On Jan. 7, the president signed into law legislation extending the period of time you can make charitable contributions to the victims of the earthquake/tsunami that hit Southeast Asia late in December. That means that you can make a charitable contribution to aid the victims by Jan. 31 but claim it on your 2004 tax return. This law applies only to cash donations. Clothing and food donations don't qualify.
The beauty of this somewhat unprecedented law is that you can elect the year that you want to claim the deduction. As noted, you can make a contribution in January 2005 and claim the deduction on your 2004 tax return. Or, if you desire, you can claim the charitable contribution on your 2005 return. The choice is entirely yours. You just can't take the deduction twice. And, of course, charitable contributions are a tax benefit only if you itemize your deductions. So, given the elective nature of this new law, you can take the deduction in the year that benefits you the greatest.
Tax code complexity
The IRS National Taxpayer Advocate (NTA) Nina Olson (a voice of sanity in the maelstrom of tax legislation and implementation) has released the 2004 annual report to Congress, indicating the largest source of compliance burdens for taxpayers, tax professionals, and the IRS is the overwhelming complexity of the tax code. She goes on to state that the only meaningful way to reduce the compliance burden for taxpayers is a simplification of the code. She praised the IRS for its administration of the Earned Income Tax Credit, its improvement of the quality of its letters and notices to taxpayers, and the improvement of its toll-free telephone service to taxpayers.
On the other hand, the report criticized the IRS for attempting to compensate for budget reductions through expanding the use of "automated" audit and collecting processes, thereby limiting the amount of human contact between the IRS and the taxpayer. If you have any interest in taxes whatsoever, take the time to read the report. I believe that Nina Olson really "gets it" when it comes to issues relating to taxpayers. Her title is fitting: She truly is a Taxpayer Advocate.
State conformity to federal tax legislation
As you are well aware, there have been many substantial changes to the tax rules over the last few months. And while we focus exclusively on federal tax issues in this article, don't overlook your state laws. Many states automatically agree (i.e., conform) with federal tax changes as they occur. But many other states (California springs immediately to mind) only "pick and choose" those federal tax laws that will be recognized by that specific state. And the differences between federal and state law can be significant. One of the downfalls (in my opinion) of the inexpensive "off the shelf" tax preparation programs is the weakness found in the various state modules. So be very careful if you're preparing your own federal and state tax return. Just because something is deductible for federal purposes doesn't necessarily mean it'll be deductible for state purposes. A good example is the deduction mentioned above for the tsunami victims. While Uncle Sam might allow a 2004 deduction for a charitable contribution made in January 2005, your specific state may turn up its nose at this deduction. It's all based upon your state of residence and how that state taxing department is in step with federal law and changes. So be careful when preparing your state return -- especially if you decide to go it alone.
Sales tax table changes
As I recently reported, there is a new deduction in 2004 for sales taxes paid. As I also noted, the IRS issued Publication 600, which provided taxpayers with the optional sales tax tables to be used to compute the deduction. Well, the IRS recently announced that it has updated these sales tax tables for Arkansas, California, and Virginia. The changes reflect sales tax changes made by these states during 2004, while the original tables were based on sales tax rates in effect for these states as of Jan. 1, 2004. According to the IRS, the changes were made before any of the tables were mailed to taxpayers in these affected states. The IRS goes on to report that they are mailing an updated Publication 600 to taxpayers in these states. So while the errors were relatively minor, if you live in one of these three states, make sure that you're using the most recent sales tax tables when computing your deduction.
The IRS is looking for more than 87,000 taxpayers whose income tax refund checks couldn't be delivered. According to the IRS, refund checks totaling more than $73 million can be reissued as soon as taxpayers correct or update their address with the IRS. If taxpayers move or change their address without notifying the IRS or the Postal Service, a refund check sent to their last known address will be returned to the IRS. So if you've recently moved, you might want to consider filing IRS Form 8822 (Change of Address) to keep your mailing information current with the IRS. If you think that you might be one of these 87,000 taxpayers, you can check out the "Where's My Refund" tool on the IRS website. All you have to do to use this tool is enter your Social Security number and filing status on your 2003 tax return, along with the amount of your refund. Of course, in the future, you can avoid any of these problems if you elect to have your refund directly deposited to your checking or savings account.
Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.