On to next year

In this final column, baltimoresun.com's tax experts offer tips to help make future tax-filing much easier

Tax Talk

April 21, 2004|By Todd Beamon | Todd Beamon,Baltimoresun.com Staff

Even though Tax Season 2004 is over, next April 15 will be here sooner than you might think.

To help get a jump on next year, baltimoresun.com's tax experts -- Jim Dupree of the Maryland office of the Internal Revenue Service in Baltimore; Nicole M. Harrell, head of her own accounting firm in Baltimore; and Gregory S. Horning of Stout, Causey & Horning in Hunt Valley -- respond to one reader's e-mail, adding tips that could apply to most filers.

I am single with no children. My tax preparer suggested that I borrow from my 401(k) immediately, since the interest rates are so low, and buy a house. I told him I was on a debt-reduction plan right now, and was not ready to buy.

Is there anything else I can do for the next year or two to reduce my taxes, while I work on lowering my debt?

Deborah, Laurel

Dupree: While it is not the purview of the Internal Revenue Service to give financial planning advice, financial decisions should never be made solely based on their tax consequences.

However, borrowing from your 401(k) may be a problem if you quit your job or retire before repaying what has been borrowed. Usually, the unpaid amount must be repaid immediately or it will be considered a taxable distribution and could be subject to a penalty if you are younger than 59.5.

That said, here is some general advice toward helping your tax situation next year:

Adjust your W-4 or estimated tax payments (on the 2004 Form 1040ES) so that the proper amount of federal and state withholdings is reflected. Claiming no allowances will cause more taxes to be withheld from your earnings each pay period, while one or more allowances will cause fewer taxes to be withheld. With 10 or more allowances, the IRS receives W-4 notification from your employer.

You also could consider designating an additional amount withheld for non-wage income or you can make estimated tax payments quarterly.

You can increase your contributions to your 401(k) plan. Such contribution limits have increased to $13,000 -- or $16,000 for those 50 and older -- for tax year 2004. (The deduction for tuition and fees for yourself, your spouse and your dependents also has increased to $4,000 for 2004.)

For 2004, the business mileage deduction increases, and so has medical mileage, an often overlooked deduction for transporting someone for treatment. It is 37.5 cents per mile and 14 cents, respectively.

For 2004, the problems many taxpayers experienced with the Advance Child Tax Credit will not occur next year; it was an issue in 2003 only.

Set a date on your calendar for early February to do your taxes for tax year 2004.

Avoid headaches by keeping track of your receipts and other records over the next year. Good record-keeping will help you remember the various transactions you made during the year, which will help greatly when preparing your taxes.

Records also help you document the deductions you've claimed on your return. You'll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents -- those relating to a home purchase or sale, stock transactions, IRA and business or rental property -- should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may affect your federal tax return. Such items would include bills, receipts, invoices, mileage logs, canceled checks or any other proof of payment -- and any other records to support deductions or credits you may claim on your return.

Good record-keeping saves time and effort at tax time when organizing and completing your return. If you hire a paid professional to complete your return, the records you have kept will help your preparer complete your return quickly and accurately.

Harrell: Deborah, as a single person with no children, there still are some other considerations that may affect your decision:

Have a tax preparer review your tax returns from the past two years to ensure that you have deducted all that is allowed to you. Take into consideration any student loan interest paid, Individual Retirement Account contributions, educational tuition and fees paid.

Many times, single individuals do not think they qualify for itemized deductions because their standard deduction, totaling $4,750 for the 2003 tax year, is greater. Remember that your Maryland state withholding, cash and non-cash charitable contributions, as well as miles traveled for charitable purposes, are deductible on Schedule A of Form 1040. This is in addition to unreimbursed employee expenses and medical expenses that you paid.

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