Taxpayers Can Benefit by Filing Early

As tax preparation season begins, military families, parents with kids in college and hybrid-car owners may find it worth their while to file early this year.

The reason: Many of them will be eligible for bigger refunds.

Employers are required to mail W-2 statements by today, clearing the way for Americans to complete their federal and state tax returns.

Although the filing deadline isn’t until April 15, tax advisors urge anyone expecting a refund to file early -- so that they, and not the government, can have use of their own money and maybe even earn some interest on it.

“Why put it off until April 15?” asked Brenda Schafer, a tax specialist with tax preparation firm H&R; Block in Kansas City. “You can get it in there and get a check right back.”

Tax codes typically change every year, and a number of changes have been made for 2004.

For instance, President Bush recently signed legislation that allows people who contribute to the Southeast Asia tsunami relief efforts this month to deduct their gifts on their 2004 returns. That speeds claiming the tax benefit by a full year.

Also this year, more people can deduct IRA contributions because the government boosted the allowable income thresholds by about 12%.

Singles earning as much as $45,000 annually and married couples with joint income of as much as $65,000 a year can now fully deduct IRA contributions of as much as $3,000 per person. In 2003, only singles earning less than $40,000 and married couples earning less than $60,000 could fully deduct IRA contributions, according to the IRS.

And for those age 50 and older, allowable contributions are $500 higher -- or $3,500 per person.

This will also be the first year people can claim deductions under the new Health Savings Accounts.

These accounts are intended primarily for people with high-deductible health insurance plans, such as small-business owners. The accounts allow you to put away tax-free money to help pay medical bills.

The maximum allowable tax deduction for an HSA is the deductible on the insurance policy, or $5,150, whichever is less. Like an IRA, you can make the contributions for 2004 up until April 15, 2005.

Other changes that may affect 2004 returns, according to the IRS and tax specialists:

* Those who bought a qualifying “clean-fuel” vehicle last year can deduct as much as $2,000 on 2004 returns. Toyota Motor Corp., Honda Motor Co. and Ford Motor Co. all produce hybrid vehicles that qualify for this deduction.

* For the first time in nearly a decade, taxpayers can choose whether to deduct state income taxes or state sales taxes. Income taxes generally provide the better break, especially in states such as California with high income taxes, but those who made a major purchase in 2004 might want to compare, tax experts said.

In some cases, buyers of a car or a boat might get a better deduction with the sales-tax formula. Information on computing the sales-tax deduction is available on the IRS website at www.irs.gov.

* The deduction for paying college tuition and fees was raised and expanded to cover more taxpayers. In the past, this deduction allowed singles earning as much as $65,000 and married couples with as much as $130,000 in income to write off as much as $3,000 of the expense on tax returns. But those who earned even a dollar more were shut out.

For 2004, the deduction rises to $4,000 for individuals meeting the $65,000 and $130,000 income thresholds. However, a deduction of as much as $2,000 is now available for those earning as much as $80,000 if single and as much as $160,000 if married, filing jointly.

* The earned income tax credit, a lucrative break for the working poor, will be available to more military families in 2004 because it will allow combat pay to be included as earned income. Additionally, changes have been made to the child tax credit to give military families a somewhat bigger benefit.

The one caution for those filing early: Beware investment income.

Many mutual fund and brokerage houses have had difficulty adjusting to shifting rules related to “qualifying” and “non-qualifying” dividend income, according to Phil Holthouse, partner in the Santa Monica tax law and accounting firm Holthouse Carlin & Van Trigt. That has led them to send out corrected 1099s -- the form on which investment income is reported.

“If you’ve got a lot of investment income, you might not want to rush the return out the door,” Holthouse said. “Wait until March. That way, if you get an amended 1099, you’ll have saved yourself the trouble of having to do the return over again.”