By and large, Congress made few changes to the tax code that will affect your 2004 taxes. Here's a rundown of the major changes, courtesy of The Post's Albert B. Crenshaw:
Sales tax: 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.
IRA Contributions: 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).
Charitable Contributions: 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.
Some good news for anyone who made a Tsunami relief charitable contribution - contributions made before the end of January 2005 are deductible on your 2004 taxes.
Selling Your Principal Residence: 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 last 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.
For D.C. Residents: The $5,000 credit for first-time home buyers in the District was extended.
Child Tax Credits for Low-Income Filers: The refundable portion of the special child tax credit of up to $1,000 per child for low- and middle-income families increased for 2004. 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) have been adjusted for inflation, making the credit slightly larger and slightly easier to claim.
Personal finance columnist Michelle Singletary says refund anticipation loans, or RALs, are a bad idea for taxpayers. Consumer groups, she writes, "point out that a RAL is a short-term loan backed by a tax refund and that it's a bad deal because of all the fees involved."
Haven't heard of the alternative minimum tax, or AMT? For a growing number of upper- and middle-income filers, it has become a tax-time surprise that winds up costing them even more.
The AMT is a piece of tax law that was created to ensure the rich don't take advantage of loopholes and avoid paying taxes. Thanks to inflation, the AMT is increasingly applied to the middle class.
Under current law, according to experts at the Tax Policy Center of the Brookings Institution and the Urban Institute, almost 30 million taxpayers will be hit by the AMT in 2010.
Unfortunately, the only way you can know if you should pay the AMT is to run your numbers through Form 6251. If you do have to pay the AMT and do not realize it, you will be liable for the additional taxes and interest on that money down the road.
You should check your status if your gross income is above $75,000 and you use some standard deductions such as home-equity loan interest. The same applies to exercised incentive stock options during the year. You should also run your numbers if you own a business, rental properties, partnership interests or S corporation stock.
For more on the AMT, see the following:
"Alternatives to the Alternative Minimum Tax:" Post columnist Albert Crenshaw looks at how some municipal bond mutual fund families are revamping their holdings to help investors avoid the AMT. (Feb. 15, 2004)
"Not Rich? You'll Pay Anyway:" In this piece for The Post's Outlook section, Kevin Adler and Annette F. Simon look at how millions more Americans could find themselves falling subject to the AMT in coming years. (Nov. 2, 2004)
"Tax Cut May Trigger AMT for Some:" Crenshaw explores how the AMT could wind up costing some upper-income families who benefited from the tax cuts passed in 2001. (June 8, 2003)
Many people with low incomes are exempt from filing. But filing a return is a good idea because you may be entitled to get back any taxes withheld during the year or you may be eligible to claim the earned income tax credit. The IRS provides answers to frequently asked questions on their site that will help you determine your correct filing status.
It is a good idea to save your receipts thoughout the year for items you wish to deduct. Make sure to collect all your W-2s from each of your employers last year. Call your place of business and request the form if you have not received it. You will also need a copy of your 1099 from your broker or investment company if you invested in non-deferred investments, such as stocks and mutual funds.
Use our basic checklist to see other items you will need to do your taxes.
Individual filers, in most cases, should refer to the 1040 form.
If you think you may have to file an alternative minimum tax form, you'll need to use the 6251 form. Use a Schedule C to report home-office and other small-business deductions and a Schedule H if you employed a household worker during 2004.
The Internet-age has arrived at the IRS and you can now file electronically using a system called IRS e-file. You have two options for filing electronically, filing automatically or filing with some help from a tax professional. Through IRS e-file, your return is more likely to be error-free, you don't have to worry about papers getting lost in the mail and the IRS says you will get your refund in half the time.
The Live prepare method requires you to fill out some tax information which is then given to a professional to prepare and then e-file. The fee for this service starts at $39.99, which can be paid by credit card or deducted from your refund.
The automated method asks you questions, provides you with the forms you need and allows you to transmit your files directly to the IRS. To use the automated method, you have to pay a $19.95 federal and state filing fee. That fee can be paid for by credit card or deducted from your return.
The IRS Web Site
The IRS Web site is a huge compendium of forms, FAQs, glossaries and interactive question-and-answer pages. The tax information you seek is probably there, but finding that information is a daunting task – especially if you start at the front door. We've explored the maze to make your searches a little easier. Here are some good starting points.
The site tree is an index page that should serve as your map.
Download any form you need from the Forms and Publications section (you will need to download Adobe's free utility Acrobat Reader to print them).
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