Taming the taxman
There's still time for some last-minute moves to save on your 2004 tax bill
In 1940, the 1040 tax return had two pages of instructions. Today it has 78.While a presidential panel ponders simplification, for now it's the same old crunch as April 15 nears with about half of an expected 133 million or so returns for 2004 yet to be completed.
Many deadline filers, including even some with simple returns, will turn to paid preparers, as did 62 percent of all filers last year. Tax doyen H&R Block handled almost 16 million of those returns, at an average fee of $140. But complications can push that price up, and many people pay much more to hire an accountant.
Still, a determined group continues to duke it out with IRS forms--often poring over instructions and dense guides or using tax software to stay on course and help with calculations.
Even if you pay a preparer, it's nice to be informed. Conscientious pros appreciate clients who are alert to the breaks they're eligible for and aware of the records and financial data that are needed. And it's smart to be able to review a preparer's work.
"You can't just rely on what you knew or did last year," warns Thomas Ochsenschlager, a tax officer at the American Institute of Certified Public Accountants. Most people, for example, now get a $3,100 exemption for themselves and each dependent, up $50 from a year ago. Taxpayers who don't itemize deductions may get a $100 to $200 bigger standard deduction for 2004; those who do itemize can generally earn $142,700 before deductions are limited, $3,200 more than for 2003.
Higher limits. Income caps that limit eligibility for college tuition tax credits have also been raised. The $1,500 Hope credit and $2,000 Lifetime Learning credit do not begin to phase out for 2004 until income tops $85,000 on a joint return and $42,000 on a single return, up $2,000 and $1,000, respectively.
Also new is a bigger tuition deduction that people ineligible for a credit may be able to claim. The top deduction for 2004 is $4,000, up from $3,000. But people who can take a credit usually save more tax that way.
You may want to try a simpler form. The IRS has doubled the income cutoff for using the abridged 1040EZ or 1040A to $100,000 of income after deductions. But other limits remain. To use a 1040EZ you must, for example, be under age 65 and have no dependents. Neither form can handle itemized deductions.
Self-employed people who deduct no more than $5,000 in expenses may be able to use a lean C-EZ form for 2004's business income. The cap on expenses is twice what was allowed a year ago.
And kids under 14 can have earned $1,600 in investment income last year--$100 more than in 2003--before facing tax on part of the income at their parents' top tax rate.
The law may permit a deduction on 2004 returns for an outlay in 2005. People who donated money in January to help tsunami victims, for example, are being allowed to deduct the gift as a 2004 itemized deduction.
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