The Bush administration may want to rewrite the tax code from top to bottom, but unless and until that happens, we taxpayers still have to live with the old one. It's the tax code...
WASHINGTON — The Bush administration may want to rewrite the tax code from top to bottom, but unless and until that happens, we taxpayers still have to live with the old one. It’s the tax code we’ve got, as they might say at the Pentagon, not the tax code we want.
So the time has come again to start getting ready for that spring ritual, tax-return filing season.
The Internal Revenue Service (IRS) is mailing out about 29.5 million tax-form-and-direction packages, though it projects this year, for the first time, more than half of the 133 million individual returns expected will be filed electronically.
Most Read Stories
- 83-year-old woman sexually assaulted in SeaTac assisted-living facility; assailant sought
- Put down that cellphone; distracted-driving law is here
- What drivers can and cannot do under Washington state's new distracted-driving law
- Trade analysis: Mariners deal a top prospect in Tyler O'Neill but leave their biggest hole unfilled
- Illicit skatepark on Green Lake’s Duck Island: Cops called on bowl built in bird habitat WATCH
That taxpayers are turning increasingly to computers should be no surprise. Despite the political mouthings about making the law simpler, it gets more complicated every year.
Not only is Congress cranking out new laws with amazing frequency — two major bills last year alone — but provisions in older laws are written to blink on and blink off, so that you can never be sure what you can and can’t do without looking it up.
Many of this year’s changes involve minor adjustments: increased deductions or credits here, easing of income limits there. But for taxpayers affected, they can be well worth knowing about.
As you begin to assemble the necessary records for your 2004 return, here are some law changes to keep in mind:
Sales tax: As has been widely reported, you can deduct your state/local sales tax. You can use state-by-state IRS tables to figure your sales-tax deduction, but you can also use actual receipts. In fact, sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the general sales-tax rate. (The tax rate on these items may be higher.) So if you had an outsized purchase last year, you may want to hunt up the sales ticket.
Tax credits: You’ll recall there is a special child tax credit of up to $1,000 per child for low- and middle-income families. Since a credit reduces the amount of tax owed dollar for dollar, it’s possible for this credit to wipe out some families’ tax altogether. In fact, it may more than do so.
For some, there’s an “additional child credit” that is “refundable,” meaning those taxpayers can get a refund when their credit is greater than the tax they owe. This feature is to try to make sure lower-income taxpayers get full value from the credit.
This year, the additional credit is refundable for certain families up to 15 percent of the amount by which their earned income exceeds $10,750, though the total may not exceed $1,000 per child. The rate had been 10 percent. As a result, families may be eligible for a larger credit.
You’ll need to use the Child Credit Worksheet with Form 1040 or 1040A, and then Form 8812 to figure it all out.
Amounts and income limits for the earned income tax credit (EITC) — used by lower-income working people — have been adjusted for inflation, making the credit slightly larger and slightly easier to claim.
Combat pay: Sad to say, more and more families are drawing this these days, and Congress has helped in some small way by allowing this pay to boost the child credit and EITC. Combat pay, though excludable from income for regular tax, is included in calculating the child credit, potentially boosting that. And nontaxable combat pay can be counted or not counted in figuring the EITC, whichever is more advantageous.
Retirement accounts: The 1997 and 2001 tax bills built into the law a number of increases in the amount workers can contribute to various retirement plans, and the limits on income a worker with a company retirement plan may have and still deduct a contribution to an individual retirement account.
It’s too late to do much about your 401(k) or similar plan for 2004, but you can still set up and/or contribute to an IRA for 2004 until the due date of your 2004 return (not including extensions).
The limit on 2004 IRA contributions stayed at $3,000 for taxpayers under 50 and $3,500 for those 50 or older, but the level at which the deduction starts to phase out for those who also have company plans rose to $45,000 for single taxpayers and $65,000 for married couples filing jointly.
And for your planning, remember that the 2005 IRA limit rises to $4,000 ($4,500 for those 50 or older). Those limits also apply to Roth IRAs, if you’re eligible.
Also, the deduction phaseout this year begins at $50,000 for a single and $70,000 for a couple. (Roth contributions are never deductible; instead, they are tax-free in retirement.)
Part-year changes: Two new provisions may affect you if you made certain transactions after specific dates.
First, for most noncash charitable contributions made after June 3, there are tougher reporting requirements: If your donation was worth more than $5,000, you must obtain a qualified appraisal and attach Form 8283 to your return. For gifts worth more than $500,000 ($20,000 if the gift was art), you must attach a copy of the appraisal.
Second, taxpayers who sell their principal residence after living in it two years or longer can exclude from taxable income profit of up to $500,000 for a couple or $250,000 for a single person.
But after a change passed in the fall, they may not exclude any of the gain on the sale of their home if they sold it after Oct. 22, 2004, and had acquired it in a like-kind, or 1031, exchange during the five years before the sale.