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The Honolulu Advertiser

Posted on: Sunday, February 13, 2005

Time to settle up with the taxman

 •  Tax Aid
Information and advice on preparing your 2004 income tax returns

By Deborah Adamson
Advertiser Staff Writer

It's time once again to settle your bill with Uncle Sam.

Your W-2 forms should have arrived by now — so there's no excuse to put off filing your taxes. This year, there are new or expanded tax breaks to make filing a return a little bit more pleasant.

Sales tax deduction

For the 2004 tax year, you have a choice of whether you want to deduct your sales taxes or your state and local income taxes on your federal tax return as long as you itemize. (An exception: sales taxes paid for items used in your trade or business don't count.)

Hawai'i's general excise tax is equivalent to a sales tax, said Judy Monahan, a spokeswoman for the Internal Revenue Service.

Didn't save receipts? The Web site for the IRS has a state-by-state table that gives you an amount you can deduct depending on your total income. Go to www.irs.gov and enter "Publication 600" in the "search for" box. You may also call (800) 829-1040 for help.

For most working people, state income taxes will be higher than the sales tax deduction so it doesn't make sense to opt for the sales tax, said Dick Freitas, president of the Hawaii Society of Certified Public Accountants and a principal at Hedberg, Freitas, King & Tom LLP in Honolulu.

For example, if your taxable income is $35,000 and you're single, your state tax bill comes to $2,285. Under the IRS tables, you can claim only $476 in sales tax expenses (assuming you claim one exemption).

Freitas said the sales tax deduction could benefit two specific groups: retirees who itemize deductions and pay little or no state income taxes; and folks who paid sales taxes on certain big purchases such as a new vehicle, boat or aircraft.

Retirees do not pay taxes on their Social Security and certain pension benefits in Hawai'i and so they may claim little or no state income taxes as a deduction.

Until the state adopts this federal tax change, you cannot claim the same deduction on your state tax return. The Legislature usually adopts the federal changes after April 20, Freitas said. If you are opting for the sales tax deduction, you could consider filing an extension on your state return.

Increased deduction for qualified education expenses

The federal deduction for qualified education expenses for 2004 rose to $4,000 for single filers earning a modified adjusted gross income of $65,000 or less and married couples filing jointly making $130,000 or lower. If you make $65,000 to $80,000 for singles and $130,000 to $160,000 for married filing jointly, the deduction is $2,000.

Qualified expenses include tuition and certain related fees for postsecondary schooling.

There's free tax help in all counties

Free tax preparation is available in all counties to anyone, but is designed specifically for the elderly, low-income people, the disabled or limited-English speakers.

Tax returns are prepared by volunteers trained by the IRS, AARP Tax-Aide, the armed forces, educational and community sponsors and the state Department of Taxation.

For the location nearest you, call (888) 227-7669 or dial 211.

For taxpayers who are home-bound or in nursing homes, arrange for a visit through the AARP Tax-Aide district coordinator on O'ahu at 678-3043.

Items to bring include:

• Social Security card or a current record of your SSN from the Social Security Administration

• Federal and state tax form packets

• W-2 forms from each employer

• 1099-INT or 1099-DIV forms

• SSA-1099 or RRB-1099

• 1099-R for pension income

• List of medical costs, taxes, interest, contributions and miscellaneous expenses for itemizing deductions

• Copies of last year's federal and state tax returns

• Childcare information and disabled dependent care information

• Picture ID

Last year, the deduction was $3,000 for singles making $65,000 or less and married couples filing jointly making $130,000 or less. There was no deduction for taxpayers who made more than those levels. For more information, download Publication 970 from the IRS or order it at (800) 829-3676.

There is no such deduction for the state, according to the Hawai'i Department of Taxation.

Deduction of overnight travel expenses

Starting in 2004, Hawai'i is allowing the deduction of over-night travel expenses — transportation, meals and lodging — for members of the National Guard and Reserve. The deduction is for travel of more than 100 miles away from home while in service. Federal tax laws already allow this deduction.

The state tax form booklet has more information on the deduction. Tax forms can be downloaded from www.state.hi.us/tax or faxed to you by calling 587-7572 on O'ahu or (808) 678-0522 from outside the county. You can also pick up forms at the Princess Ruth Ke'elikolani Building, 830 Punchbowl St. in Honolulu.

For federal help, refer to Form 2106 or 2106-EZ and its instructions. To contact the IRS, call (800) 829-1040. To contact the state, call 587-4242.

The earned income tax credit

Don't forget about the earned income tax credit, which could put as much as $4,300 in federal money into your pocket, said Ron Wall, family economics specialist at the University of Hawai'i-Manoa.

In 2002, about $40 million in earned income credit money was left unclaimed in Hawai'i, he said. In part, that's because people don't file Schedule EIC along with their federal tax return.

"Some people who don't owe tax are not encouraged to file a tax return," Wall said. "Whether they owe or don't owe any tax, the EITC will be paid to them."

Taxpayers who benefit include workers who earn lower wages. This year, the IRS has unveiled an "EITC Assistant" program on its Web site to check whether you qualify. For more information, download Publication 596 from the IRS Web site or order it for free by calling (800) 829-3676.

Tsunami contribution

Don't forget to deduct your contributions to the Indian Ocean tsunami victims, as long as you made a cash donation by Jan. 31 to a qualified charity.

If you choose not to take the deduction this year, you can do it for the next tax year, Freitas said. As for taking the same deduction for the state, you have to wait to see if the Legislature adopts this tax break.

Finally, the state Department of Taxation said that it sent out erroneous 1099-G statements to some taxpayers this year and that the errors will be corrected. If you've already filed your tax return, you should file an amended return to fix the mistake.

John Molay, an attorney with the Taxation Department, said the mistake is "extremely rare." As such, taxpayers do not have to wait until the last moment to file taxes in anticipation of a possible error. Moreover, any corrections could theoretically come after the tax filing deadline.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.