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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
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6. Education credits earning limit increased
The Hope and Lifetime Learning tax credits are two other popular tax-saving ways to pay for college costs. This filing season, you can make up to $42,000 as a single filer and still claim these credits in full; married filing jointly taxpayers can make up to $85,000. These earning limits are $1,000 and $2,000 higher, respectively, than they were the previous tax year. If you make more than those amounts for your filing status, your credit claims will be reduced and possibly eliminated.

7. Environmentally friendly cars
If you purchased either a hybrid car or a fully electric auto last year, you'll continue to get the maximum tax breaks this year as a reward for your environmentally friendly driving. The deduction for hybrids and other alternative-fuel vehicles, as well as the credit for fully electric vehicles, had been scheduled to start phasing out last year, but the Working Families Tax Relief Act of 2004 postponed the reductions.

So hybrid drivers who bought their cars last year can still claim the full $2,000 deduction on their 2004 returns (as long as they file Form 1040, that is; the deduction can only be taken on line 35 of that form). And if you're going to buy an alternative-fuel auto this year, you'll also get the full deduction. In 2006, however, the deduction drops to $500 and it will disappear in 2007.

Similarly, the reduction of the tax credit for purchasers of fully electric autos is postponed until 2006. This larger tax break -- a $4,000 credit -- will remain in effect for electric cars bought in 2004 and 2005 before being phased out by 2007.

8. Expansion of child tax credits
On 2004 returns, this tax credit could cut a parent's tax bill by $1,000. Thanks to the Working Families Tax Relief Act that became law in October, this same savings-per-child amount will continue through 2010. This popular and easy-to-claim credit has one drawback: It's nonrefundable, meaning that if it's more than the tax you owe, the excess credit is wasted.

But its companion tax break, the additional child tax credit, could help some parents get a part of that excess back based on a percentage of their earned income. The same law that extended the child tax credit amount through the end of the decade also upped the allowable additional child credit percentage to 15 percent vs. the previous 10 percent limit. This increase should let eligible taxpayers get a bigger tax break.

9. SUV loophole closed
If you bought a large sport utility vehicle and started using it primarily for your business (either full- or part-time) before Oct. 23, 2004, you are going to be a happy filer this year. But if your heavy-duty ride went to work for you on that day or later, your tax write-off has dropped dramatically.

Previously, business filers could expense up to $100,000 of the cost of a 6,000-pound company vehicle. Many folks took advantage of this law to make Hummers and their heavy-duty brethren official business vehicles. But the American Jobs Creation Act of 2004 that was signed into law last autumn throws a major roadblock into the path of the SUV tax break.

The $100,000 deduction is still around for vehicles bought since the law took effect, but only if they weigh at least 14,000 pounds. A relatively smaller SUV placed in service on or after the law took effect will only get its owner a $25,000 write-off.

What if you purchased your high-dollar, but lighter-weight, SUV on Oct. 22, 2004, or earlier? You're in luck. You can claim the larger, prior-law amount on your 2004 returns.

Remember, regardless of which amount applies to your vehicle, the deduction can only be claimed on vehicles that are used at least 50 percent of the time for business, and then only up to the actual percentage of use that is business-related.

10. IRA deduction phase-out range is bigger
Many taxpayers continue to fund traditional IRAs, either because they do not meet Roth account guidelines or they want the tax deduction that comes with the original IRA account. That deduction, however, is phased out at certain income limits if you also are covered by a retirement plan at work.

For 2004 taxes, more traditional-IRA holders should be eligible for at least some deduction of their contributions because the adjusted gross income limit has been raised. Single and head-of-household filers covered by a company retirement plan can make up to $45,000 and still get a full IRA contribution deduction. They're allowed a partial deduction if their income falls between $45,000 and less than $55,000.

Married couples filing joint returns can make up to $65,000 modified adjusted gross income and get the full deduction; a partial deduction is available when income falls between $65,000 and up to $75,000. Your tax form instructions have worksheets to help you determine just how much of your contribution can be used to reduce your tax bill.

You can put up to $3,000 ($3,500 if you're 50 or older) in your IRA for the 2004 tax year. You have until April 15 to make the contribution, regardless of whether you deduct it.

Freelance writer Kay Bell writes Bankrate's tax stories from her home in Austin, Texas, and blogs each day on tax topics at Don't Mess with Taxes.

-- Posted: Jan. 24, 2005
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