February 06, 2005|By Eileen Ambrose | Eileen Ambrose,SUN STAFF
"It looks like the IRS is probably going to be a little suspicious of those year-end [contributors]," said Mark Luscombe, the principal federal tax analyst for CCH Inc., a tax information provider in Riverwoods, Ill.
Tsunami relief. To encourage donations for the victims of the southern Asia tsunami that struck in late December, federal legislation was passed a few weeks ago to allow January donations to be deducted on 2004 tax returns. To qualify, the money must go toward an IRS-approved charity and be used for tsunami relief.
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.
To find out if a charity gets the thumbs up from the IRS, check Publication 78.
Extended engagement. Some tax breaks that were on their way out have been revived to live at least another tax season or two.
Elementary and high school teachers, for instance, can continue to deduct up to $250 they spend out-of-pocket on classroom supplies. They don't have to itemize to take the deduction. This perk was supposed to expire in 2003 but it was extended to the end of this year.
The child tax credit remains at $1,000 per child, age 17 and younger, instead of dropping to $700 -- the higher credit was extended through 2010. This credit begins to phase out once income reaches $110,000 for joint filers and $75,000 for singles.
Not too late to save. It's 2005, but you still can make a contribution for 2004 to an individual retirement account. The deadline is April 15. The contribution limits for 2004 are a maximum of $3,000 for younger workers, plus an extra $500 for those 50 and older.
If you're not covered by an employer or self-employed retirement plan, your contributions to a traditional IRA are fully deductible, no matter your income. If you participate in a workplace plan, then deductions begin to phase out once income exceeds $45,000 for a single filer and $65,000 for joint filers.
Another option is the Roth IRA, where you don't get a deduction upfront, but the principal and earnings can be withdrawn tax-free in retirement. Contributions begin to be phased out once adjusted gross income reaches $95,000 for single filers and $150,000 for joint filers.
The contribution limit for IRAs rises to $4,000 this year, although the catch-up contribution for those 50 and older remains the same.
More reasons to save more. This won't affect your current tax return, but the amount of dollars you can squirrel away in tax-friendly retirement accounts at work goes up this year, too. Workers can contribute up to $14,000 this year, or $1,000 more, in a 401(k) or similar type plan. Those 50 and older can sock away an additional $4,000, or $1,000 more, if their employer permits catch-up contributions.
Money goes into 401(k)s before taxes are paid on it, so it reduces your taxable income now. You'll pay regular income tax on the money when you make withdrawals.
Maryland millionaires. Maryland's estate tax laws used to just go along with whatever changes the federal government made. Not any more.
An individual now can shelter up to $1.5 million from federal estate taxes, and the amount is set to go even higher. But Maryland, seeing a loss of revenue, split from the federal law last year. Residents can shelter a maximum of $1 million from the state. The potential Maryland estate tax on that $500,000 difference is about $64,000.
"You can have a situation where you're not even liable for filing a federal estate tax return, but have to pay Maryland estate tax," said Joel S. Maller, a certified public accountant with the Maller Group in Rockville.
Most likely, married couples with estates over $1 million and who have set up trusts based on the federal exemption will need to amend their documents, said Jeffrey K. Gonya, a Baltimore lawyer. In these cases, a will may have to be revised to give a surviving spouse the flexibility of when to recognize Maryland taxes, he said.
For some, the changes in Maryland law could cause them to accelerate efforts to give away assets to children and others to reduce the size of their estate.
You might not feel like a million bucks, but it's easier than you think for your estate to reach that point. With rapid house appreciation in recent years, life insurance policies, retirement and investment accounts, a couple's estate could top $1 million without them knowing it, Maller said.
Free help
A variety of community groups are offering free tax help for low- to moderate-income individuals or older taxpayers.
Here are sources to find the nearest location and information about appointments:
Internal Revenue Service: 800-829-1040
Maryland Volunteer Lawyer Service: 800-510-0050
United Way's First Call for Help: 800-492-0618
Baltimore Creating Assets, Savings and Hope Campaign: Online at www.baltimorecash.org.
Audits of wealthy increased in 2004
Hey, big earner, the Internal Revenue Service is keeping a closer eye on you.
For the year that ended in September, the IRS conducted more than 195,000 audits of taxpayers with earnings of $100,000 or more, a 40 percent increase over the year before.
