Only two months remain in 2004, which means it's time to start your end-of-year tax planning. There are a few new wrinkles to consider, including one benefit that comes to individuals courtesy of the tax bill that's awaiting the President's signature. Starting this year, taxpayers will have the option of taking a deduction for state sales taxes instead of state income tax. The change is a boon for residents of nine states with no income tax, including Florida and Texas. Congress eliminated the sales tax deduction in the 1980s.
Taxpayers who pay state income tax typically generate a larger deduction. But that may not be the case if you've bought -- or buy before yearend -- an expensive item, such as a car or boat. You just might cough up enough sales tax to make the deduction worthwhile.
Whichever one you choose, you could end up losing it if you trigger the alternative minimum tax. That's intended to make sure the very wealthy pay at least some tax, but it ends up catching millions of taxpayers with more moderate incomes. Under the AMT, you first calculate your tax the regular way, and then again, using the form 6251, which does not allow you to take many of the juiciest deductions. You pay the higher amount.
A preliminary run-through may help you determine whether you're heading into the AMT zone. If you're unlikely to be hit in 2004 but may get trapped in 2005, one strategy would be to accelerate deductions -- such as pay your January real estate taxes in December -- to make the most of the deduction now.
When doing your tax checkup, you should also consider these items:
-- 401(k) contributions Make sure you're on track to put the maximum contribution into the account for 2004. The 2004 limit for a 401(k) is $13,000 plus an additional $3,000 if you're 50 or older.
-- Charitable donations Are you thinking about donating your clunker to a worthy cause? You'd better do it now, because the rules for valuing the car will be tougher in 2005.
-- Clean-fuel vehicle deduction Get a $1,500 write-off for buying a hybrid car. Check the qualifying vehicles in Tax Tip 2004-59 at irs.gov.
-- IRA contributions The deadline to put in up to $3,000 ($3,500 for the over-50 taxpayer) is when you file your taxes, or Apr. 15. If you or your spouse has a retirement plan at work, the amount you can deduct phases out. Remember that contributions to a Roth IRA are not deductible.
-- Medical expenses You can deduct these only if the amount exceeds 7.5% of your adjusted gross income. If you're close to or over the limit, get that new dental crown, stock up on your prescriptions, or have your annual checkup -- and pay for it all no later than Dec. 31.
By Ellen Hoffman