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Doing your taxes can be less frustrating, less time-consuming and less costly if you're prepared.

New tax laws that could affect your 2004 return

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.

-- Posted: Jan. 24, 2005
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