Some recent tax law changes for the 2005 Tax Year.
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 exemption.
- Head of household filing status.
- Earned income credit (EIC).
- Child tax credit.
- Credit for child and dependent care expenses.
FS-2005-7 has more information.
Section 1202 Exclusion Increased for Gain from Empowerment Zone Business Stock
You generally can exclude up to 50 percent of your gain on the sale or trade of qualified small business stock held by you for more than 5 years. This is called the section 1202 exclusion. Beginning in 2005, you generally can exclude up to 60 percent of your gain if you meet the following additional requirements.
- You sell or trade stock in a corporation that qualifies as an empowerment zone business during substantially all of the time you held the stock.
- You acquired the stock after December 21, 2000.
Item (1) will still be met if the corporation ceased to qualify after the 5-year period that begins on the date you acquired the stock. However, the gain that qualifies for the 60 percent exclusion cannot be more than the gain you would have had if you had sold the stock on the date the corporation ceased to qualify.
The part of the gain that is included in income is 28 percent rate gain.
Charitable Contributions of Cars, Boats, and Aircraft
If you donate a car to a qualified organization after December 31, 2004, your deduction is limited to the gross proceeds from its sale by the organization. This rule applies if the claimed value of the donated vehicle is more than $500. However, if the organization makes significant intervening use of or materially improves the car, you generally can deduct its fair market value.
Boats, aircraft, and other vehicles. These rules also apply to donations of boats, aircraft, and any vehicle manufactured mainly for use on public streets, roads, and highways.
Acknowledgement required. If the claimed value of the car is more than $500, you must have a written acknowledgement of your donation from the organization and must attach it to your return. If you do not have an acknowledgement, you cannot deduct your contribution.
The acknowledgement must include the following information.
- Your name and taxpayer identification number.
- The vehicle identification number or similar number.
- A statement certifying the car was sold in an arm's length transaction between unrelated parties.
- The gross proceeds from the sale.
- A statement that your deduction may not be more than the gross proceeds from the sale.
- The date of the contribution.
However, if there was significant intervening use of or material improvement to the car by the organization, the acknowledgement does not have to include the information in items 3, 4, and 5 above. Instead, it must contain a certification of the intended use of or material improvement to the car and the intended duration of that use and a certification that the vehicle will not be transferred in exchange for money, other property, or services before completion of that use or improvement.
This acknowledgement must be provided within 30 days of the sale of the car or, if there is significant intervening use or material improvement of the car by the organization, within 30 days of the contribution.
The organization also must provide this information to the IRS.
Donations of inventory. These rules do not apply to donations of inventory. For example, these rules do not apply if you are a car dealer who donates a car you had been holding for sale to customers.
More information. The IRS expects to issue more guidance on these rules early in 2005.
Exemption Amount Increases
The amount you can deduct for each exemption has increased from $3,100 in 2004 to $3,200 in 2005.
You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2005, the phaseout begins at:
- $109,475 for married persons filing separately,
- $145,950 for single individuals,
- $182,450 for heads of household, and
- $218,950 for married persons filing jointly or qualifying widow(er)s.
Standard Deduction Amount Increases
The standard deduction for people who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2005 than it was for 2004. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another person. The 2005 Standard Deduction Tables are shown in Publication 505, Tax Withholding and Estimated Tax.
Earned Income Credit (EIC) Amounts Increase
The following paragraphs explain the changes to the credit for 2005.
Earned income amount. The maximum income you can earn and still get the credit is higher for 2005 than it is for 2004. You may be able to take the credit for 2005 if:
- You have more than one qualifying child and you earn less than $35,263 ($37,263 if married filing jointly),
- You have one qualifying child and you earn less than $31,030 ($33,030 if married filing jointly), or
- You do not have a qualifying child and you earn less than $11,750 ($13,750 if married filing jointly).
The maximum adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.
Investment income amount. The maximum investment income you can have in 2005 and still get the credit increases to $2,700.
Standard Mileage Rate
Business-related mileage. For 2005, the standard mileage rate for the cost of operating your vehicle is increased from 37½ cents a mile to 40½ cents a mile for all business miles.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Medical and move-related mileage. For 2005, the standard mileage rate for the cost of operating your vehicle for medical reasons or as part of a deductible move is increased from 14 cents a mile to 15 cents a mile. See Transportation under What Medical Expenses Are Includable in Publication 502, Medical and Dental Expenses, or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.
Social Security and Medicare Taxes
For 2005, the employer and employee will continue to pay:
- 6.2 percent each for social security tax (old-age, survivors, and disability insurance), and
- 1.45 percent each for Medicare tax (hospital insurance).
Wage limits. For social security tax, the maximum 2005 wages subject to the tax increased to $90,000. For Medicare tax, all covered 2005 wages are subject to the tax. For information about these taxes, see Publication 15 (Circular E), Employer's Tax Guide.
Source: www.irs.gov (Internal Revenue Service)
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