2005 TAX LAW CHANGES FOR INDIVIDUALS AND BUSINESS
STANDARD DEDUCTIONS INCREASE: MFJ/QW: $10,000,
SINGLE:$5000,
HOH: $7300, MFS: $5000.
PERSONAL EXEMPTIONS: $3200
SALES TAXES: Taxpayers may either claim the amount of State taxes paid in 2005 or the sales taxes paid, whichever is greater.
UNIFORM DEFINITION OF A QUALIFYING CHILD:
Beginning in 2005, one definition of a qualifying child will apply for each of the following tax
benefits:
DEPENDENCY
HEAD OF HOUSEHOLD
EARNED INCOME CREDIT
CHILD TAX CREDIT
CHILD AND DEPENDENT CARE CREDIT
In general, all four of the following tests must be met to claim someone as a qualifying child
1) Relationship test: The child must be your child (including adopted child, stepchild, or eligible foster child) brother, sister, step brother, or descendent of any of these relatives.
2) Residency test: The child must live with you for MORE than half of the year (except for temporary absences for school, vacation, medial care, military service or detention in a juvenile facility) Exceptions for residency apply to children of divorced or separated
parents.
3) Age test: The child must be under age 19 or under age 24 and a full time student by the end of the tax year to be a dependent, head of household and earned income credit. For purposes of the child tax credit the child must be under age 17 by year end and
for the child care credit, the child must be under age 13 unless permanently and totally disabled.
4) Support test: The child cannot have provided over half of their own support during the tax year. The exception to this is for purposes of the earned income credit where the support test does not apply. In the event that the child is the qualifying child of more than one person, the child becomes the qualifying child of the person who is first the parent, if the child has two parents, then the child becomes the qualifying child of the parent for whom the child lived with for a longer period of time. If the time spent with each parent is equal, then, the parent with the highest adjusted gross income will win the test. In the event the child has lived with more than one non parent during the year, the
non parent with the highest adjusted gross income will win the test.
CLARIFICATION ON HEAD OF THE HOUSEHOLD STATUS:
In general, you may use the head of the household status if, at the end of the tax year, you are single or are considered single for tax purposes and have maintained a home for a qualifying individual.
A) Your parent who lived in your home or a home you maintained for the entire year and your parents are your dependents in which you provided over 50% of cost of their total support in that tax year.
B) Married child who lives in a home you maintain who is not filing a joint return unless they are only filing a joint return for claim of refund due to no tax liability existing had a separate return been filed. The child must be a U.S. citizen, U.S. national or resident of the U.S., Canada or Mexico.
C) Under 2005 change, all children over age 18( not in school) living in a taxpayers home must be a DEPENDENT in order to file head of household.
CHILD TAX CREDIT:
The child tax credit is available to taxpayers with a qualifying child, under age 17 who lived with them over 50% of the tax year. This $1000 credit is also available to the non custodial parent, if the custodial parent via form 8332, or similar document, waives their right to the qualified child and agrees that the non custodial parent may claim the qualified child as a dependent. The authorization to give the non custodial parent the right to the qualified child may also come through the divorce decree. There are specific requirements which must be met for the non custodial parent to use the custodial parent’s qualifying child. Find those specific requirements in Publication 501 on the IRS website.
KATRINA RELIEF:
The normal $100 floor for casualty losses are waived for
Katrina related victims.
Debt forgiveness due to Katrina will not be taxable on personal debt cancelled by a lending institution.
Earned income credit for Katrina disaster victims may calculate the EIC and additional child tax credit using 2004 earned income.
Distributions made by Katrina disaster victims up to $100,000 from pensions and IRA’s may include the income ratably over a 3 year period, will be exempt from the 10% early withdrawl distribution if under age 59 ½, may recontribute to an eligible
retirement plan anytime during the 3 year period beginning the day after the distribution. The 20% Federal income tax withholding requirement does not apply.
Hardship distributions from retirement plans or firsttime homebuyer distributions from IRA’s that were received after 2/28/05 and prior to 8/29/05, intended for the purchase or
contruction of a principal residence within the Hurricane Katrina disaster area, may be rolled back into an eligible retirement plan tax free.
Employees hired, regardless of location, who were displaced by the Katrina hurricane, my qualify for WOTC credit.
Loans on retirement plans for Katrina victims are doubled to the lessor of $100,000 or the greater of 100% of the Individuals account balance or $10,000.
Individuals who provide free housing (rent free) who lived in the Katrina disaster area on 8/28/05 who were displaced by the Hurricane, can claim a personal exemption deduction of $500 per each such individual up to 4 people. This deduction may be
claimed in 2005 or 2006. Housing must have been provided for at least 60 consecutive days.
Involuntary conversion gains for Katrina victims is extended for a 5 year period.
CHARITY:
If elected, the 50% AGI limit on charitable contributions does not apply to CASH donations given to 50% limit charities. If the amount given is not allowed, the carry forward for 5 years but then limited to 50% of the AGI. Donations given do NOT
have to be used for Katrina related purposes and phase out limitation based higher income thresholds is excluded.
Mileage rates for charitable use of car is now 14 cents per mile unless the mileage was for volunteering for Katrina relief and the mileage rate in that case is 29 cents per mile from 8/25/05-8/31/05 and 34 cents per mile from 9/1/05-12/31/05.
Donations of food from inventory is enhanced if donated for the care of the ill, needy or infants to the lower of: the basis of the food item plus half of the item’s appreciation , or two times basis. Need not be given for Katrina relief.
DONATION OF VEHICLES to a charity. The contribution for the donation of a vehicle is limited to the gross proceeds from the sale of the vehicle by the charity or the fmv of the value of the vehicle if the charity decides to use the vehicle themselves. If the contribution exceeds $500, there must be a written
acknowledgment from the charity.
ENERGY TAX INCENTIVES FOR 2006
ALTERNATIVE MOTOR VEHICLE CREDIT: Tax credits for the following
4 types of new vehicles
1) qualified hybrid vehicles
2) Advanced lean burn technology vehicles
3) Qualified fuel cell vehicles
4) Qualified alternative fuel vehicles
The sum of all vehicle credits cannot reduce the taxpayers federal income tax liability below AMT amount. Depreciable basis must be reduced by the credit amounts and 179 expenses.
Fuel economy credit between $400 and $2400 calculated on a sliding scale based upon fuel efficiency improvements compared to 2002 models.
Conservation Credits of $250 to $1000 based upon an anticipated lifetime fuel savings expressed by gallons of gasoline.
PERSONAL ENERGY PROPERTY CREDIT:
Beginning 1/1/2006, a credit of 10% of expenditures for qualified energy efficiency improvements to existing homes plus 100% of expenditures for qualified residential energy property. The nonrefundable credit is limited to a lifetime amount of $500. 10% items: insulation materials or systems designed to reduce heat loss, exterior windows including skylights limited to $200, metal roofs coated with heat reduction pigments. 100%-qualified energy efficient electric heat pumps, heat pump water heaters, geothermal heat pumps and central air conditioners
(all limited to $300 each item) Qualified natural gas, propane and oil furnaces (limited to $150 per item) Advanced main air circulating fans (limited to $50 per fan)
QUALIFIED ALTERNATIVE FUEL VEHICLE REFUELING PROPERTY:
A 30% credit for the cost of installing clean fuel vehicle refueling property to be used in a trade or business installed at either the business or taxpayers personal residence.
RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT:
A personal credit equal to 30% of the cost of qualified solar water heating equipment (max of $2000) or qualified electricity generating solar photovaltaic property, or 30% of the cost of a qualified fuel cell property (max credit $500 for each .5 kilowatt of capacity) Only equipment to benefit taxpayers residence is allowable. No equipment to heat swimming pools or hot tubs qualify. For Principal residences only.
TIMBER SALES: Outright sales of standing timber qualify for capital gain treatment. The owner no longer needs to retain an economic interest in the timber for capital
gain treatment.
