WHAT'S NEW.

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Author: Feldman, Amy afeldman@moneymail.com

The capital-gains tax cut took effect in May of last year, creating mind-numbing complexity for Schedule D filers. This year the rules are simpler-the rate is 15% for long-term capital gains and qualified dividends-but you can still trip yourself up.

You have to get the timing right. Short-term gains (on investments held one year or less) are taxed at your marginal rate. Only long-term gains (those held longer than a year) qualify for the 15% rate. You can offset your capital gains with an equal amount of losses. First pair short-term gains with short-term losses, then match long-term with long-term. After that, if you have more losers than winners, you can deduct as much as $3,000 in losses from your regular income.

A TIP FOR BIG LOSERS: If you have more than $3,000 in losses left over, you can carry them over into next year or beyond.

Not all dividends "qualify" for the low 15% rate. The income that most domestic and foreign stocks pay does. But the payouts on REITs and most preferred stocks do not. With funds, the rules are even more complicated. If stocks in the fund pay dividends and the manager passes them on to investors, those qualify. If what the fund dubs "dividends" are short-term gains or bond interest, they do not. Your Form 1099-DIV should say whether the dividends are ordinary (and taxed as income) or qualified.

A TIP FOR FREQUENT TRADERS: To get the 15% rate, you must have owned the stock for more than 60 days within a 121-day window around the ex-dividend date (the date you have to own the stock to collect a dividend). Using the site divtracker.com will help at tax time ($19 for six months).

A CRACKDOWN ON CAR GIFTS

Starting in 2005, if you donate a car to charity, you'll be able to deduct only the amount the charity netted from selling the car. If you beat the clock and donated a car to charity in 2004, you can still deduct the full fair market value. To estimate that, start with the Kelley Blue Book (kbb.com) and then adjust for wear and problems.

What does a charity net from selling your car? In 2005 the organization must send you a receipt for that amount.

tsunami aid

If you gave money to charity for tsunami relief by Jan. 31, you can take this write-off on either your 2004 or 2005 return.

With rates not scheduled to change in 2005, the deduction is worth the same both years (but your finances could change). If you take the deduction in 2004, check your state's rules to see if you can do the same on your local return.

The opportunities to save money in a tax-advantaged account keep growing. Don't miss out on these breaks if you qualify:

IRAs
2004 LIMIT*
$3,000
$3,500
if you're 50-plus
* You can make a 2004 contribution through April 15, 2005.

2005 LIMIT
$4,000
$4,500
if you're 50-plus

401(k)s
2005 LIMIT
$14,000
+$1,000 from 2004
$18,000
if you're 50-plus
+$2,000 from 2004

FOR THE FIRST TIME IN YEARS, YOU CAN CHOOSE WHICH TO DEDUCT

WHAT'S NEW. Starting this year-and for 2004 and 2005 only, under current law-you can deduct either your state and local income taxes or sales taxes on your federal return as long as you itemize (and don't fall prey to the AMT). For those who live in states that levy sales taxes but not income taxes, such as Florida, Nevada and Texas, this is a huge boon. If you've been taking the standard deduction, this may be reason enough to itemize.

WHAT'S SO TRICKY. For residents of states with an income tax, the decision comes down to which deduction is bigger. Fortunately, while you can use actual sales receipts to determine your write-off, you don't have to. The IRS has calculated how much you can deduct based on where you live, your income and your exemptions. Simply look it up in Publication 600, available at irs.gov, or use tax software. If you bought a car, boat, motorcycle or plane last year, you can in most cases add the taxes on that big-ticket item to the IRS number.

HOW IT WORKS. Consider a married couple with two kids who live in Baton Rouge and earn $80,000. Their state and local income tax would be $2,608, according to Justin Ransome, a senior manager in KPMG's private-client advisory services practice, while their state and local sales tax deduction would be just $1,288. But if they bought a car for $30,000, their sales tax would increase by $2,523, pushing the deduction to $3,811.

TAX PLANNING TIP. If your sales tax deduction is just below your income tax deduction, consider bunching major purchases into this year. Then take the state sales tax deduction in 2005 and the income tax write-off in 2006.

THE BAKERS SAVE WITH SALES TAXES Since former pilot Bo Baker, 67, retired, he and his wife Judy, 63, have kept three homes-in Marco Island, Fla., South Portland, Maine and Mesa, Ariz.-but have filed as Florida residents. That's meant no state income taxes, but no hefty deduction on their federal return either. So the couple will save money under the new tax law-after they do a little math. The Bakers must divvy up the sales tax deductions based on the number of days they live in each state. IRS tables show that, with an income of $93,000 and two exemptions, the couple can deduct $1,018 in Florida, $859 in Arizona or $749 in Maine; if split equally three ways, that's an $875 write-off.

More seniors will be able to convert a traditional IRA to a Roth this year. Anyone can make the switch, but only if his income is $100,000 or less. Under new rules, retirees don't have to count required minimum IRA distributions toward that $100,000 cutoff.

Why convert to a Roth in retirement? Estate planning, for one. The taxes you pay on the conversion reduce your estate, and Roths, unlike regular IRAs, don't force you to take minimum distributions after age 701/2.

PHOTO (COLOR)

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By Amy Feldman

Photographs by Jeffrey Lowe