Should I Refinance?

5 Tips: Staying one step ahead of the taxman.

By Gerri Willis, CNN/Money contributing columnist (CNN Money)

NEW YORK (CNN/Money) - So it's only February. But with 2004 in the dust, he's on his way...the taxman cometh.

You know you have the W-2 form lying around somewhere, unopened. Crack it open. It's time to think seriously about what you owe Uncle Sam, or what he owes you.

Today's Top Five Tips will help you get going on your 2004 tax filing.

1. Be an early bird.

H&R Block spokesperson Tom Linafelt says the tax-preparer has two peak seasons: one that's ending right now, and one that ends April 15th. In that first peak, H&R sees individuals who know they have refunds filing their taxes as soon as they receive their W-2 forms. If you are expecting a refund, don't wait until the deadline. Follow those early birds' example and file now.

Anthony Burke, public affairs specialist at the IRS, says, "The clear benefit of filing early is you'll get your check sooner." It's your money, so you should earn interest on it rather than letting the government reap those benefits.

According to the IRS, 80 percent of taxpayers will get a refund this year. Many will get even bigger refunds than before because there are some new deduction rules that might work in their favor.

For one, donations to the Tsunami relief efforts that you made up until January 31st will count toward your 2004 taxes. Usually, you can only count charitable donations made up until December 31st. If you made your contribution before the deadline last month, your tax benefit will be sped up a full year.

Also this year, more taxpayers can deduct the contributions to their IRAs because the government raised the salary cap. For example, singles making as much as $45,000 a year and married couples earning as much as $65,000, can deduct as much as $3,000 per person. In 2003, the salary limits were $40,000 and $60,000 respectively.

Those aged 50 years and older who are playing catch-up on their IRAs, can deduct as much as $3500 per person. The government also raised and expanded the deduction for taxpayers who pay college tuition.

And military families can include combat pay in their income if it helps them take better advantage of the earned income tax credit. Good news, too, for hybrid car owners: the government postponed changes to the deductions for driving a clean-air car. You will still get a deduction of up to $2,000 for 2004 and 2005.

2. E-file it.

You might like bonding with your calculator and pencil every year, but really you're not doing yourself any favors by paper-filing. E-filing through a computer software program cuts out your math errors.

Plus, when your filing is transmitted online, Burke says no mistakes, like a wrong social security number, can be made or the system rejects the filing. E-filing also eliminates mistakes on the IRS' part; clerks can sometimes make errors when entering your paper-filing into the computer system.

One more incentive: 60 percent of taxpayers or some 78 million individuals are eligible to use free software offered by Free File Alliance companies to e-file their taxes. It's all part of a partnership between the IRS and the Free File Alliance. You can find out more at their Web site at www.IRS.gov/efile

The IRS has a list of companies and will link you straight to the company's Web site. Each company has its own limits for eligibility for free e-filing, try using the "Guide Me to a Service" button on the IRS e-file Web site (above).

Burke says no matter how you file, paper or online, go for the direct deposit. "It's the best way to get your refund. You'll get your check sooner. It won't get lost in the mail and it saves you a trip to the bank."

3. Deduct your shopping addiction.

Another change in the tax code: For the first time in nearly a decade, you can either deduct your state income tax or your state sales tax. This might be great for you if you had some rather extreme shopping habits this year, i.e. you bought a yacht.

Deducting your income taxes will generally be the better break, but tax experts say if you made a major purchase in 2004 such as a car or boat, you might want to compare which is the larger deduction.

This is also a nice bonus for taxpayers living in low- or no-income tax states. There is currently no state income tax in Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. To figure out what your state sales tax total was, take a look at your receipts from big-ticket items or refer to tables on the IRS Web site.

4. Watch out for the AMT.

By one estimate, some 3 million Americans will be subject to the Alternative Minimum Tax, or AMT, for their 2004 tax filing. The bummer here is that they are forced to pay more than what they would under the normal tax system.

Sound unfair? The AMT is an old tax scheme set into place back in 1969 to ensure that the ultra-wealthy couldn't escape paying taxes by milking tax breaks. The AMT has been under more criticism lately because President Bush's $1.9 trillion in tax cuts lowered the tax base for millions of Americans, but exposed more middle-class taxpayers to the AMT as a result.

The real bummer: the burden of knowing if you fall under the AMT is yours. In other words, you have to calculate your tax burden twice: once under the regular tax system, and once under the AMT system.

Unfortunately, you have to pay the IRS the larger amount. According the National Taxpayer Advocate, the average AMT taxpayer will have to pay an average of $6,000 more in taxes than under the normal system. Most e-file software will calculate your AMT for you. You can also do an easy comparison on H&R Block's AMT calculator online at www.hrblock.com/taxes/tools/amt .

5. Dot your i's, Cross your t's.

The IRS does care about the details on your return. According to Eric Smith, public affairs specialist at the IRS, one of the biggest taxpayer goofs is forgetting to sign the return.

If you are e-filing, that's not a concern, but don't forget to hit the submit button. A lot of programs will let you work on your return here and there, but some taxpayers might save the return but forget to send it.

Another big oops that paper-filers make: forgetting to attach their W-2 form. With e-file, many programs won't require you to send your W-2 to the IRS because they may just ask for your company's ID number and address. If you are unsure about what to do with your W-2, be sure to ask the software provider.

Finally, if you're freaking even now about getting your paperwork together before the deadline, apply for an extension online by midnight on April 15th. You can find the form-4868 on www.irs.gov to extend your deadline through August 15th.