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Tax Changes That Merit Remembering This Spring

The $5,000 credit for first-time home buyers in the District was extended.

Combat pay: Sad to say, more and more families are drawing this these days, and Congress has helped in some small way by allowing this pay to boost the child credit and EITC. Combat pay, though excludable from income for regular tax, is included in calculating the child credit, potentially boosting that. And nontaxable combat pay can be counted or not counted in figuring the EITC, whichever is more advantageous.

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Tax Changes Guarantee Surprises
Experts say those most likely to face an unpleasant shock are people in the income range of roughly $75,000 to $400,000.

Filed Your 1099 Form?
If you are a mutual fund investor, you may want to wait until the end of the month before filing your tax return.

Falling Into AMT Trouble
The AMT is expected to loom far larger this year, especially in the Washington region than in lower-tax, lower-cost areas of the country.

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Retirement accounts: The 1997 and 2001 tax bills built into the law a number of increases in the amount workers can contribute to various retirement plans, and the limits on income that a worker with a company retirement plan may have and still deduct an individual retirement account contribution.

It's too late to do much about your 401(k) or similar plan for 2004, but you can still set up and/or contribute to an IRA for 2004 until the due date of your 2004 return (not including extensions).

The limit on 2004 IRA contributions stayed at $3,000 for taxpayers under 50 and $3,500 for those 50 or older, but the level at which the deduction starts to phase out for those who also have company plans rose to $45,000 for single taxpayers and $65,000 for married couples filing jointly.

And for your planning, remember that the 2005 IRA limit rises to $4,000 ($4,500 for those who are 50 or older). Thus, a worker under 50 who hasn't made her 2004 contribution can plunk $7,000 into an IRA now, combining the '04 and '05 contributions, and a person over 50 can put in $8,000. Those limits also apply to Roth IRAs, if you're eligible.

Also, the deduction phaseout this year begins at $50,000 for a single and $70,000 for a couple. (Roth contributions are never deductible; instead, they are tax-free in retirement.)

Part-year changes: Two new provisions may affect you if you made certain transactions after specific dates.

First, for most non-cash charitable contributions made after June 3, there are tougher reporting requirements: If your donation was worth more than $5,000 you must obtain a qualified appraisal and attach Form 8283 to your return. For gifts worth more than $500,000 ($20,000 if the gift was art) you must attach a copy of the appraisal.

Second, taxpayers who sell their principal residence after living in it two years or longer can exclude from taxable income profit of up to $500,000 for a couple or $250,000 for a single person. But after a change passed this fall, they may not exclude any of the gain on the sale of their home if they sold it after Oct. 22, 2004, and had acquired it in a like-kind, or 1031, exchange during the five years before the sale.

Tsunami donations of cash made by the end of this month will be deductible on Americans' 2004 returns, thanks to a measure sponsored by Max Baucus (D-Mont.), ranking minority member of the Senate Finance Committee, and backed by the panel's chairman, Sen. Charles E. Grassley (R-Iowa). The measure was passed unanimously in both the Senate and the House and signed by President Bush last week.

Don't use it, still lose it. Treasury Secretary John W. Snow told Grassley last week that workers who fail to use up all the money in their health care flexible spending accounts will continue to lose it at year-end. The senator had asked Snow to see if Treasury could change the rules to permit workers to carry leftover sums forward, instead of forfeiting them to their employer. But Snow replied that the department lacks legal authority to do that. So if Congress wants it fixed, Congress will have to do the fixing itself.

Back to you, Chuck.


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