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Simplifying more complex tax forms

Eileen Ambrose
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Consider these deductions, credits as your financial situation evolves

Eileen Ambrose

March 13, 2006

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At some point, most of us graduate from the 1040EZ.

It usually happens in our 20s and 30s. Finances get more complex. We buy a home. Or, if we're really lucky, our taxable income tops $100,000 -- too high for the simplest of forms.

If you're new to longer forms this tax season, welcome to a world of deductions and credits.

Among them:

Even if you don't remember what you learned in college, at least you can deduct up to $2,500 in student loan interest. This deduction phases out once adjusted gross income reaches $60,000 for singles and $135,000 for married couples.

If you're still in college or graduate school, you may be eligible to deduct up to $4,000 in tuition and fees. Or, students may be eligible for a lifetime learning credit of up to $2,000.

Credits are generally better than deductions. "You figure your tax bill and lop off $2,000," says Barbara Weltman, author of "1001 Deductions and Tax Breaks."

Maybe you're not a student but the teacher? Deduct up to $250 in classroom supplies you buy that are not reimbursed by the school.

Hate your job? Deduct the costs of finding a new one. That includes printing up resumes, postage and travel to interviews. The caveats: First-time job seekers aren't eligible. You must be looking for work in your current field. And you can only deduct those expenses that exceed 2 percent of adjusted gross income.

Cell phone bills and Internet access used for work may also be deductible if not reimbursed by an employer, Weltman says. These, too, must meet the 2 percent threshold.

Reduce taxes and save for retirement by funding a 401(k) or similar plan. Contribute at least enough to get any free money from an employer match.

You may be able to deduct up to $4,000 contributed to a traditional individual retirement account if you meet income limits.

Low-income workers -- couples with incomes of $50,000 and less and singles earning half that -- also may be eligible for a Savers Credit. It's worth up to half the amount you contribute to a 401(k) or an IRA, but no more than $1,000. The credit essentially allows you to "double dip" because you also get the IRA deduction and tax benefits of the 401(k), Weltman says.

Consider a Roth IRA. There's no tax break up front, but withdrawals won't be taxed in retirement. The Roth is ideal for younger investors who have decades to see investments grow.

Save more money by filing electronically for free, Weltman says. Those with incomes of $50,000 or less are eligible for Free File at www.irs.gov.

Got tax questions? Baltimoresun.com has a group of experts to answer them. Go to www.baltimoresun.com/taxtalk.

Questions? Comments? Write personal.finance@baltsun.com.