Tax Cut - Paying taxes can save you money!
It’s that time of year again when millions of Americans will cover their tables with IRS forms, and unearth past receipts while looking for another tax cut that they can benefit from. If you calculate your own taxes, and fall into that category, don’t forget that this is the last year to take advantage of the tax cut you may be entitled to receive. President Bush did sign a temporary bill (effective for 2004 and 2005 returns only), which was included in the American Jobs Creation Act of 2004. It was designed to give taxpayers the option to claim state and local sales taxes instead of itemizing deductions. Whether or not the Congressional budget will allow for an extension of this Provision, resulting in a tax cut in future years is unknown at this time.
If you live in a state where income taxes are not deducted from your wages, this Provision allows you to deduct state and local sales taxes on your Federal return. This tax cut is especially useful to those living in Florida, Alaska, Texas, Washington, Wyoming, South Dakota, Nevada, Tennessee, and New Hampshire. Even though those states will benefit the most, by this tax cut, it is possible for those living in other states to benefit as well. The Provision may provide for a larger deduction to any taxpayer who paid more in sales taxes than in their income taxes.
Here is how the tax cut basically breaks down. Those who live in states that don’t have income taxes deducted from their wages could not itemize income taxes on their Federal returns because they didn’t have to pay them. You can’t itemize something that’s never been paid. To give those non-income paying states a tax cut, a law was enacted that allows everybody an alternative to either deduct any state and local sales taxes paid or the option of deducting state and local income taxes paid, regardless of where you live. You cannot deduct both, so you’ll have to make a choice between deducting the income or sales taxes, and you will need to itemize deductions in order to get the tax cut. You’ll want to do some number crunching and take the deduction that gives you the largest cuts.
If you wish to itemize, and didn’t save your receipts, there is a standard tax cut deduction available. Publication 600, which can be viewed from the IRS website, offers Optional Sales Tables to help determine your deduction amount. The Tables provide specific information, such as deduction totals based on a taxpayer’s income bracket and number of deductions. If you purchased a big-ticket item, such as a house, home building materials, boat, car, etc., sales taxes paid on those top-dollar items can be added to the Table amount, but the IRS does have a set policy, with other stipulations applied to that, so be sure to read the Publication for all the details.
This is a very condensed summary of the Provisions and code, but hopefully it will serve as a reminder to get out your calculator to see if you can take advantage of this short-lived tax cut law, because sometimes paying taxes adds up to a big savings!
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