SECTION 2. CHANGES

.01 The initial bracket amounts for the 10% tax rate for married individuals filing joint returns and surviving spouses under § 1(a) of the Internal Revenue Code, and heads of households under § 1(b) are adjusted for inflation under § 1(i)(1)(C)(ii). Under § 1(i)(1)(B)(iii) the initial bracket amounts for § 1(c) (unmarried individuals (other than surviving spouses and heads of

households)) and § 1(d) (married individuals filing separate returns) are equal to ¹ /2 the initial bracket amount of § 1(a) (married individuals filing joint returns and surviving spouses) after adjustment for inflation.

.02 The amounts deemed substantiated when paid by eligible employers in the transportation mainline pipeline construction industry under an accountable plan to employees in accordance with Rev. Proc. 2002–41, 2002–1 C.B. 1098, are adjusted for inflation. (Section 3.09).

.03 The dollar amount in § 179(b)(1) used to determine the dollar limitation

TABLE 1 - Section 1(a). - Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is : The Tax Is :

Not Over $14,300 10% of the taxable income

Over $14,300 but not over $58,100 $1,430 plus 15% of excess over $14,300

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TABLE 1 - Section 1(a). - Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is : The Tax Is :

Over $58,100 but not over $117,250 $8,000 plus 25% of excess over $58,100

Over $117,250 but not over $178,650 $22,787.50 plus 28% of excess over $117,250

Over $178,650 but not over $319,100 $39,979.50 plus 33% of excess over $178,650

Over $319,100 $86,328 plus 35% of excess over $319,100

TABLE 2 - Section 1(b). - Heads of Households

If Taxable Income Is : The Tax Is :

Not Over $10,200 10% of the taxable income

Over $10,200 but not over $38,900 $1,020 plus 15% of excess over $10,200

Over $38,900 but not over $100,500 $5,325 plus 25% of the excess over $38,900

Over $100,500 but not over $162,700 $20,725 plus 28% of the excess over $100,500

Over $162,700 but not over $319,100 $38,141 plus 33% of the excess over $162,700

Over $319,100 $89,753 plus 35% of the excess over $319,100

TABLE 3 — Section 1(c). - Unmarried Individuals (other than Surviving Spouse and Heads of Households)

If Taxable Income Is : The Tax Is :

Not over $7,150 10% of the taxable income

Over $7,150 but not over $29,050 $715 plus 15% of the excess over $7,150

Over $29,050 but not over $70,350 $4,000 plus 25% of the excess over $29,050

Over $70,350 but not over $146,750 $14,325 plus 28% of the excess over $70,350

Over $146,750 but not over $319,100 $35,717 plus 33% of the excess over $146,750

Over $319,100 $92,592.50 plus 35% of the excess over $319,100

TABLE 4 - Section 1(d). - Married Individuals Filing Separate Returns

If Taxable Income Is : The Tax Is :

Not Over $7,150 10% of the taxable income

Over $7,150 but not over $29,050 $715 plus 15% of the excess over $7,150

Over $29,050 but not over $58,625 $4,000 plus 25% of the excess over $29,050

Over $58,625 but not over $89,325 $11,393.75 plus 28% of the excess over $58,625

Over $89,325 but not over $159,550 $19,989.75 plus 33% of the excess over $89,325

Over $159,550 $43,164 plus 35% of the excess over $159,550

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TABLE 5 - Section 1(e). - Estates and Trusts

If Taxable Income Is : The Tax Is :

Not Over $1,950 15% of the taxable income

Over $1,950 but not over $4,600 $292.50 plus 25% of the excess over $1,950

Over $4,600 but not over $7,000 $955 plus 28% of the excess over $4,600

Over $7,000 but not over $9,550 $1,627 plus 33% of the excess over $7,000

Over $9,550 $2,468.50 plus 35% of the excess over $9,550

(2) For taxable years beginning in 2004, a taxpayer’s modified adjusted gross income in excess of $42,000 ($85,000 for a joint return) is taken into account in determining the reduction under § 25A(d)(2)(A)(ii) in the amount of the Hope Scholarship and Lifetime Learning Credits otherwise allowable under § 25A(a).

.06 Earned Income Credit . (1) In general . For taxable years beginning in 2004, the following amounts are used to determine the earned income credit under § 32(b). The “earned income amount” is the amount of earned income at or above which the maximum amount of the earned income credit is allowed. The “threshold phaseout amount” is the amount of adjusted gross income (or, if greater, earned income) above which the maximum amount of the credit begins to phase out. The “completed phaseout amount” is the amount of adjusted gross income (or if greater, earned income) at or above which no credit is allowed.

.02 Unearned Income of Minor Children Taxed as if Parent’s Income (the “Kiddie Tax”) . For taxable years beginning in 2004, the amount in § 1(g)(4)(A)(ii)(I), which is used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $800. (This amount is the same as the $800 standard deduction amount provided in section 3.10(2) of this revenue procedure.) The same $800 amount is used for purposes of § 1(g)(7) (that is, in determining whether a parent may elect to include a child’s gross income in the parent’s gross income and for calculating the “kiddie tax”). For example, one of the requirements for the parental election is that a child’s gross income is more than the amount referenced in § 1(g)(4)(A)(ii)(I) but less than 10 times such amount; thus, a child’s gross income for 2004 must be more than $800 but less than $8,000 to satisfy that requirement.

.03 Adoption Credit . For taxable years beginning in 2004, under § 23(a)(3) the maximum credit allowed for an adoption of a child with special needs is $10,390.

For taxable years beginning in 2004, under § 23(b)(1) the maximum credit allowed with regard to other adoptions is the amount of qualified adoption expenses up to $10,390. The available adoption credit begins to phase out under § 23(b)(2)(A) for taxpayers with modified adjusted gross income in excess of $155,860 and is completely phased out for taxpayers with modified adjusted gross income of $195,860. (See section 3.14 for the adjusted items relating to adoption assistance programs.)

.04 Child Tax Credit . For taxable years beginning in 2004, the value used in § 24(d)(1)(B)(i) in determining the amount of credit under § 24 that may be refundable is $10,750.

.05 Hope and Lifetime Learning Cred- its .

(1) For taxable years beginning in 2004, 100 percent of qualified tuition and related expenses not in excess of $1,000 and 50 percent of such expenses in excess of $1,000 are taken into account in determining the amount of the Hope Scholarship Credit under § 25A(b)(1).

Number of Qualifying Children

Item One Two or More None

Earned Income Amount $ 7,660 $10,750 $ 5,100

Maximum Amount of Credit $ 2,604 $ 4,300 $ 390

Threshold Phaseout Amount $14,040 $14,040 $ 6,390

Completed Phaseout Amount $30,338 $34,458 $11,490

Threshold Phaseout Amount (Married Filing Jointly)

Completed Phaseout Amount (Married Filing Jointly)

$15,040 $15,040 $ 7,390

$31,338 $35,458 $12,490

The instructions for the Form 1040 series provide tables showing the amount of the

earned income credit for each type of taxpayer.

(2) Excessive investment income . For taxable years beginning in 2004, the earned income tax credit is denied under

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that is deemed substantiated under an accountable plan when paid in accordance with Rev. Proc. 2002–41. If the employer provides fuel or otherwise reimburses fuel expenses, up to $8 per hour is deemed substantiated when paid under Rev. Proc. 2002–41. .10 Standard Deduction . (1) In general . For taxable years beginning in 2004, the standard deduction amounts under § 63(c)(2) are as follows:

§ 32(i) if the aggregate amount of certain investment income exceeds $2,650.

.07 Low-Income Housing Credit . For calendar years beginning in 2004, the amounts used under § 42(h)(3)(C)(ii) to calculate the State housing credit ceiling for the low-income housing credit is the greater of $1.80 multiplied by the State population or $2,075,000.

.08 Alternative Minimum Tax Exemp- tion for a Child Subject to the “Kiddie Tax.” For taxable years beginning in 2004, for a child to whom the § 1(g) “kiddie tax”

applies, the exemption amount under §§ 55 and 59(j) for purposes of the alternative minimum tax under § 55 may not exceed the sum of (A) such child’s earned income for the taxable year, plus (B) $5,750.

.09 Transportation Mainline Pipeline Construction Industry Optional Expense Substantiation Rules for Payments to Em- ployees under Accountable Plans . For calendar years beginning in 2004, an eligible employer may pay certain welders and heavy equipment mechanics an amount of up to $13 per hour for rig-related expenses

Filing Status Standard Deduction

Married Individuals Filing Joint Returns and Surviving Spouses (§ 1(a)) $9,700

Heads of Households (§ 1(b)) $7,150

Unmarried Individuals (other than Surviving Spouses and Heads of Households) (§ 1(c))

$4,850

Married Individuals Filing Separate Returns (§ 1(d)) $4,850

expenses furnished pursuant to an adoption assistance program in connection with other adoptions by the employee is $10,390. The amount excludable from an employee’s gross income begins to phase out under § 137(b)(2)(A) for taxpayers with modified adjusted gross income in excess of $155,860 and is completely phased out for taxpayers with modified adjusted gross income of $195,860. (See section 3.03 for the adjusted items relating to the adoption credit.)

.15 Private Activity Bonds Volume Cap . For calendar years beginning in 2004, the amounts used under § 146(d)(1) to calculate the State ceiling for the volume cap for private activity bonds is the greater of $80 multiplied by the State population or $233,795,000.

.16 Personal Exemption . (1) Exemption amount . For taxable years beginning in 2004, the personal exemption amount under § 151(d) is $3,100.

(2) Phase out . For taxable years beginning in 2004, the personal exemption amount begins to phase out at, and is completely phased out after, the following adjusted gross income amounts:

(2) Dependent . For taxable years beginning in 2004, the standard deduction amount under § 63(c)(5) for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $800 or the sum of $250 and the individual’s earned income.

(3) Aged and blind . For taxable years beginning in 2004, the additional standard deduction amounts under § 63(f) for the aged and for the blind are $950 for each. These amounts are increased to $1,200 if the individual is also unmarried and not a surviving spouse.

.11 Overall Limitation on Itemized De- ductions . For taxable years beginning in 2004, the “applicable amount” of adjusted gross income under § 68(b), above which the amount of otherwise allowable itemized deductions is reduced under § 68, is $142,700 (or $71,350 for a separate return filed by a married individual).

.12 Qualified Transportation Fringe . For taxable years beginning in 2004, the monthly limitation under § 132(f)(2)(A), regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass, is $100. The monthly limitation

under § 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $195.

.13 Income from United States Savings Bonds for Taxpayers Who Pay Qualified Higher Education Expenses . For taxable years beginning in 2004, the exclusion under § 135, regarding income from United States savings bonds for taxpayers who pay qualified higher education expenses, begins to phase out for modified adjusted gross income above $89,750 for joint returns and $59,850 for other returns. This exclusion completely phases out for modified adjusted gross income of $119,750 or more for joint returns and $74,850 or more for other returns.

.14 Adoption Assistance Programs . For taxable years beginning in 2004, under § 137(a)(2) the maximum amount that can be excluded from an employee’s gross income in connection with the adoption by the employee of a child with special needs is $10,390. For taxable years beginning in 2004, under § 137(b)(1) the maximum amount that can be excluded from an employee’s gross income for the amounts paid or expenses incurred by the employer for qualified adoption

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AGI – Exemption Fully Phased Out

Filing Status

AGI – Beginning of Phaseout

Married Individuals Filing Joint Returns and Surviving Spouse (§ 1(a)) $214,050 $336,550

Heads of Households (§ 1(b)) $178,350 $300,850

Unmarried Individuals (other than Surviving Spouses and Heads of Households) (§ 1(c))

$142,700 $265,200

Married Individuals Filing Separate Returns (§ 1(d)) $107,025 $168,275

.18 Eligible Long-Term Care Premi- ums . For taxable years beginning in 2004, the limitations under § 213(d)(10), regarding eligible long-term care premiums includible in the term “medical care,” are as follows:

.17 Election to Expense Certain Depre- ciable Assets . For taxable years beginning in 2004, under § 179(b)(1), the aggregate cost of any § 179 property a taxpayer may elect to treat as an expense shall not exceed $102,000. Under § 179(b)(2), the

$102,000 limitation shall be reduced (but not below zero) by the amount by which the cost of § 179 property placed in service during the 2004 taxable year exceeds $410,000.

Attained age before the close of the taxable year Limitation on premiums

40 or less $260

More than 40 but not more than 50 $490

More than 50 but not more than 60 $980

More than 60 but not more than 70 $2,600

More than 70 $3,250

§ 685, the trust may not accept aggregate contributions by or for the benefit of an individual in excess of $8,000.

.24 Expatriation to Avoid Tax . For calendar year 2004, the amounts used under § 877(a)(2), regarding whether an individual’s loss of United States citizenship had the avoidance of United States taxes as one of its principal purposes, are more than $124,000 for “average annual net income tax” and $622,000 or more for “net worth.”

.25 Valuation of Qualified Real Prop- erty in Decedent’s Gross Estate . For an estate of a decedent dying in calendar year 2004, if the executor elects to use the special use valuation method under § 2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use § 2032A that is taken into account for purposes of the estate tax may not exceed $850,000.

.26 Annual Exclusion for Gifts . (1) For calendar year 2004, the first $11,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts under § 2503 made during that year.

(2) For calendar year 2004, the first $114,000 of gifts to a spouse who is not

.19 Medical Savings Accounts . (1) Self-only coverage . For taxable years beginning in 2004, the term “high deductible health plan” as defined in § 220(c)(2)(A) means, for self-only coverage, a health plan that has an annual deductible that is not less than $1,700 and not more than $2,600, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits does not exceed $3,450.

(2) Family coverage . For taxable years beginning in 2004, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $3,450 and not more than $5,150, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits does not exceed $6,300.

.20 Interest on Education Loans . For taxable years beginning in 2004, the $2,500 maximum deduction for interest paid on qualified education loans under § 221 is reduced under § 221(b)(2)(B) when modified adjusted gross income exceeds $50,000 ($100,000 for joint returns), and is completely eliminated when

modified adjusted gross income is $65,000 ($130,000 for joint returns).

.21 Treatment of Dues Paid to Agricul- tural or Horticultural Organizations . For taxable years beginning in 2004, the limitation under § 512(d)(1), regarding the exemption of annual dues required to be paid by a member to an agricultural or horticultural organization, is $124.

.22 Insubstantial Benefit Limitations for Contributions Associated with Charitable Fund-Raising Campaigns .

(1) Low cost article . For taxable years beginning in 2004, the unrelated business income of certain exempt organizations under § 513(h)(2) does not include a “low cost article” of $8.20 or less.

(2) Other insubstantial benefits . For taxable years beginning in 2004, the $5, $25, and $50 guidelines in section 3 of Rev. Proc. 90–12, 1990–1 C.B. 471 (as amplified and modified), for disregarding the value of insubstantial benefits received by a donor in return for a fully deductible charitable contribution under § 170, are $8.20, $41, and $82, respectively.

.23 Funeral Trusts . For a contract entered into during calendar year 2004 for a “qualified funeral trust,” as defined in

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insurance contract that are treated as paid by reason of the death of a chronically ill individual, is $230.