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.
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
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
9. SUV loophole
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
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.