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Tax overhaul would benefit tax itemizers

People in states without income taxes could see their federal income taxes drop by about $500 if they itemize deductions under the corporate tax overhaul approved by Congress. President Bush is expected to sign the bill before the election.
/ Source: The Associated Press

People living in states without income taxes could see their federal income taxes fall by about $500 if they itemize deductions under the corporate tax overhaul approved by Congress.

The bill, which President Bush is expected to sign before the election, allows residents of eight states without an income tax to deduct sales taxes on their federal tax returns. States that benefit from the two-year law are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.

Taxpayers in those states can either fill up a shoe box with sales receipts or use a table of estimated sales tax expenses being created by the Internal Revenue Service to claim deductions under the new law, which applies to the 2004 as well as 2005 tax years.

The table, still being developed, will take into account adjusted gross income; filing status and number of dependents; average consumption by state; and state and local sales tax rates.

Calculating an average savings is difficult, experts said, because taxpayers differ.

Taxpayers who take the standard deduction — $9,700 for a married couple filing jointly — will see no change in their tax rates.

For those who itemize, however, the new law presents a potential windfall, since sales taxes could be added to other major deductions, such as mortgage interest payments, property taxes and medical expenses.

A study by the Congressional Research Service concluded that Washington state residents, for instance, could save between $488 million and $541 million per year under the two-year proposal, or about $505 to $560 each for the nearly 1 million state taxpayers who itemized returns in 2001.

About one-third of Washington taxpayers itemized their returns in 2001, according to the Congressional study. Figures are similar or lower in the other states affected by the law.

Little impact for most taxpayers
The number of people who itemize is likely to increase, experts said, but for most taxpayers the new law is likely to have little or no impact.

For those who itemize, the attitude seems to be, “Great. I get a little additional deduction,” said Thomas Neill, a Seattle accountant who tracked the bill. But, he said, “It’s not one of the bigger tax bills I’ve seen over the years.”

Still, the bill could be a boost for homeowners — especially those with relatively modest homes who now take the standard deduction. By adding their annual sales tax to a list of deductions, such homeowners may conclude it makes sense to itemize next year for the first time, Neill and other experts said.

While the law allows taxpayers to calculate their deductions using receipts, experts cautioned against it, especially this year, with nine months gone before the law was adopted. IRS tables are likely to be a more convenient option for most taxpayers, the experts said.

On the other hand, it makes sense to save receipts for major purchases such as cars, boats and home appliances. The Treasury Department is creating a list of such big-ticket items that taxpayers can deduct even as they use tax tables created by the IRS.

“We are already working on them,” said Tara Bradshaw, a spokeswoman for the Treasury Department. “We will get them done as quickly as possible.”