As taxpayers begin gathering information and preparing
their 2005 income tax returns they will want
to note several changes from last year. Most
of the changes originated from the Working Families
Tax Relief Act of 2004 and the American Jobs
Creation Act of 2004 which were both signed into
law on October 22, 2004. Also, their was a new
tax law called the Katrina Emergency Tax Relief
Act of 2005 signed into law on September 23,
2005 that will affect many income tax returns.
Personal Exemptions and the Standard Deduction
have increased. The personal exemption is now
$3,200. The standard deduction is now $5,000
for Single filers, $7,300 for Head of Household,
and $10,000 for Married Filing Jointly. The “marriage
penalty” has been temporarily eliminated.
Mileage rates were also adjusted in 2005 due to
the rising cost of fuel. The standard business
mileage rates for 2005 were 40 ½ cents
from 1/1/05 to 8/31/05, and increased to 48 ½ cents
from 9/1/05 to 12/31/05. The business mileage
rate for 2006 has been set at 44 ½ cents.
Medical and moving mileage rates for 2005 were
15 cents from 1/1/05 to 8/31/05, and increased
to 22 cents from 9/1/05 to 12/31/05. The medical
and moving mileage rate for 2006 is 18 cents.
Charitable mileage was 14 cents the entire year
of 2005 and has not been increased for 2006.
In 2005, taxpayers will want to note that not
only is it important they have their total mileage
for the year, but taxpayers also need to break
it down between the different dates.
Businesses are allowed to write-off the total
cost of certain equipment purchased for use in
their business in the first year. This is called
Section 179 expense and is limited to $105,000
for 2005. However, there are limits for SUVs
purchased after October 22, 2004. The SUV must
have a gross vehicle weight of at least 6,000
pounds and be used more than 50% in business
to qualify for Section 179 expensing. For SUVs
having a gross vehicle weight between 6,000 and
14,000 pounds, the limit is $25,000. Heavy pickups
are exempt from the limit if they weigh at least
6,000 pounds and have a cargo area at least 6
feet in length separate from the passenger compartment.
Previously, if a taxpayer donated a vehicle, boat
or airplane to charity they could deduct the
fair market value. After December 31, 2004, if
a taxpayer donates a vehicle, boat, or airplane
to charity and the charity sells the vehicle,
boat, or airplane they can only deduct the amount
the charity receives as gross proceeds. The charity
is required to give the taxpayer Form 1098-C.
If the charity uses the vehicle in its exempt
purpose, then the old rules apply.
The IRA contribution limit was raised to $4,000
in 2005. The 401(k) and 403(b) contribution limits
were $14,000 and an extra $4,000 “catch
up” contribution, for those over 50. Don’t
forget, taxpayers have until April 15, 2006 to
make their IRA contributions for 2005.
Most of the 2005 legislation regarding Katrina
affects only those who were victims of the hurricane;
however, there are a few deductions which could
affect all taxpayers. Individuals who used their
principal residence to provided housing free
of charge to evacuees for at least 60 days can
claim a $500 deduction per evacuee up to a maximum
of $2,000. The standard mileage rate for charitable
mileage related to Katrina is 29 cents from 8/25/05
to 8/31/05 and 34 cents from 9/1/05 to 12/31/05
and 32 cents for 2006. Also, the 50% limitation
for cash contributions made between August 28,
2005 and December 31, 2005 has been removed.
Taxpayers should consult their tax advisor to
ensure they take advantage of all the deductions
and credits now available.
Tax topic is provided by Jeremy Watson, CPA, Jones & Company,
Ltd, Paragould.
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