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Another filing season
has arrived, bringing with it the perennial tax-law
changes.
Some of the changes are provisions from
legislation passed years earlier that finally took effect
in 2004. You can thank Internal Revenue Service rulings
for a few. And two new laws enacted in October bring
both good and bad news this filing season, depending
on your tax specifics.
If you're a parent, a student or resident
of a state with a high sales tax rate but no income
tax, you'll probably find something to like on your
current return. On the other hand, if you plan to write
off an SUV purchase or donate a car this year, you could
be out of tax luck.
Here are 10 tax changes you should
know about. Most of them will affect your return due
this April. A couple won't matter this filing season,
but you need to know about them now so that you won't
run into tax trouble when you file next year.
1. Sales tax break
The big tax news, at least for people in Texas, Florida
and the other states without an income tax, is that
state
sales taxes are now deductible on federal returns.
To claim this tax break you'll have to
itemize and then determine which tax amount, sales or
income, provides you with the biggest deduction. You
can count all the sales taxes you paid in 2004, but
since this deduction was created last October as part
of the American Jobs Creation Bill, most people probably
don't have sales receipts for the whole year. So the
IRS created state tables providing an average sales
tax deduction amount based on income levels that you
can claim. Local levies also can be counted (you'll
have to fill out a worksheet to determine how much more
you can deduct), as can sales taxes you paid on the
purchase of an auto, boat, other vehicles and home building
supplies.
2. Charitable considerations
The tax code has long provided rewards for generous
filers, and this tax season is no different. In fact,
a special law change was made early this year to allow
some 2005 donations to count against 2004 taxes. Contributions
made by Jan. 31 to tsunami
relief funds can be deducted on your current return
rather than being delayed until you file 2005 taxes
next year. If, however, you'll get more of a tax benefit
by waiting, you can decide to wait to deduct your charitable
gift to tidal wave victims. A couple of things to remember
here: You must itemize to deduct any contributions,
and in addition to being made by the end of January,
your tsunami donations must be in the form of cash,
check or credit card.
But what the tax code gives, it also takes.
If you donate a vehicle to your favorite nonprofit in
2005, you might not get as big a tax break on next year's
returns as you expect. Previously, you could deduct
the fair market value of the vehicle (usually the Blue
Book amount). But a new law has scrapped that option.
For any donations made this year, exactly how much you
can claim on your 2005 taxes will depend on how the
charity uses the vehicle and, if they sell it, how much
they actually get for it.
This vehicle contribution change took
effect Jan. 1, so if you donated
a car in 2004, you can still use the earlier, more
lenient valuation guidelines on your current taxes.
3. Easier forms
for more filers
If you don't need to itemize to claim the sales tax,
charitable donation or any other allowable deductions,
you'll probably file one of the easier 1040 incarnations:
the 1040A or the 1040EZ. This filing season, even more
taxpayers are eligible for these two forms because the
income limit has been raised. Previously, you could
only use these two if your taxable income was less than
$50,000. This year, you can make up to $100,000 and
file a 1040A or 1040EZ.
Self-employed taxpayers, both those who
run a full-time business and those who operate one on
the side to supplement a wage-paying job, get some tax-form
help, too. If the expenses you claim against self-employment
income are $5,000 or less, you can file the less-complicated
Schedule C-EZ instead of Schedule C. Last year, the
expense limit was $2,500. The IRS says the threshold
change means approximately 500,000 more small businesses,
a 15 percent increase, will be able to file C-EZ, saving
themselves a combined 5 million hours of paperwork.
4. Educator tax
break revived
When 2004 began, this tax break was dead, but lawmakers
resuscitated it as part of the Working Families Tax
Relief Act so teachers can continue to deduct
$250 of their classroom expenses. You don't have
to itemize to claim this deduction; it's claimed directly
on Form 1040 or 1040A. And it isn't limited to teachers.
Principals, instructors, counselors and aides who work
at least 900 hours during the school year in a public
or private school, kindergarten through grade 12, also
can claim it. The educator expenses deduction will continue
through 2005, but is scheduled to expire, again, at
the end of that year.
5. Larger tuition
and fees deduction
The amount of qualified education expenses you can take
into account in figuring this tax break is now $4,000.
This is up a grand from last year. You'll find this
deduction directly on Form 1040 and Form 1040A, meaning
you don't have to itemize to take advantage of it. Just
remember, this easy-to-claim deduction has an income
limit. Single filers can take it as long as their total
income is less than $65,000; the income cap is twice
that for married couples filing jointly. If you make
more than that, all might not be lost. As long as you
made $80,000 or less ($160,000 or less for married filers),
you can still can claim up to $2,000 in tuition and
fees.
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