Many people think big tax breaks go only to those who itemize deductions on their income tax returns. But there are many deductions and credits available to the two-thirds of Americans who claim the standard deduction.
That's something to think about as the April 15 tax filing deadline approaches.
"There are many reasons people chose not to itemize," said Mary Wilson, an accountant and senior tax manager with Rothstein Kass Certified Public Accountants, headquartered in Roseland, N.J. "Maybe they don't have enough in mortgage interest payments or charitable deductions or medical expenses.
"But that doesn't mean they can't take advantage of the many deductions on the 1040" tax form, she said.
These deductions and credits are over and above the standard deduction, which has been raised this year to $4,850 for singles or married people filing separately; $9,700 for a couple filing jointly, and $7,150 for a person who claims head of household status.
Deductions 101
Under the federal tax code, deductions are used to reduce the total income on which taxes are computed. Credits are dollar-for-dollar reductions of the tax owed.
Some of the tax breaks are designated for certain occupational groups. For example, teachers, instructors and teachers' aides can reduce their taxable income by up to $250 for books, computer equipment and other supplies they buy for their classrooms, Wilson pointed out.
Members of the National Guard and military reserve, meanwhile, can deduct some expenses when they travel more than 100 miles from their homes for required activities, she said.
Still, there are many tax-saving options that just about any family can qualify for.
One of the best is the deduction for setting up an Individual Retirement Account, or an IRA. Workers who don't have an employer-provided retirement plan can take a deduction for setting aside up to $3,000 a year in an IRA — or $3,500 if they're 50 or older.
These accounts can be set up until the April 15 tax filing deadline, Wilson pointed out. And in 2005, workers will be able to set aside $4,000 in their IRAs, or $4,500 if they're 50 and older, she said.
A similar deduction is allowed for contributions to the new Health Savings Accounts, which have been called the IRAs of health insurance. Available since Jan. 1, 2004, HSAs allow families to set aside money to pay for future medical expenses in connection with a high-deductible insurance policy. The maximum annual deductible is $2,600 for an individual or $5,150 for a family policy, the IRS said.
Among the most widely claimed deductions and credits are those for education, according to Mark Luscombe, an analyst at CCH Inc. in Riverwoods, Ill., which provides tax information and services.
"People are aware that these tax breaks are out there, but there are so many of them that it's hard for people to figure out which is best for them," he said.
Here are the main educational tax breaks:
Student loan interest deduction
Taxpayers can reduce their taxable income by up to $2,500 for interest paid on student loans for post-secondary education, including tuition and room and board. The deduction phases out at incomes above $50,000 for single filers and $100,000 for joint filers.
Tuition-and-fees deduction
This deduction can total up to $4,000 for post-secondary education expenses for tuition, student activity fees and course-related fees. That's up $1,000 from last year. It phases out above incomes of $65,000 for single filers and $130,000 for joint filers, and it can't be taken if a Hope or Lifetime Learning credit (explained in the next few paragraphs) is taken for the same student.
Hope credit
This credit can be claimed for up to $1,500 per student for expenses in the first two years of college. It phases out for single filers with income above $42,000, and joint filers with income above $85,000 _ much lower income limits than for the deductions. It can't be taken if a Lifetime Learning credit or the tuition-and-fees deduction is taken for the same student.
Lifetime Learning credit
A credit of up to $2,000 per family for post-secondary education or courses to improve job skills. The same income phase-outs apply as for the Hope credit. It can't be taken if a Hope credit or the tuition-and-fees deduction is taken for the same student.
Luscombe of CCH noted that the credits are generally a better tax deal for families than the deductions, but the credits also have lower income limits.
"The bottom line is that you have to look closely to see which make the most sense for your particular situation," he said. "You should seek professional help if you're not sure."