Tax rule tweaks that can save you a bundle

/ Source: CNBC

If you’re hoping to save money on your taxes this year, you’ll want to take note of some important tax rule tweaks that affect your 2004 federal tax return.

Sales receipts, for example, can help you ring up some savings.

If you itemize your 2004 federal tax return this year you can chose between deducting the sales tax you’ve paid for the year, or your state income tax. Analysts say many more people are likely to itemize their return this year to take advantage of this rule.

The biggest beneficiaries of this rule change will be individuals who live in states with no income tax — like Florida, Texas and Washington — but have paid sales tax in that state says tax expert Jeff Kelson of BDO Seidman LLP in New York. Other states that benefit from the rule because they have no earned-income tax are New Hampshire, South Dakota, Nevada, Tennessee, Alaska and Wyoming.

Even in states with both a sales tax and an earned-income tax, it’s worth working out both the sales tax total and state income tax total according to Mark Luscombe, a tax analyst at tax law consultancy CCH. “A lot of taxpayers are going to be better off checking both totals, because in a given situation your sales taxes could exceed your income taxes,” he notes.

This is particularly true if you bought big-ticket items in 2004 like a boat, or a sport utility vehicle. And bear in mind that if you bought a big SUV for business purposes you can only expense $25,000 of the cost, and not $100,000. This is due to a law change last October that cut the SUV write-off for vehicles weighing three or more tons.

If you have a sales receipt for that SUV, but threw away all your other sales receipts, you can estimate your base sales tax by using tables that the IRS is expected to publish to help filers determine how much they’ve paid. Just add the cost of that big-ticket item to the total.

But don’t assume this new write-off will let you wriggle your way out of Uncle Sam’s grasp.

If you raise your itemized deductions, you may be making yourself more vulnerable to the alternative minimum tax (AMT) Luscombe notes. The AMT, essentially an extra tax some people have to pay on top of the regular income tax, is designed to prevent taxpayers from escaping their fair share of tax liability by employing certain tax breaks.

Another important tax change for 2004 that’s less likely to make you vulnerable to the wrath of the AMT, and isn’t limited to those that itemize their returns, is a bigger deduction for college tuition.

Students, and those paying for the education of their children or spouse, can deduct $4,000 from their return if they’re single, earning less than $65,000 or married with incomes under $130,000. And couples earning up to $160,000, or singles making up to $80,000, can deduct half that amount, or $2,000.

But using this deduction disqualifies taxpayers from using certain education credits Luscombe says. Income limits on tuition deduction are higher than income limits for the Hope Scholarship Credit and the Lifetime Learning Credit, two new tax incentives available for students attending colleges and universities. “So people with higher incomes are more likely to qualify for the tuition deduction,” he adds.

And when it comes to calculating your charitable contributions for 2004, don’t forget that donations to last December’s tsunami disaster made through the end of January are still deductible on your 2004 federal return.