If you live in Mississippi and received a form in the mail from the IRS detailing the new deductions allowed for sales taxes, you might have thought this provision was going to save you some money this year. But the change in the deductibility of sales tax by individuals will mostly benefit people living in states that do not have an individual income tax, said Vance Randall, CPA, of GranthamPoole Certified Public Accountants in Jackson.
“Other taxpayers that may benefit are those whose income is made up of mostly retirement, tax-exempt interest and social security,” Randall said. “These taxpayers rarely owe state income tax and would therefore not have any state income tax to deduct on an annual basis.
“The IRS is currently mailing Publication 600 to individuals that includes the optional state sales tax tables. Taxpayers need to remember that they can add the sales taxes paid on a motor vehicle (leased or purchased) to the amounts listed in the tables. Taxpayers have the option of using the IRS tables or actual sales tax paid during the year.”
A deduction unique to coastal residents is regarding casualty losses for hurricane damage. Hurricane Ivan caused damages in coastal Mississippi, and even heavier losses were seen in Alabama and the panhandle of Florida.
But there are a number of hoops taxpayer must go through to take advantage of the deduction for hurricane repairs, said Amon Holcomb, an enrolled agent with Strojny & Strojny in Ocean Springs.
Holcomb said the victims must know the fair market value of their home before and after the hurricane damage. And the total amount of insurance reimbursement has to be taken into consideration. If you had no insurance, you have to be able to itemize to take that deduction.
Holcomb said it is similar to the medical expense deductions. Some people save their medical expenses all year long not realizing that only expenses that are more than 7.5% of their adjusted gross income can be itemized. So if you make $100,000, and had $7,501 worth of medical expenses, you could only deduct $1.
Holcomb said the casualty loss provision is similar to the medical expense provision in that few people have expenses high enough to make this a good deduction.
A change in the 2004 tax laws that is likely to have a lot bigger impact on Mississippi residents is regarding earned income credit and child credit for military residents.
“This is huge,” Holcomb said. “If members of the military worked in a combat zone and made $40,000 to $50,000 in tax-free combat pay, they can include that when calculating the refundable child credit and earned income tax credit for 2004 and 2005.
“That is a very big advantage in this area. And before if you had to go to Camp Shelby for duty, you had to itemize to get a deduction. Now you don’t have to itemize, and can get that as an adjustment to your income.”
Changes were also made regarding health savings accounts (HSA). HSAs allow taxpayers to contribute a certain amount each month that goes into an interest bearing savings account. Checks can be drawn on the account to pay deductibles or other medical expenses. Taxpayers don’t have to pay taxes on interest gained on the accounts, but the HSAs must be used for medical reasons only in order to avoid a 10% penalty by the IRS.
Holcomb said HSAs can be considered an asset like an IRA or a 401K plan.
“Your money can grow, and it is completely tax free to whatever it goes to,” Holcomb said. “With the old Medical Savings Account, you could put $5,000 into it each year, but you had to spend the entire amount every year. With the HSA, that money actually rolls over. You actually own it. If you’re healthy person and don’t ever get sick, you put it back for a rainy day.”
He added that while he is not yet seeing a lot of interest in HSAs, he believes they will become more popular in the future.
According to the IRS, some other tax law changes include the following:
Educators can deduct up to $250 worth of their out-of-pocket costs for books and other classroom supplies. This deduction originally expired at the end of 2003, but was restored for two more years. Teachers and other educators need to save their receipts in order to take the deduction.
Clean fuel vehicle deduction
The maximum amount of this deduction for hybrid gas-electric cars was scheduled to expire, but has been retained at the $2,000 level through 2005.
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 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.
Sale of personal residence acquired in a like-kind exchange
The IRS says that taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange.
Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org.