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On money

Deductions for people who don't itemize

By HELEN HUNTLEY
Published February 20, 2005

I'm getting accustomed to crestfallen looks when people ask me about the new sales tax deduction. You only benefit if you itemize deductions on your federal income tax return, which most taxpayers don't.

If you rent or if your mortgage is nearly paid off, the standard deduction the IRS allows is probably bigger than your itemized total, even with sales tax included. That's mostly a benefit because the standard deduction makes calculating your taxes a lot easier, but it leaves many people feeling they're missing out on something.

The good news is that there are some deductions you can take even if you don't itemize. The catch is that they don't apply to everyone. However, if you happen to qualify for one or more of them, you can save some money on your tax return.

I'm talking about "above the line" deductions, so called because they are subtracted before you get to your adjusted gross income. If you think you might be able to use one or more of these, check the instructions for Form 1040 or go to www.irs.gov and read up on the requirements for claiming the deductions. Here are some possibilities:

* IRA contributions. You may be able to deduct up to $3,000 on your 2004 return ($3,500 if you are 50 or older). You have until April 15 to contribute.

* Classroom expenses. Elementary and secondary teachers can deduct up to $250 for out-of-pocket expenses on classroom supplies.

* College tuition and fees. Up to $4,000 may be deductible, but you may be better off taking the Hope or Lifetime Learning credit instead if you qualify.

* Student loan interest. Up to $2,500 may be deductible.

* Alimony. Alimony is deductible, but property settlements and child support are not.

* Moving expenses. If you take a new job that's at least 50 miles farther from your home than your old job, you may be able to deduct the cost of moving.

* Bank early withdrawal penalties. If you paid a penalty for cashing a CD before maturity, it's deductible. Look on the 1099 form for "forfeited interest."

* Health savings account contributions. You may be eligible for a health savings account if you have a high-deductible health insurance policy.

* Self-employment deductions. You probably can deduct your health insurance premiums, retirement plan contributions and half your self-employment tax.

* Clean fuel cars. A deduction of up to $2,000 is available for purchase of certain gas-electric cars placed into service last year.

I need a more reasonable return than my CDs and money markets provide. A financial adviser told me that Progress Energy is a solid utility that pays a 5.7 percent dividend and also suggested Inland Real Estate, a real estate investment trust that he says pays about a 10 percent dividend. I have not been able to find information. Can you help?

You should be able to get information from any sources that cover stocks, such as Value Line and Morningstar, as well as on the Internet. The reference desk at the public library may be able to help. Dividend yields vary with stock prices. When I checked recently, Inland Real Estate's yield was 6 percent and Progress Energy's was 5.3 percent.

I am concerned that you may be taking risks you don't understand. I recommend that you learn more about investing before switching from CDs to stocks. Eric Tyson's Investing for Dummies is a good primer.

I have been supporting a friend who owes tax money to the government. If I claim her on my taxes this year as a dependent, would the government withhold my tax refund?

The IRS says it would not withhold your refund because one of your dependents had a tax liability. It would be different if it were your spouse and you were filing jointly.

Just be sure that you are entitled to claim her as a dependent. For a nonrelative to qualify, a list of requirements must be met, including that she lived in your household for the entire year and had gross income of less than $3,100.

You cannot claim someone with whom you have a relationship that would be considered illegal under state law such as an unmarried man and woman living together.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 31, 2005, 11:13:32]