New, revised tax breaks can help ease pain of filing

PERSONAL FINANCE

March 30, 2003|By EILEEN AMBROSE

WITH ABOUT two weeks to go until the tax deadline, 40 percent of the 132 million expected returns have yet to be filed.

Taxes and procrastination are a common combination, but Matthew Hitt, a Towson accountant, says this year it's worse than usual. His clients are waiting a week to 10 days longer to come in for their tax return preparation.

"A lot of things have tempered people's excitement about getting their taxes done and getting their refunds," especially the war and the weak economy, Hitt said.

Late filers tend to be those who owe Uncle Sam money. But in the rush to meet the filing deadline, they should be careful not to overlook provisions to lessen the tax bite. There are new and revised tax breaks this year. Among them:

Education: New is a deduction for up to $3,000 in higher-education expenses, available to single taxpayers with adjusted gross income of up to $65,000 and married joint filers with income up to $130,000.

The deduction can't be taken the same year the taxpayer is claiming the Hope Scholarship credit or Lifetime Learning credit for the same student.

The Hope provides a maximum credit of $1,500 each year for education expenses per student, but only for the first two years of college. The maximum Lifetime credit is $1,000 per family, and applies to undergraduate and graduate work plus courses to improve job skills.

Generally, filers are better off with a credit than a deduction. Deductions reduce the amount of income to be taxed, but credits reduce your tax bill dollar for dollar. Even so, the new deduction will appeal to those whose income levels are too high to be eligible for one of the credits, experts said.

Another new deduction is available to teachers, aides and counselors from kindergarten through high school who pay for school supplies out of their own pocket and aren't reimbursed. They can deduct up to $250 of these costs.

Student loans: Time limits have been dropped so that interest on student loans can be deducted no matter the age of the loan.

Also, income limits have been raised so more people will be eligible to deduct up to $2,500 in interest paid last year. The deduction now phases out for singles with incomes of $50,000 to $65,000, and joint filers with income of $100,000 to $130,000.

Retirement: People have until April 15 to contribute to a traditional or Roth individual retirement account for 2002. The limit has been raised from $2,000 to $3,000, although those 50 and older can make an additional $500 "catch-up" contribution for a total of $3,500.

Those not covered by a retirement plan at work can deduct contributions to a traditional IRA no matter their income. Married couples filing jointly with adjusted gross income of up to $64,000 and singles with incomes of up to $44,000, are eligible to deduct some or all of their contributions to a traditional IRA, too.

There's also a new credit for lower-income taxpayers who contribute to an IRA, 401(k) or other retirement plan. Depending on their income, they can get a credit equal to 10 percent, 20 percent or 50 percent of the first $2,000 of contributions.

The largest credit goes to married couples with income up to $30,000, heads of households with income not over $22,500, and singles with income up to $15,000. The credit is in addition to deductions for IRA contributions.

Hybrid cars: If you purchased a new Honda or Toyota hybrid gas-electric car last year, you can get a one-time $2,000 deduction.

Those who bought a hybrid before last year can qualify for this new deduction by filing an amended return.

Adoption: Those adopting a child can get a credit for up to $10,000 - twice the previous amount - for related expenses, including travel, attorney fees and court costs. The credit is phased out for filers with adjusted gross income of $150,000 to $190,000.

Overlooked deductions: While not new, some people may forget these deductions:

Mortgage refinancing hit a record last year. If homeowners paid points to get a lower interest rate, they can deduct part of that expense each year over the life of the loan, said Sandy Botkin, a former IRS lawyer and chief executive of the Tax Reduction Institute in Germantown. A point is 1 percent of the loan.

Also, homeowners should be aware that once they sell the house or refinance again, any point expenses remaining to be deducted on the old mortgage are immediately deductible, Botkin said.

Those seeking a job can deduct expenses related to the search, including resume preparation, travel, postage or employment services, that exceed 2 percent of adjusted gross income, said Donna LeValley, contributing editor of J. K. Lasser's Your Income Tax 2003.

Of course, you don't have to be laid off to be eligible for deductions, and those seeking a better job, too, can qualify, LaValley said. "There is only one limitation. You have to look for a job in the same [field]," LeValley said. So, the expenses for a lawyer-turned-clown won't be deductible, she said.

To suggest a column idea, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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