W-2 forms are arriving in the mail, and Christmas bills are still being paid, but it's never too early to begin the process that so many Americans dread. The muddle of filing tax returns can evoke procrastination, but understanding the new laws now and avoiding tax scams could leave you with more money to pay off that Christmas splurge.
Avoid a costly tax scam
When tax time comes around it's often the most cash-strapped workers who get hooked into refund schemes, said a consumer advocate expert.
And these low- and moderate-income families spent $1.4 billion in 2003 paying back unnecessary loans at cut-throat interest rates.
"We discovered that in 2003, 12.15 million consumers took out these loans," said National Consumer Law Center staff attorney Chi Chi Wu. "And mostly it was low income people - 75 to 80 percent - who took out these loans."
The scheme is called the refund anticipation loan, and consumer advocates warn taxpayers to steer clear of this avoidable tax-time expense.
A new survey from the Boston-based center, found that 70 percent of borrowers surveyed didn't realize that they were even taking out a loan. The loans particularly target minority, low-income working families claiming the Earned Income Tax Credit, draining hundreds of millions of dollars from its anti-poverty benefits.
Refund anticipation loans cost from $30 to $115 in loan fees, according to the consumer law center. The annual interest rate can range from 40 percent to more than 700 percent. That means, for an average tax refund of $2,000, the guarantor will charge $215 in total fees, which is more than 10 percent of the refund.
Taxpayers who need quick refunds can get them in two weeks or less by using electronic filing and having refunds directly deposited into their own bank accounts, which is free.
FLOAT INFO BOX
Refund anticipation loans - high-cost bank loans secured by the taxpayer's expected refund. The loan will last from one week to two until the actual IRS refund repays the loan.
Earned Income Tax Credit - refundable federal income tax credit for low-income working individuals and families. When the credit exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit, according to the IRS.
One out of every three earned income tax credit recipients takes out a refund anticipation loan, according to IRS data.
For more information
Visit www.consumerlaw.org for the "Don't Pay to Borrow Your Own Money" brochure or call 617-542-8010
Visit www.irs.gov for the earned income tax credit certification test
New for 2004
New tax laws are passed every year, and even the tax experts scurry to keep up with them, said Steve Johnson, an E.L. Wiegand professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas. The tax law professor said several changes and extensions were made this year that affects the 2004 tax return, which could put more or less money in your pocket.
In the bold
Unlawful discrimination claims
Johnson said any person who won a civil rights case can deduct attorney fees and court costs paid after October.
"In the old days, the sweetness of winning that victory was taken away by the income taxes deducted from it," he said.
This includes victims of employment discriminations or other civil rights litigation.
Head under water?
For those who owe the IRS more money than they can afford to pay, a new option is available. Johnson stressed that this option is only open to the IRS, and taxpayers don't have an absolute right to it.
The IRS can now enter into installment agreements with a taxpayer for partial payment of a debt. The agreement can span over five years to 50 years.
Child credit
A special tax relief for low-income families, the child credit was accelerated from 10 percent to 15 percent refundability.
New State and local general sales tax itemized deductions
Taxpayers may take an itemized deduction for state and local general sales taxes paid instead of the current itemized deduction for state and local income taxes. To take this deduction, taxpayers have two choices: collect their sales tax receipts and claim the total amount of general sales taxes paid as an itemized deduction, or use a standard itemized deduction amount according to a table.
John Bullis, a financial specialist and senior advisor with Bullis and Company CPAs, said one problem generated from this deduction is the sales tax table that was issued by the IRS.
A taxpayer navigates the table by the number of people in the household and the gross income to determine that family's sales tax reduction. He said the problem is that the table only shows the 2 percent constitutional sales tax, but the 5 percent local school support sales tax is also an additional deductible tax.
"For example, if you are a single person with an income of $30,000 the table says $474 is the standard sales tax deduction, but that's only 2 percent," Bullis said. "So you may want to divide that by two to get 1 percent and multiply by seven, if in Carson City, to get your general sales tax deduction."
Tsunami relief
Taxpayers who donated in January to the tsunami relief can claim it as an itemized charitable contribution deduction in their 2004 or 2005 tax return, Bullis said.
Tax relief for businesses:
The welfare to work and work opportunity tax credits are extended. This provision rewards employers for hiring economically disadvantaged people. The tax credits can reach as high as $2,400 for each employee.
The renewable-source energy credit is extended for facilities placed in service before 2006.
The teacher's classroom expense deduction is extended. This allows professional K-12 educators to deduct up to $250 of out-of-pocket classroom expenses.
A significant change for some businesses
Congress passed a deduction available for manufacturing companies. Professor Johnson said "manufacturing" is defined very broadly and will include businesses not usually associated with an assembly line, including construction activities. "Lots of companies in Nevada will qualify for this," he said.
"When fully phased in for eligible companies, it will reduce the tax rate as much as 3 percentage points," Johnson said. "So a (qualifying) company paying 35 percent taxes would go down to 32 percent."
...And the bizarre
Private debt collection services received a boon from Congress this year. Johnson said that the IRS can't handle the number of people owing taxes.
"You'd think the natural response would be to increase the number of IRS collections agents, but instead Congress authorized the IRS to enter into agreements with private debt collectors," he said.
Johnson said the private debt collectors can be compensated up to 25 percent of the amount collected. Not only could this burn an already big hole in a debtors pocket, but it also raises questions about the confidentiality of the tax process.
Contact reporter Becky Bosshart at bbosshart@nevadaappeal.com or 881-1212.