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Tax Changes That Merit Remembering This Spring

By Albert B. Crenshaw
The Washington Post
Sunday, January 9, 2005; Page F04

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 once again to start getting ready for that American spring ritual, tax-return filing season.

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The Internal Revenue Service said last week it was mailing out about 29.5 million tax-form-and-direction packages, though it expects that this year, for the first time, more than half of the 133 million individual returns it expects to receive will be filed through its electronic filing system.

That taxpayers are turning increasingly to computers should be no surprise. Despite the political mouthings about making the law simpler, the fact is that 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 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 will be able to choose between deducting your state/local income tax and your state/local sales tax. Most taxpayers will continue to find that writing off the income tax is more beneficial -- especially in high-tax jurisdictions like the District -- but special circumstances, such the purchase of a car or boat, can change that. 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 that 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 of those taxpayers, there's an "additional child credit" that is "refundable," meaning that they 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 tax 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.

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