Three tools to whittle that tax bill
US taxpayers still have time to make a few moves before the April deadline.
Liberal, conservative, independent, or party-line voter - it doesn't matter. When it comes to paying taxes, most Americans have the same attitude: Pay what you owe and not a penny more.Skip to next paragraph
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With that goal in mind and with April 15 less than three months away, taxpayers and tax preparers are still looking for ways to legally lower the tax burden to Uncle Sam. In fact, even though 2004 is now a fading memory, there are still ways to trim your tax bill. Here are a few tools you can use to build up that refund check from the Internal Revenue Service - or at least whittle down what you owe:
Not everyone, of course, has an employer-sponsored retirement account. That's where other plans like an Individual Retirement Account, a simplified employee pension plan (SEP), or a Keogh plan come into play.
"Ideally, you should be contributing to your IRA throughout the year by taking advantage of dollar-cost averaging," says Matthew Schaber, a certified public accountant from Grosse Pointe, Mich. "But if you haven't done that, it's better late than never. Depending on your income level and filing status, you may be able to deduct all or part of your contribution."
Since 1997, investors have had two main types of IRAs from which to choose: a traditional IRA and a Roth. Both allow a $3,000 individual contribution for 2004 ($3,500 if you are 50 or older). But the timing of their deductibility differs. Traditional IRAs offer an immediate deduction but gains are eventually taxed. Roths are taxed immediately but gains are forever tax-free. Which is best depends on your situation. Just remember that you can't get an extension for IRA contributions even if you request an extension of time to file the tax return.
Congress recently passed legislation giving taxpayers until Jan. 31 to make cash donations to relief groups addressing the Asian disaster and claim a tax deduction for 2004. Starting Tuesday, donors will have to claim deductions for 2005.
"This tax break should give people an extra incentive to support a great cause," says Donna LeValley, a tax attorney in Hoboken, N.J., who is also a contributing editor to "J.K. Lasser's Your Income Tax 2005." "It's rare when Congress makes a temporary change to the tax law, and charitable donations are an excellent way to reduce your tax burden to the federal government."
Donors large and small have stunned charities with their generosity in the wake of the tsunami. The American Red Cross and Catholic Relief Services have both said that they expect the tax break extension will also help extend the outpouring of donations.
Thanks to a multibillion-dollar corporate tax bill, individual taxpayers are receiving a new tax break. But it isn't an add-on; it will require a choice. For 2004 and 2005, taxpayers can deduct state sales taxes or their state income-tax amounts from their federal filings.
The choice is obvious for residents of the seven states that do not collect state income taxes but do levy sales taxes: Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Deducting income taxes is the choice for residents of Delaware, Montana, and Oregon, which assess no sales taxes. (Alaska and New Hampshire have no taxes in either category.)