Change in tax laws will mean that many receive a refund
Industry experts say that eight million more taxpayers will receive refunds this tax season and that the average refund for those filing by April 15th will be 29 percent higher.
The main reason is the new tax law signed in May 2003, which reduced income tax rates retroactive to January. However, the tables used by employers to withhold taxes from paychecks were not changed until July. If you failed to adjust your withholding, then you overpaid taxes for the first half of the year; hence, the refund.
Workers who may have taken advantage of deferred income or an acceleration in deductions at the end of the year, may find their strategy backfires if the alternative minimum tax, or AMT, kicks in. Instead of paying regular income tax, you may have to pay the AMT which is higher. While the AMT was designed years ago to trap the rich who avoided taxes through numerous deductions, its impact is being felt more and more by middle-income families.
Other tax laws which have changed:
- Retirement accounts. This year, younger workers can contribute up to $12,000 in a 401(k), while those 50 and older can put away up to $14,000. The minimum contribution for IRAs this year is $3,000 for young workers and $3,500 for those 50 and older. IRA contributions for 2003 can be made up to April 15th, the tax deadline.
- IRA conversions. Consider a Roth IRA, since earnings can be withdrawn tax-free in retirement. To qualify, your annual income must be lower than $100,000.
- Income and short-term gains. The highest marginal rate is now 35 percent and is retroactive to January 1, 2003.
- Capital gains. If losses exceeded the gains, you can deduct up to $3,000 against ordinary income. The law also reduced the rate for long-term capital gains - investments held longer than a year - from 20 percent to 15 percent for those in higher tax brackets. The rate dropped to 5 percent for those in the 10 and 15 percent brackets.
- Tax break for teachers (available for 2003 only). Teachers from elementary through high school can deduct up to $250 spent this year on books and supplies, and they don't have to itemize to get the deduction.
If you don't itemize deductions, you may be eligible to have the IRS figure your taxes for you. It is essential to provide all pertinent information but not necessary to visit an IRS office in person. Call your local IRS field office to see if you are eligible to receive this assistance.
Note: This information was prepared as a public service by the Illinois State Bar Association and is a joint project with the Illinois Press Association. Its purpose is to inform citizens of their legal rights and obligations.
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