Don’t overlook these potential tax breaks
BY TERRY SAVAGE SUN-TIMES COLUMNIST Jul 14, 2006
Updated: May 3, 2013 12:14PM
Originally published: March 6, 2003
I hate tax season. The tax law is so huge and convoluted that it doesn’t lend itself to a simple column of tax tips. In fact, you don’t have to be a cynic to believe that the tax law is written so we can all spend countless hours worrying and countless dollars seeking advice to make sure we don’t overpay our taxes.
As always, there’s good news and bad.
The good news is lower tax rates apply across the board. The bad news is that the tax system just got more complex, even though Congress is trying to make us believe that it once again “simplified” its provisions. Here are a couple of classic examples.
Earned income tax credit
This tax credit (as opposed to a tax deduction ) applies only to low-income taxpayers. Yet most will need professional advice just to get back money that was withheld from their paychecks.
This tax break is available to individuals who earn less than $34,178. (No that odd number wasn’t a typo; this is the government’s idea of simplification!) The credit reduces any tax owed dollar for dollar. And if the credit reduces the tax obligation to zero, the taxpayer may actually get a refund out of the withholding taxes on each paycheck.
The credit is based on your income and the number of children you have. It maxes out at $4,140. But Congress broadened the definition of “children” to include descendants of a stepson or stepdaughter, and reduced the residency requirements for foster children.
New college tuition deduction
Here’s a new tax break that hasn’t been widely publicized. For 2002, taxpayers can take this deduction if they are attending college themselves or are paying for their children’s college education. You can make this subtraction from your income on a new line on the front page of Form 1040.
Again, simplification is an overstatement. For 2002 and 2003, the maximum deduction is $3,000 for single taxpayers with adjusted gross incomes of $65,000 or less. Married couples filing a joint return must have an AGI of $130,000 or less. In 2004 and 2005, the deduction increases to $4,000. In the meantime, don’t overlook this new deduction.
Expanded student loan break
There’s more help for those already out of college and still paying for it. The key issue here is that the deduction now can be taken as long as you are paying interest on your loan, and is no longer limited to 60 months of interest deductions.
Again, there are limits. For 2002, you can deduct up to $2,500 each year for interest paid on student loans. But you have to fall within the income limits to take the deduction, and this year the limits have been raised. Singles whose adjusted gross income is $65,000 or less, and married couples whose AGI is $130,000 or less can now take the deduction. That’s up from last year’s limitations of $55,000 on a single return, and a whopping increase from last year’s limitation of $75,000 on a joint return. (Who says the tax writers aren’t keeping up with the times!)
One last deduction--IRS aside
To find deductions you might have overlooked, you have one last chance to “create” a tax deduction against your 2002 income. Make a contribution to an Individual Retirement Account. You don’t have to put it in the stock market. Bank CDs are easy and appropriate if you don’t want to take risk.
If you’re not covered by or eligible for a company retirement plan, you can deduct your IRA contribution. And if you are covered, this year the limits for deductibility of your IRA have been increased. You can take a full deduction if you’re single with modified AGI of less than $44,000 or married and filing jointly with modified AGI of less than $64,000.
So I’ve done my duty and alerted you to some of the changes and “simplifications” and “opportunities” in this year’s tax forms.
My advice: Go out and spend $39.95 on TurboTax Deluxe (there’s a $10 mail-in rebate) which you can convince yourself is like a refund check. Or call your tax-preparer while there is still time.
Or check in at www.IRS.gov, or many local public libraries or senior citizens centers that offer free or inexpensive advice this time of year. If you still insist on doing it yourself, I’m very impressed. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. Send questions via e-mail to firstname.lastname@example.org. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.