Believe it or not, it's time to starting thinking about your taxes again.
In hopes of making this time around a little less -- taxing -- The Early Show is kicking off a three-part series full of tips and advice, with financial advisor Ray Martin as your guide.
Thursday, he shares how we can get the biggest possible refunds.
You may be surprised to hear that almost half of taxpayers file their taxes themselves, without the help of a tax professional. And many are unaware of special tax breaks that apply to them.
For example, the Earned Income Tax Credit: Although this credit has been around for 30 years, 25 percent of those eligible didn't claim the credit in 2003. If that many people failed to claim such an established credit, can you imagine how many are missing out on credits/deductions that are only a year or two old?
What's new this season?
Sales Tax Deduction: For the first time, you can choose to add up all the sales tax you paid in 2004 and deduct that amount from your federal return instead of deducting your state income tax.
This applies only to people who itemize their tax returns. The people certain to benefit from this are residents of states with no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Choosing to take the deduction is a no-brainer for anyone in these states. But what about the rest of America? Should you deduct your state income tax, or your sales tax?
In short, you want to deduct the larger number. The trick is determining which number is larger. If you live in a state such as New York or California, where income taxes are high, you'll probably be better off deducting your income tax. However, in other states, such as Illinois, the sales tax and income tax levels are roughly comparable, so figuring out the best option is trickier.
If you bought a big-ticket item this year such as a car or boat, it may make more sense for you to deduct the sales tax. Also, if you spent a lot of money fixing up your home in 2004, the sales tax deduction might make sense.
If you think the sales tax deduction might be better for you, the IRS has created a table based on income and other factors to give you a rough idea of how much sales tax you paid in 2004. When looking at the table, keep in mind that it's only based on state sales taxes and doesn't include any additional local taxes. For example, the New York state rate is 4.25 percent, but New York City residents pay an additional 4.425 percent tax on their purchases.
: If you made a charitable donation toward tsunami relief in January, you can choose to deduct that amount from your 2004 tax return. Congress voted to approve this unusual move in hopes of encouraging more people to give to the relief efforts. You can also wait, and deduct this contribution on your 2005 return.
Medical Expenses: 2004 was the first year that people could put money into tax-free Health Savings Accounts, so this is the first year that HSAs appear on tax returns. Any contribution made to an HSA is tax deductible, even if you don't itemize your return. HSAs allow you to save money for future medical expenses. They're only available to people who have high-deductible insurance plans.
Hybrid Cars: If you bought a hybrid gas-electric car, you can take a one-time deduction of $2,000 this year. Again, this is an above-the-line deduction, meaning there's no need to itemize in order to claim it.
Other Important Credits/Deductions:
These categories involve several different types of possible tax breaks:
Education: There are four major credits and deductions that relate to college tuition. Three of the four are tied to income levels. The fourth involves student loans -- anyone who is paying back a student loan can deduct the interest paid on the loan.
The basic deduction for tuition and fees has risen from $3,000 to $4,000. You can deduct $4,000 off the top of your return if you are single and earning less than $65,000, or a couple earning less than $130,000. You can take a smaller deduction of $2,000 if you are single and earn more than $65,000 but less than $80,000, or a couple jointly earning more than $130,000 but less than $160,000.
Children:If you have dependent children, you may be eligible for a variety of tax breaks. Parents will be happy to hear that the Child Tax Credit, which was scheduled to be reduced to $700, will remain at $1000 this year.
Retirement: Most people know about the benefits of contributing to tax-deferred or tax-free retirement accounts. But individuals whose adjusted income is below $25,000 (or couples below $50,000) qualify for an additional credit: the Retirement Savings Contribution Credit. Qualifying taxpayers can deduct 50 percent of the amount they put into a retirement account, up to $2000.
Calling All Teachers: This deduction doesn't fit neatly into one of the above categories, but it's certainly worth mentioning. Teachers who buy items for the classroom out of their own pockets can deduct $250 from their tax returns. This Deduction for Educator Expenses was scheduled to expire after 2003, but has been extended.
On Friday, learn about filing taxes online.
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