans, the amount increases to $9,000 ($10,500 if you are age 50 or over).

The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2004 than it was for 2003. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.

The basic standard deduction amounts for 2004 are:

• Head of household — $7,150
• Married taxpayers filing jointly and qualifying widow(er)s — $9,700
• Married taxpayers filing separately — $4,850
• Single — $4,850

The full 2004 Standard Deduction Tables are shown in the 2004 instructions for Form 1040 and Form 1040A.

For tax years beginning in 2004, the allowable deductions for the standard mileage rate are as follows:

• Business miles. The standard mileage rate for the cost of operating your car increases to 37.5 cents a mile for all business miles driven.
• Medical reasons. The standard mileage rate allowed for use of your car for medical reasons is 14 cents a mile.
• Moving. The standard mileage rate for determining moving expenses is 14 cents a mile.

Beginning in 2004, student loan repayments provided to you under certain federal and state repayment programs are tax free. Whether or not the repayment qualifies depends in part on the nature of your employment and the type of lender who made you the loan. Beginning in 2004, student loan repayment assistance you receive from the National Health Service Corps (NHSC) Loan Repayment Program and state programs eligible under the Public Health Service Act are tax free.

The student loan cancellation program is explained in chapter 5 of Publication 970, Tax Benefits for Education.

Final regulations, issued May 7, 2004, changed the rules for deducting student loan interest. The changes apply to interest due and paid after December 31, 1997, on qualified student loans.

Longer period allowed for loan disbursement.

The 60-day safe harbor for disbursing loan proceeds used to pay qualified education expenses has been increased to 90 days before and 90 days after the academic period to which the expenses relate.

Interest paid by a third party may be deductible.

The person legally obligated to make interest payments on a student loan may be able to deduct interest payments on that loan made by someone else (third party).

The student loan interest deduction is explained in chapter 4 of Publication 970, Tax Benefits for Education.

The 2004 tax rate schedules are provided so that you can compute your estimated tax for 2004.

Beginning in 2004, the amount of qualified education expenses you can take into account in figuring your tuition and fees deduction increases from $3,000 to $4,000 if your modified adjusted gross income (MAGI) is not more than $65,000 ($130,000 if you are married filing jointly).

If your MAGI is more than $65,000 ($130,000), but not more than $80,000 ($160,000 if you are married filing jointly), your maximum tuition and fees deduction will be $2,000.

No tuition and fees deduction will be allowed if your MAGI is more than $80,000 ($160,000 for married filing jointly).

The tuition and fees deduction is explained in chapter 6 of Publication 970, Tax Benefits for Education.

If you donate a car to a qualified organization after December 31, 2004, your deduction is limited to the gross proceeds from its sale by the organization. This rule applies if the claimed value of the donated vehicle is more than $500. However, if the organization makes significant intervening use of or materially improves the car, you generally can deduct its fair market value.

Boats, aircraft, and other vehicles.

These rules also apply to donations of boats, aircraft, and any vehicle manufactured mainly for use on public streets, roads, and highways.

Acknowledgement required.

If the claimed value of the car is more than $500, you must have a written acknowledgement of your donation from the organization and must attach it to your return. If you do not have an acknowledgement, you cannot deduct your contribution.

The acknowledgement must include the following information.

1. Your name and taxpayer identification number.
2. The vehicle identification number or similar number.
3. A statement certifying the car was sold in an arm's length transaction between unrelated parties.
4. The gross proceeds from the sale.
5. A statement that your deduction may not be more than the gross proceeds from the sale.
6. The date of the contribution.

However, if there was significant intervening use of or material improvement to the car by the organization, the acknowledgement does not have to include the information in items 3, 4, and 5 above. Instead, it must contain a certification of the intended use of or material improvement to the car and the intended duration of that use and a certification that the vehicle will not be transferred in exchange for money, other property, or services before completion of that use or improvement.

This acknowledgement must be provided within 30 days of the sale of the car or, if there is significant intervening use or material improvement of the car by the organization, within 30 days of the contribution.

The organization also must provide this information to the IRS.

Donations of inventory.

These rules do not apply to donations of inventory. For example, these rules do not apply if you are a car dealer who donates a car you had been holding for sale to customers.

More information.

The IRS expects to issue more guidance on these rules early in 2005.

Beginning in 2005, one definition of a qualifying child will apply for each of the following tax benefits.

• Dependency exemption.
• Head of household filing status.
• Earned income credit (EIC).
• Child tax credit.
• Credit for child and dependent care expenses.

Tests To Meet

In general, all four of the following tests must be met to claim someone as a qualifying child.

Relationship test.

The child must be your child (including an adopted child, stepchild, or eligible foster child), brother, sister, stepbrother, stepsister, or a descendent of one of these relatives.

An adopted child includes a child lawfully placed with you for legal adoption even if the adoption is not final.

An eligible foster child is any child who is placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.

Residency test.

A child must live with you for more than half of the year. Temporary absences for special circumstances, such as for school, vacation, medical care, military service, or detention in a juvenile facility count as time lived at home. A child who was born or died during the year is considered to have lived with you for the entire year if your home was the child's home for the entire time he or she was alive during the year. Also, exceptions apply, in certain cases, for children of divorced or separated parents and parents of kidnapped children.

Age test.

A child must be under a certain age (depending on the tax benefit) to be your qualifying child.

Dependency exemption, head of household filing status, and EIC.

For purposes of these tax benefits, a child must be under the age of 19 at the end of the year, or under age 24 at the end of 2005 if a student, or any age if permanently and totally disabled.

A student is any child who, during any 5 months of the year:

1. Was enrolled as a full-time student at a school, or
2. Took a full-time, on-farm training course given by a school or a state, county, or local government agency.

A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or night school.

Child tax credit.

For purposes of the child tax credit, a child must be under the age of 17.

Credit for child and dependent care expenses.

For purposes of the credit for child and dependent care expenses, a child must be under the age of 13 or any age if permanently and totally disabled.

Support test.

A child cannot have provided over half of his or her own support during the year.

Exception.

For purposes of the EIC only, the Support test does not apply.

Qualifying Child of More Than One Person

Sometimes a child meets the tests to be a qualifying child of more than one person. However, only one person can treat that child as a qualifying child. If you and someone else (other than your spouse if filing jointly) have the same qualifying child, you and the other person(s) can decide who will claim the child. If you cannot agree on who will claim the child and more than one person files a return using the same child, the IRS may disallow one or more of the claims using the tie-breaker rule explained in Table 1, next.

Table 1. When More Than One Person Files a Return Claiming the Same Qualifying Child (Tie-Breaker Rule).

Dependency Exemption

To claim the dependency exemption for a qualifying child, all four tests listed earlier under Tests To Meet must be met. The child generally must also be a U.S. citizen, U.S. national, or a resident of the United States, Canada, or Mexico. An exception applies for certain adopted children. If married, he or she cannot file a joint return unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.

A person who used to qualify as your dependent but who is not your "qualifying child" may still qualify as your dependent as a "qualifying relative." To claim the dependency exemption for a qualifying relative, the child cannot be the qualifying child of any other person and all five dependency tests discussed under Dependency Tests in Publication 501 must be met.

Note: If you are a dependent of another person, you cannot claim any dependents on your return.

Head of Household Filing Status

In general, you can use head of household filing status only if, as of the end of the year, you were unmarried or " considered unmarried" and you paid over half the cost of keeping up a home:

1. That was the main home for all the entire year of your parent whom you can claim as a dependent (your parent did not have to live with you), or
2. In which you lived for more than half of the year with either of the following:
   1. Your qualifying child (defined earlier, but without regard to the exception for children of divorced or separated parents). But, if your qualifying child is married at the end of the year, see Married child below.
   2. Any other person whom you can claim as a dependent.

But you cannot use head of household filing status for a person who is your dependent only because:

• He or she lived with you for the entire year, or
• You are entitled to claim him or her as a dependent under a multiple support agreement.

Married child.

If your qualifying child is married at the end of the year, both of the following must apply for the child to be your qualifying child for purposes of head of household filing status.

1. The child cannot file a joint return unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.
2. The child must be a U.S. citizen, U.S. national, or a resident of the United States, Canada, or Mexico. An exception applies for certain adopted children.

Earned Income Credit (EIC)

You may be able to claim the earned income credit (EIC) in 2005 if you have:

1. 2 or more qualifying children and your earned income is less than $35,263 ($37,263 if married filing jointly for 2005),
2. 1 qualifying child and your earned income is less than $31,030 ($33,030 if married filing jointly for 2005), or
3. No qualifying children and your earned income is less than $11,750 ($13,750 if married filing jointly for 2005). For purposes of the EIC, a qualifying child must meet the Relationship test, Residency test (without regard to the exception for children of divorced or separated parents), and Age test, earlier. A qualifying child does not have to meet the Support test for purposes of the EIC. But, if your qualifying child is married at the end of the year, see Married child next.

Married child.

A child who is married at the end of the year is a qualifying child for purposes of the EIC only if you can claim him or her as your dependent (see Dependency Exemption, earlier) or this child's other parent claims him or her as a dependent under the rules for children of divorced or separated parents in Publication 501, Exemptions, Standard Deduction, and Filing Information.

Child Tax Credit

You may be able to take the child tax credit if you have a qualifying child that meets all four of the tests listed earlier under Tests To Meet. For additional rules that you must meet, see Publication 972, Child Tax Credit.

Credit for Child and Dependent Care Expenses

Generally, a qualifying person for purposes of the credit for child and dependent care expenses is:

• Your qualifying child (defined earlier, but without regard to the exception for parents of kidnapped children), or
• Your dependent or spouse who is physically or mentally incapable of caring for himself or herself and who lived with you for more than half of the year.

For purposes of the credit for child and dependent care expenses, a qualifying child and dependent are determined without regard to the exception for children of divorced or separated parents and the child is treated as a qualifying person only for the custodial parent.

For additional rules that you must meet, see Publication 503, Child and Dependent Care Expenses. However, you no longer need to meet the Keeping Up a Home test discussed in Publication 503.

Earned income amount.

The maximum amount of income you can earn and still get the credit is higher for 2005 than it is for 2004. You may be able to take the credit for 2005 if:

• You have more than one qualifying child and you earn less than $35,263 ($37,263 if married filing jointly),
• You have one qualifying child and you earn less than $31,030 ($33,030 if married filing jointly), or
• You do not have a qualifying child and you earn less than $11,750 ($13,750 if married filing jointly).

The maximum amount of adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount.

The maximum amount of investment income you can have in 2005 and still get the credit increases to $2,700.

For 2005, the proposed 50% reduction of the maximum electric vehicle credit and the clean-fuel deduction has been eliminated. You can claim the maximum electric vehicle credit allowed for a qualified electric vehicle you place in service in 2005. You can claim the maximum deduction allowed for qualified clean-fuel vehicle or other clean-fuel property placed in service in 2005.

You generally can exclude up to 50% of your gain on the sale or trade of qualified small business stock held by you for more than 5 years. This is called the section 1202 exclusion. Beginning in 2005, you generally can exclude up to 60% of your gain if you meet the following additional requirements.

• You sell or trade stock in a corporation that qualifies as an empowerment zone business during substantially all of the time you held the stock.
• You acquired the stock after December 21, 2000.

Condition (1) will still be met if the corporation ceased to qualify after the 5-year period that begins on the date you acquired the stock. However, the gain that qualifies for the 60% exclusion cannot be more than the gain you would have had if you had sold the stock on the date the corporation ceased to qualify.

The part of the gain that is included in income is a 28% rate gain. See Capital Gain Tax Rates and Section 1202 Exclusion in chapter 4 of Publication 550, Investment Income and Expenses.

For more information about empowerment zone businesses, see Publication 954, Tax Incentives for Distressed Communities.