It's that time again
It won't be as taxing as last year. Lower rates and marriage penalty relief continue, and a majority of returns may be filed electronically.
By HELEN HUNTLEY
Published January 23, 2005
Ready for tax season? This could be one of the easiest and most financially rewarding for millions of U.S. taxpayers. It also could be the first in which a majority of the 133-million returns are filed electronically, a money-saving milestone for the IRS.
The lower tax rates and marriage penalty relief that took effect for 2003 returns are still with us, but there are none of the big confusing changes that made tax time a particular headache last year. This time there are no mid-year changes in capital gains rates, no advance child credit that parents can't remember collecting and no changes in the dividend rules that brokerages have to figure out.
"On the whole it should be easier because there's not too much that's really new," said Mark Luscombe, principal analyst for CCH Inc., which publishes tax software and information. "In fact, some of the tax law changes were extending things that otherwise were set to expire; they kept things on an even keel."
One of the more rewarding changes, particularly for Floridians, is the addition of a deduction for state sales tax for those who itemize returns. That means bigger refunds or smaller tax payments for millions of taxpayers. In Florida only about 25 percent of tax filers usually itemize, but the extra deduction could make it profitable for some of those who took the standard deduction in the past to switch.
While preparing a return is likely to be easier than last year for many people, that doesn't mean it will be simple, especially for those who do it themselves.
"Without a doubt, the largest source of compliance burdens for taxpayers and the IRS alike is the overwhelming complexity of the tax code," Taxpayer Advocate Nina Olson said in a report to Congress this month. She said education tax breaks and retirement savings incentives are among the most difficult parts of the law to understand, along with the earned income tax credit and the Alternative Minimum Tax.
And confusing tax laws aren't the only difficulty. Bad record keeping is the biggest problem for many taxpayers, said Mark Steber, vice president of tax resources for Jackson Hewitt, a tax preparation chain. He said people forget about deductible expenses they've incurred and don't know where to find their receipts.
"You miss a lot of different things that way," he said.
It's no wonder that fewer and fewer people tackle return preparation with only the tax forms and a calculator to guide them. Last year 62 percent of all returns were signed by a paid preparer. An even larger proportion, 85 percent, were prepared on a computer.
The growth in computerized tax preparation has gone hand in hand with the acceptance of electronic filing. That's a boon for the IRS, which saves millions of dollars by printing, mailing and processing fewer paper returns.
Last year more than 61-million returns were filed electronically. This year that number could grow to more than 66-million.
The prime incentive for taxpayers to file electronically is a faster refund. With direct deposit to your bank account, you are likely to have your money within two weeks. Even if you owe money, there are a couple of lesser incentives for electronic filing - you get a receipt for your return and there's less chance of an error during processing. You have the option of delaying payment until April 15 even if you file earlier.
The IRS is encouraging the trend to electronic filing through a partnership with tax preparers offering free online filing to millions of people. Last year 4.1-million taxpayers took the IRS up on its offer. This year's Free File service, accessible through the IRS Web site (www.irs.gov) got up and running last week. Fifteen companies are participating. While most have eligibility requirements, some of the services, including TurboTax for the Web, are available free to anyone accessing them through the IRS site.
Whether you file electronically or prepare your return the old-fashioned way, here are some areas that merit attention this year:
* Inflation adjustments produced small changes in some key numbers that apply to 2004 returns. Personal exemptions are worth $3,100 apiece. The standard deduction is $4,850 for singles, $7,150 for heads of household and $9,700 for married couples filing jointly.
* Congress kept the child tax credit at $1,000 and made more of it refundable.
* Teachers should welcome the extension of the $250 deduction for elementary and secondary school educators who spend their own money on classroom supplies. You don't have to itemize to take this deduction.
* Income limits have been increased for deducting contributions to individual retirement accounts. They are now at least partly deductible for people covered by retirement plans who have incomes of up to $55,000 if single and $75,000 if married filing jointly. You have until April 15 to make a contribution you can deduct on your 2004 return.
* The deduction for college tuition and fees has increased. A deduction of up to $4,000 is now available for filers with incomes of up to $65,000 for single people and $130,000 for married couples. A deduction of up to $2,000 is available for those with incomes up to $80,000 if single and $160,000 if married. One big drawback: You can't claim both the deduction and the Hope or lifetime learning credit in the same year for the same student. In addition, expenses paid by a scholarship or a tax-free withdrawal from an education savings plan cannot be used toward the deduction.
* Buyers of hybrid gas-electric cars still can get a $2,000 clean fuel deduction. The Ford Hybrid SUV now qualifies in addition to the Toyota Prius, Honda Insight Hybrid and Honda Civic Hybrid. You must be the original owner to take this one-time deduction, which can be claimed even if you don't itemize.
* Business owners who bought an SUV in 2004 can expense costs of up to $100,000 if they bought it before Oct. 23. Starting that date, the expense limit dropped to $25,000. Bonus depreciation allowances also are availble on qualifying business property purchased and placed into service by Dec. 31.
* You might be subject to the Alternative Minimum Tax if your income is more than $40,250 if you are single or $58,000 if you are married filing jointly, although it more typically applies to returns with incomes of more than $100,000. Factors that can trigger the AMT include exercising incentive stock options and claiming a large number of exemptions.
* Combat pay may be counted in calculating the earned income credit and the child credit even though it is not taxable as income. This change will allow more military personnel to qualify for the credits.
* A new deduction is available for attorney's fees and court costs related to discrimination lawsuits. It applies only to judgments or settlements occuring after Oct. 22, 2004.
Helen Huntley can be reached at 727 893-8230 or email@example.com
TAX RETURNS BY THE NUMBERS
85%: Prepared by computer
78%: Claimed a refund
62%: Signed by paid preparer
48%: Filed electronically
39%: Signed up for direct deposit
33%: Itemized deductions
20%: Claimed the child tax credit
Source: IRS, based on returns filed Jan. 1-Aug. 27, 2004
Top deductions on individual returns, 2001
Home mortgage interest.............................$330.7-billion
State and local income taxes............................$196.4-billion
Real estate taxes............................................$101.9-billion
Unreimbursed employee business expenses...........$57.4-billion
Medical and dental expenses..............................$47.1-billion
Investment interest expenses..............................$17.0-billion
Personal property taxes...................................$7.8-billion
Source: Internal Revenue Service
[Last modified January 23, 2005, 00:13:14]
[an error occurred while processing this directive]