New bill would benefit tax itemizers

Posted: Thursday, October 14, 2004

WASHINGTON Taxpayers who itemize deductions could see their federal income taxes cut by about $500 under legislation the president is expected to sign before Election Day.

A bill overhauling corporate taxes would allow residents of eight states, including Washington, that do not have an income tax to deduct sales taxes on their federal tax returns.

Taxpayers can either fill up a shoe box with sales receipts or use a table of estimated sales tax expenses being created by the Internal Revenue Service to take advantage of the new law, which applies to the 2004 and 2005 tax years.

The table, which is still being developed, will take into account adjusted gross income; filing status and number of dependents; average consumption by state; and state and local sales tax rates.

Calculating an average savings is difficult, experts said, because taxpayers differ. And many taxpayers who take the standard deduction $9,700 for a married couple filing jointly will not see their tax rates adjusted at all.

But for those who itemize, the new law presents a potential windfall, since sales taxes could be added to other major deductions, such as mortgage interest payments, property taxes and medical expenses.

A study by the Congressional Research Service concluded that Washington state residents could save between $488 and $541 million per year under the two-year proposal, or about $505 to $560 each for the nearly 1 million state taxpayers who itemized their returns in 2001.

Thomas Neill, a Seattle accountant who has tracked the bill, said most taxpayers would welcome it. But he added, ''I don't think there's going to be rejoicing in the streets either.''

About one-third of Washington taxpayers itemized their returns in 2001, according to the congressional study. The figure is similar in Nevada and even lower in the six other states that will benefit from the new law: Alaska, which has local sales taxes but not a state sales tax; Florida; South Dakota; Tennessee; Texas; and Wyoming.

The number of people who itemize in those states is likely to increase, Neill said, but for the vast majority of taxpayers, the new law is likely to have little or no impact.

For those who do itemize, the attitude seems to be, ''Great. I get a little additional deduction,''' Neill said. ''It's not one of the bigger tax bills I've seen over the years.''

Still, the bill could be a boost for homeowners especially those with relatively modest homes who now take the standard deduction. By adding their annual sales tax to a list of deductions, homeowners may conclude it makes sense to itemize next year for the first time, Neill and other experts said.

''Some people may be close'' to the point where itemizing makes sense, said Steven Maguire, an analyst in public finance for the Congressional Research Service. Adding sales tax as a third major deduction along with mortgage interest payments and property taxes ''could push them over the top,'' Maguire said.

While the law allows taxpayers to calculate their deduction using receipts, Neill and others cautioned against it especially this year, with nine months gone by before the law was even adopted.

''Generally you are going to have to save an awful lot of receipts to figure out if you are going to benefit,'' Neill said, adding that the IRS tables are likely to be a more convenient option for most taxpayers.

On the other hand, it makes sense to save receipts for major purchases such as cars, boats and home appliances. The Treasury Department is creating a list of such ''big-ticket'' items that taxpayers can deduct along with using tax tables created by the IRS.

''We are already working on them,'' said Tara Bradshaw, a spokesperson for the Treasury Department. ''We will get them done as quickly as possible.''

While details remain unknown, politicians in the affected states are so confident of the new law's popularity that they have stumbled over themselves struggling to take credit for it. Rep. George Nethercutt, R-Wash., a candidate for U.S. Senate, has added a special link to his campaign Web site that allows taxpayers to plug in their personal information and estimate their savings, if any.

A married couple filing jointly, with household income of $60,000, would save $464, Nethercutt's Web site says. A single head of household earning $40,000 a year would save the same amount, the Web site says.

On the Net:

Center on Budget and Policy Priorities: http://www.cbpp.org

Nethercutt for Senate: http://www.nethercuttforsenate.com/



CONTACT US

  • Switchboard: 907-283-7551
  • Circulation and Delivery: 907-283-3584
  • Newsroom Fax: 907-283-3299
  • Business Fax: 907-283-3299
  • Accounts Receivable: 907-335-1257
  • View the Staff Directory
  • or Send feedback

ADVERTISING

SUBSCRIBER SERVICES

SOCIAL NETWORKING

MORRIS ALASKA NEWS