Lessening the pain

Congress revives the sales-tax deduction, increases break for college tuition

February 06, 2005|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Last fall, Congress passed two major tax bills with big names that are easy to forget.

But taxpayers should remember that there are new tax breaks available as they prepare this season's returns.

In some cases, the tax breaks aren't new, but rather renewed. The deductions and credits had expired or were on the verge of doing so, and Congress extended them. That makes the filing season a lot less chaotic than it could have been.

Beyond actions taken under the Working Families Tax Relief Act of 2004 and the American Jobs Creation Act of 2004, changes in older tax regulations kick in this year, too.

FOR THE RECORD - An article in Sunday's Business section incorrectly stated the age a child must be for parents to receive the child tax credit. The child must be under 17 at the close of the tax year.
The Sun regrets the errors.

So, whether you shop, send a child to college or save for retirement, you might be able to keep more money in your pocket instead of sending it to Uncle Sam.

For Marylanders, the important change is that the state last year split from federal estate tax rules. That means residents could get hit with a bill from the state if they don't plan properly.

Here are some of this season's tax highlights:

Keep those receipts. The big change from last year is that Congress revived an old deduction: the sales tax. Filers can now choose to deduct the state and local sales taxes they paid over the year on their federal tax returns or continue to deduct their state and local income taxes. You must file an itemized return to use this deduction.

For residents of states with low or even no income taxes, such as Texas, Florida and Nevada, taking the sales tax deduction is a no brainer.

Residents in states with higher income taxes -- and Maryland is in that category -- generally will be better off sticking to deducting income taxes. However, if residents in these states made a major purchase, such as a boat, car or home-building materials, it could be to their advantage to deduct sales taxes.

You can deduct the sales taxes you actually paid last year or use an estimate created by the Internal Revenue Service and listed in Publication 600.

"Very few people kept all their receipts, since the law was enacted late in the year," said Bob D. Scharin, editor of RIA's Practical Tax Strategies, a publication for tax professionals.

The IRS estimates, available online at www.irs.gov, are based on a filer's state, income and family size.

Filers who pay local sales taxes on top of a state sales tax will need to complete a worksheet in the publication to figure their deduction. "Nothing is simple there," Scharin said.

As of now, this tax break is only in effect for last year and this year.

Simpler times ahead: Form 1040 has 75 lines and Schedule A, where you itemize deductions, has an additional 28. Filling out both these forms -- from start to mailing the finished return to the IRS -- is expected to take an average of 19 hours and 12 minutes this year.

A year ago, anyone with taxable income of $50,000 and over had to file the 1040. Now that income limit has been raised, making more people eligible to use easier forms.

Anyone with taxable income of less than $100,000 can file Form 1040A (48 lines; 10 hours and 25 minutes) or the 1040EZ (12 lines; 3 1/2 hours.) "If you are itemizing, you would still need the 1040," Scharin said.

A little help for the armed forces. There's an earned-income tax credit designed to help low-income individuals by reducing their tax bill or giving them a refund if they don't owe taxes. Some of those low wage earners are members of the military.

Combat pay isn't taxed, so it's not considered "earned income" when figuring the credit. But beginning this tax season, members of the military can include all or none of their combat pay when figuring the credit, depending on which option provides the biggest benefit.

This tax provision expires at the end of this year.

Higher deduction for higher education. Filers can deduct up to $4,000 spent on college tuition and fees last year, an increase of $1,000. Single filers with adjusted gross income of up to $65,000 and joint filers with income of up to $130,000 are eligible.

A new perk for higher earners allows them to deduct up to $2,000 in tuition and fees paid. It's available for single filers with adjusted income of more than $65,000 but less than $80,000 and joint filers with income of more than $130,000 but less $160,000. The tax break expires at the end of this year.

Car donations. Many people rushed to donate cars to charities in the last few weeks in December, trying to get their gift under the wire before a new tax law kicked in this year.

If you gave a car to charity last year, you can still deduct its fair market value on this season's return. But donate a vehicle this year, and the deduction could be less substantial.

That's because Congress has tried to stop filers from abusing this deduction by inflating the value of their old vehicles. Starting with this year's donations, filers seeking a deduction of more than $500 will be allowed to deduct only the amount the charity received if it quickly sold the car. If the charity keeps the vehicle, filers can deduct the market value.

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