Below the line -- actually on Schedule A -- things haven't changed all that much, though the amounts involved may have. In many places, state and local taxes have gone up sharply, while mortgage interest may have gone down. Or it may not have. BDO's Kelson noted that many people either took out more money or traded up to a bigger house in 2003. "The rate may be lower, but the amount [of interest] may be the same," he said.
The tax cuts of 2001 to 2003 have laid an array of credits before American families, designed to make it easier, especially for middle- and lower-income groups, to save, to afford children and to send their children to college.
David Brooks looks through stacks of tax forms at a New York public library. Some tax credits require special forms.
(Daniel Acker -- Bloomberg News)
Credits are particularly helpful to people in lower brackets because they reduce taxes dollar for dollar, and thus have the same value for all taxpayers. Deductions, by contrast, reduce taxable income and thus are more valuable to people in higher brackets.
First up is the child credit, which is now $1,000 for each child under 17 for couples with income under $110,000 and single parents with income under $75,000. It begins to phase out at those income levels, so parents with somewhat higher income can get a partial credit -- but they will have to use a worksheet to figure it out. Also, the child credit is partly refundable, meaning that if it exceeds the family's tax liability, the filer can get part of the benefit back in cash.
This is the credit that was boosted last summer and the increase paid at that time to most eligible families. However, up to $600 per child remains available.
Then there is the child- or dependent-care credit. A taxpayer who incurs day-care or similar expenses for children or certain other dependents that allow him or her to go to work is allowed a credit of up to $1,050 for one dependent and $2,100 for two or more dependents. The credit, which is not refundable (meaning it can be used only to reduce taxes and cannot be refunded to the taxpayer in cash), is a percentage of qualifying expenses up to $3,000 for one child and $6,000 for two or more. The percentage varies with income -- it's higher for lower-income people -- but there is no income cutoff. However, the credit for child care is limited to children under 13.
Also, RIA's Seidel noted that some people who are using a pretax spending account at work for child care may be able to take a portion of the credit in addition. Form 2441 will walk you through that as well.
For college students, the Hope credit and the Lifetime Learning credit, enacted in 1997, remain available. The Hope's maximum is $1,500 and the Lifetime's is $2,000, but they are calculated differently, so which is better depends on the amount of the student's educational expenses. Also, both get phased out, beginning at incomes of $83,000 for a single person and $103,000 for a couple. However, a well-to-do family may choose to drop its student as a dependent so the student can file independently and claim the entire credit -- assuming the child has income and can use it. This is particularly true if the parents are in the personal-exemption phaseout.
Finally, there are two credits for low-income workers that should not be forgotten: the earned-income tax credit, which has been around for years, and the "saver's credit" (technically the "credit for elective deferrals and IRA contributions"), which was enacted in 2001.
The saver's credit is nonrefundable, but basically tells a worker, if you put some money into a 401(k) or individual retirement account, the government will pick up as much as half the contribution. The full credit of 50 percent for a contribution of $2,000 (for a maximum credit of $1,000) is for couples with incomes of $30,000 or less ($15,000 for singles). The credit goes down as income goes up, disappearing entirely at $50,000 for a couple and $25,000 for a single.
Taxpayers who are in a 401(k) or similar plan at work shouldn't overlook this credit. And since IRA contributions for 2003 can still be made up until this April 15, workers who want to claim the credit may still do so. Use Form 8880.
The earned-income tax credit is very beneficial but very complex. It is refundable, and available to most low-income single workers as well as families. The maximum credit is $4,204 for a family with two or more children. Taxpayers are required to have wage income, and those with children must show that the child or children are their dependents. The credit phases out as income rises, but the exact phaseout depends on marital status as well as number of dependents. To claim it, file Schedule EIC, which can be used with Forms 1040, 1040A and 1040EZ.
The EITC is so difficult that many low-income taxpayers every year are forced to turn to professional preparers. But the IRS also has 14,000 volunteer assistance sites around the country, and taxpayers can call 800-829-1040 (800-TAX-1040) for help in finding one.
Also, taxpayers with Internet access can go to www.irs.gov, click on Free File and be referred to one of the companies that offer free electronic filing. A number of these are specifically for low-income taxpayers.