Any day now my credit card statements will show up tallying my oh-so-generous holiday spending.
But I'm not going to let those bills get me down and I challenge you to do the same, more especially because a recently enacted law gives Americans the option of deducting sale taxes paid in 2004.
Yes, it's that time of year again: Most of your tax forms are required to be mailed to you by the end of January, so many of you will have what you need to get your 2004 tax return filed in a few weeks. And since last year, more than 101 million people got refunds averaging $2,126, according to Kevin McKeon of the IRS, the odds are good. Even better, if you file your return electronically, that refund will show up in your bank account within 10 days (I've gotten mine in as fast as five!). So let Uncle Sam help you pay off your bigheartedness.
And while President Bush's re-election didn't create a ton of tax breaks for 2004, there were a few items that could affect your tax return this filing season.
Sales Tax Deduction
The biggest issue -- and most likely the most complicated one this season -- will be the new sales tax deduction. Thanks to the American Jobs Creation Bill of 2004, taxpayers now have a choice to deduct on their federal return either their state and local income taxes or the sales taxes they've paid throughout the year. This option is only available on 2004 and 2005 tax returns.
Here's how it works. In previous years, you would typically just drop the amount of the state and local income taxes you paid for that year on line 5 of your Schedule A -- Itemized Deductions. That, along with your other deductions, like mortgage interest paid and charitable contributions,would hopefully bring your tax bill down.
This year, you have the option of choosing between those state and local income taxes and the amount of sales tax you paid in 2004. Having the option means you need to tally up all your receipts. If your sales tax number is bigger than your state and local income taxes, put it on line 5.
But wait. This law was enacted in October, so who's going to have receipts from the first nine months of the year? Not many of us. So the IRS has tables in
Publication 600 - Optional StateSales Tax Tables to help you figure out a bestguess of what you might've spent, based on the average consumption of someone in your filing status, with a particular number of dependents, in a specific adjusted gross income, etc. You get the idea.
And because sales tax rates vary from state to state, there are different tables for each state. (If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, lucky you: This provision was clearly intended to benefit you. Because you don't have state income tax, you can now deduct
on line 5 of your federal Schedule A.)
If you don't have a year's worth of receipts -- as I suspect most of you don't -- look at the table and find the sales tax number that applies to your situation. After a few minor calculations, you'll be able to decide which number is bigger. In most cases, you'll just want to put the biggernumber on line 5. (Folks with alternative minimum tax issues have planning decisions to make here but we'll get to that in a different column.)
And here's an added bonus: If you use the sales tax number from the charts, you can add on the sales tax that you paid on some big ticket items, like a mobile home, car or a boat. Thosepurchases were not considered part of the "average consumption" when the tables were calculated. (
Gee, I wonder why.
So if you bought a house worth of furniture or an engagement ring in 2004, you might find that those items alone increase your sales tax number, says Bob Scharin, editor of
RIA's Practical Tax Strategies
, a monthly journal written for tax professionals.
But don't forget, this option currently expires at the end of 2005, so if you're thinking about buying a new car or proposing to your sweetie, get it done this year. And save your receipts!
On Jan. 7, 2005, President Bush signed the Tsunami relief bill. Under this new legislation, if you make a cash donation to an approved Tsunami relief fund during January 2005, you can include the donation as part of your charitable deductions for 2004, says Martin Nissenbaum, national director of income tax planning at Ernst & Young.
Unless you're going to be donating big money, you probably won't see all that much benefit on your tax return, but every little bit helps, so sign the check before Jan. 31.
The list of acceptable Tsunami charities is not yet available.
Upcoming Hot Topics
There's a lot going on this year so this column will endeavor to cover everything to help you get your tax return filed. Here's a preview of some of the bigger issues we plan to address in future columns.
What should you do with those worthless securities? How do you report that WorldCom stock on your tax return? And what do you do with those Enron shares? We'll show you.
Thinking about donating your car to charity? Think again. The IRS is cracking down. Also, you may get a write-off for that SUV you bought this year. And did you know you get a deduction for driving that environmentally safe hybrid car?
Attention Teachers: You've got another year to get an extra deduction! We'll give you the scoop.
Remember all those hurricanes and snow storms in 2004? What tax relief can you get for the damage caused by them? What difference does it make where the damaged property was located? You may be able to take some casualty loss deductions, notes Scharin.
And of course there's that pesky alternative minimum tax. Unfortunately many more of you will be singing the AMT blues this year. We'll help you figure it all out.
We'll also look at some of the available tax preparation software and tell you everything you'll need to know to file your return electronically.
So get yourself fired up. Start thinking about what you're going to do with that refund money. And if you have any specific questions, please send them to
Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University.