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January 14, 2005
TAX TIPS
“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” — Arthur Godfrey, entertainer
The tax season will soon be here, so as usual, I have been looking at some of the changes in store for us this year. The federal government has changed some of it’s rules and so has Massachusetts; so let’s take a look at some of the changes.
MASSACHUSETTS SENIOR CIRCUIT BREAKER CREDIT – If you are over 65 by the end of the tax year and do not live in subsidized housing, you might be eligible for a refund from Massachusetts, even if you never paid any tax. The only catch is that you have to file a Massachusetts state income tax return in order to obtain this refund. The refund amount is based upon your income and the amount you paid for real estate taxes and water/sewer, or rent if you do not own your own home.
There are many seniors who do not file because they do not earn enough money to be required to file. These are the people who are most likely to be entitled to this refund. Last year I set a new personal record in getting seniors over $30,000 in refunds from Massachusetts from the circuit breaker credit under my free income tax preparation service. There is no charge for getting your Massachusetts income tax return prepared as long as the only reason for filing is to get your senior circuit breaker credit.
CHARITABLE DEDUCTIONS: For a contribution to be deductible, it must be made to a domestic, tax exempt, charitable organization. Furthermore it must have been made by December 31, 2004 to be deductible on your 2004 tax return.
SPECIAL EXCEPTION - For those of you who itemize your deductions and have made a contribution for the tsunami victims, a new law was enacted on January 7, 2005. This new law allows you to take a deduction in 2004 for any contributions made in January, 2005 for the relief on the tsunami victims.
DEDUCTING SALES TAX : For the last twenty years or so, there has been a ban on deducting sales tax as an itemized deduction. We used to be able to deduct the sales tax on the purchase of a car or boat, and now we can once more. Under the new rule, the IRS will issue a table that you can look up, based upon your income, how much sales tax you can deduct. The sales tax on some major purchases will be allowed as an additional amount in addition to the amount allowed under the tables. For a single person with income between $40,000 and $50,000 this will mean an extra deduction of about $500. This deduction could increase to as much as $677 for a family of 5 earning the same amount of money. In lieu of using the tables, you may save all of your receipts and claim the actual amount of sales taxes that you paid. Sounds like I’ll be using the table.
CAPITAL GAINS: Appropriate for this category is the following quote:
“The hardest thing in the world to understand is the income tax.” — Albert Einstein, physicist
This has become one of the most confusing aspects of preparing income taxes. Depending on what was sold and when it was sold, the gain could either be taxed at 5%, 10%, 15% or 20% on your federal form 1040. Massachusetts has also complicated the matter beyond belief. For 2004 depending on what you sold and when you sold it, your tax rate will range from 0% to 12%.
Let’s take an easy example and assume you sold 100 share of GE stock that you have owned for more than one year. On the sale you received $3,000, net of brokerage commission, and you paid $1,000 for the stock. The maximum federal tax rate on the capital gain is 15% and the rate for Massachusetts is 5.3%. Your tax would be calculated by multiplying 20.3% (15%+5.3%) times your gain of $2,000, resulting in $406.00 for your combined federal and state income taxes.
Now if this was a short term gain, a gain from an investment that was held less than one year, the only change would be that Massachusetts would tax you at 12% instead of 5.3%. That would result in an additional $134 of Massachusetts income tax.
The tax rules are different depending on what kind of property you are selling, when you bought it and when you sell it. There are special rules, meaning a higher tax rate, for collectibles, property used in a trade or business (things like equipment) and rental real estate. And for Massachusetts, if you elected to report a gain under the installment sale method and sold the property between January 1, 1996 and May 1, 2002 your Massachusetts tax rate is between 0% and 5%. I guess what I’m trying to say is that if you have a substantial gain, or are still reporting capital gains according to the installment sales method, you should seek assistance from a CPA or other qualified tax advisor.
EDUCATORS’ DEDUCTION: This is a deduction that had been slated to expire at the end of 2003 but has been extended for another 2 years. This allows educators to deduct expenses that they have paid, and were not reimbursed, even if they do not itemize their deductions.
CHILD TAX CREDIT – Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 10% of the amount by which their 2003 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.
GETTING READY FOR TAX SEASON – Preparing to get your taxes done is not really that hard. Save all of the slips (1099’s) from your bank(s), social security, pensions and stocks. Make a record of how much you paid for real estate taxes and water/sewer, or rent, if you do not own any property. Try to get your taxes done earlier, rather than later. Tax preparers often have more time to concentrate on your tax return earlier in the tax season than during crunch-time.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Ma. He also holds a masters in accounting and a masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys.