Very important that everyone is aware of this...............
<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=left>Your purchases could help cut your tax bill
By Kay Bell
</TD></TR><TR><!-- Main Text --><TD align=left>Never underestimate the staying power of a popular tax break. One that was excised from the tax books almost 20 years ago has reappeared on current returns.
When the Tax Reform Act of 1986 cut income tax rates, it also eliminated, among other things, a filer's ability to deduct sales taxes. Now, thanks to the American Jobs Creation Bill of 2004, that deduction is back for the 2004 and 2005 tax years in a modified form.
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</NOSCRIPT></TD></TR></TBODY></TABLE></CENTER></TD></TR></TBODY></TABLE>Deductions help millions of filers reduce their taxable income; less taxable income generally means a lower tax bill. One of the most-claimed federal deductions is for income taxes paid to a filer's state. Now taxpayers in the seven states that do not collect state income taxes but do levy state sales taxes -- Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming -- will get their turn for a tax deduction. So will some Alaskans who, although they pay no state income or sales tax levy, do face local sales taxes. (For those keeping tax collection score, New Hampshire has neither a sales nor an income tax.)
Even some residents of states with both types of taxes might find the resurrected sales tax deduction is more valuable to them than the income tax write-off. But regardless of your state's tax collection practices, to take full advantage of the sales tax deduction you've got to know exactly how to file for it and just which taxes you can claim.
Choosing your deduction method
The process begins with your answers to two filing questions. First, do you plan to itemize? If so, then which write-off -- sales taxes or income taxes -- will give you the biggest break?
Deciding whether to itemize deductions or claim the standard amount is always a key tax-time choice. The Internal Revenue Service says that most people (nearly 66 percent according to preliminary 2003 filing data) take the standard deduction. It's easy to claim; there are no forms or worksheets to fill out and the amount is found directly on your return near the line where it should be entered. For 2004, the standard deduction is $4,850 for single filers or married couples filing separately, $7,150 for head of household filers and $9,700 for married couples who file a joint return.
But if you use the standard deduction, you can't take the sales tax break. To claim the sales taxes you paid, you must itemize. If you have deductions such as mortgage interest, property taxes, charitable donations and medical and miscellaneous expenses to add to your sales taxes, then the new deduction should help you push your Schedule A total well above your standard deduction amount.
However, if sales taxes are your only deductible expense, then it's not worth it to itemize. This one itemized deduction will likely be much less than your standard deduction, and you always want to take the largest tax deduction amount you're allowed.
For example, couples who file jointly and don't have other things to itemize will be better off using the standard deduction; otherwise, they would have had to have gone on a major spending spree last year (and kept all the receipts) to accumulate more than $9,700 in sales taxes to exceed their standard deduction. (For 2005, when they can again consider claiming sales taxes, their standard deduction will go up to $10,000.)
Many filers are likely to come to the same deduction method realization as they fill out their 2004 returns. According to the Center on Budget and Policy Priorities, since the sales-tax deduction is available only to itemizing filers, the benefits are limited to a small group of taxpayers. Analysts for the Washington, D.C.-based nonprofit group say that the deduction offers no tax savings to seven out of every 10 residents of the no-income-tax states of Texas and Tennessee; eight out of every 10 South Dakotans save nothing.
Picking the proper tax to claim
Other filers, however, will find it's worthwhile to itemize and claim the sales-tax deduction. And that means a bit of extra, and possibly unfamiliar, tax work.
"Some people, especially in states with no income tax, might find that this is the first time they've ever had to go to the long form and Schedule A to file," says Bob Scharin, editor of Practical Tax Strategies, a monthly journal from Warren, Gorham & Lamont/RIA for tax professionals.
These itemizers also now must answer question No. 2: Should you deduct your sales taxes or income taxes? In its pre-1986 incarnation, filers could claim both of these tax amounts. Now it's an either-or decision; you cannot take both deductions and must note on Schedule A which tax you're claiming.
"If you live in a state with no income tax, you're clearly better off claiming the sales tax," says Scharin.
And if you do pay both types of taxes, don't automatically assume that your income tax break is going to be bigger. "If you live in a state with both, you can <NOBR>-- should </NOBR>-- look at both," says Scharin. "Some states offer generous income tax exclusions for retirement income. In New York, for example, pensions for state and city employees are not taxed at the income tax level. It's the same situation for disability pensions. You need to look and see exactly how much state income tax you're paying."
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<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD align=left>Your purchases could help cut your tax bill
By Kay Bell
</TD></TR><TR><!-- Main Text --><TD align=left>Never underestimate the staying power of a popular tax break. One that was excised from the tax books almost 20 years ago has reappeared on current returns.
When the Tax Reform Act of 1986 cut income tax rates, it also eliminated, among other things, a filer's ability to deduct sales taxes. Now, thanks to the American Jobs Creation Bill of 2004, that deduction is back for the 2004 and 2005 tax years in a modified form.
<TABLE cellSpacing=0 cellPadding=0 width=294 align=left border=0><TBODY><TR><TD colSpan=100><!--and thisponsor <> "fed"--><CENTER><!--Continued below
--><TABLE cellSpacing=0 cellPadding=0 border=0><TBODY><TR><TD vAlign=top align=middle><CENTER>
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Even some residents of states with both types of taxes might find the resurrected sales tax deduction is more valuable to them than the income tax write-off. But regardless of your state's tax collection practices, to take full advantage of the sales tax deduction you've got to know exactly how to file for it and just which taxes you can claim.
Choosing your deduction method
The process begins with your answers to two filing questions. First, do you plan to itemize? If so, then which write-off -- sales taxes or income taxes -- will give you the biggest break?
Deciding whether to itemize deductions or claim the standard amount is always a key tax-time choice. The Internal Revenue Service says that most people (nearly 66 percent according to preliminary 2003 filing data) take the standard deduction. It's easy to claim; there are no forms or worksheets to fill out and the amount is found directly on your return near the line where it should be entered. For 2004, the standard deduction is $4,850 for single filers or married couples filing separately, $7,150 for head of household filers and $9,700 for married couples who file a joint return.
But if you use the standard deduction, you can't take the sales tax break. To claim the sales taxes you paid, you must itemize. If you have deductions such as mortgage interest, property taxes, charitable donations and medical and miscellaneous expenses to add to your sales taxes, then the new deduction should help you push your Schedule A total well above your standard deduction amount.
However, if sales taxes are your only deductible expense, then it's not worth it to itemize. This one itemized deduction will likely be much less than your standard deduction, and you always want to take the largest tax deduction amount you're allowed.
For example, couples who file jointly and don't have other things to itemize will be better off using the standard deduction; otherwise, they would have had to have gone on a major spending spree last year (and kept all the receipts) to accumulate more than $9,700 in sales taxes to exceed their standard deduction. (For 2005, when they can again consider claiming sales taxes, their standard deduction will go up to $10,000.)
Many filers are likely to come to the same deduction method realization as they fill out their 2004 returns. According to the Center on Budget and Policy Priorities, since the sales-tax deduction is available only to itemizing filers, the benefits are limited to a small group of taxpayers. Analysts for the Washington, D.C.-based nonprofit group say that the deduction offers no tax savings to seven out of every 10 residents of the no-income-tax states of Texas and Tennessee; eight out of every 10 South Dakotans save nothing.
Picking the proper tax to claim
Other filers, however, will find it's worthwhile to itemize and claim the sales-tax deduction. And that means a bit of extra, and possibly unfamiliar, tax work.
"Some people, especially in states with no income tax, might find that this is the first time they've ever had to go to the long form and Schedule A to file," says Bob Scharin, editor of Practical Tax Strategies, a monthly journal from Warren, Gorham & Lamont/RIA for tax professionals.
These itemizers also now must answer question No. 2: Should you deduct your sales taxes or income taxes? In its pre-1986 incarnation, filers could claim both of these tax amounts. Now it's an either-or decision; you cannot take both deductions and must note on Schedule A which tax you're claiming.
"If you live in a state with no income tax, you're clearly better off claiming the sales tax," says Scharin.
And if you do pay both types of taxes, don't automatically assume that your income tax break is going to be bigger. "If you live in a state with both, you can <NOBR>-- should </NOBR>-- look at both," says Scharin. "Some states offer generous income tax exclusions for retirement income. In New York, for example, pensions for state and city employees are not taxed at the income tax level. It's the same situation for disability pensions. You need to look and see exactly how much state income tax you're paying."
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