It’s
that dreaded time of year again. The time when you start
biting your nails and start tearing your house apart
looking for receipts, tax bills, your W-2, 1099s, and
everything else you may need to prepare your federal
income tax return. To make it more difficult to prepare
your return, the government changes the rules every year.
Expenses that were deductions last year may not be deductions
this year; and expenses that were not deductions last
year may be deductions this year. If you’re lucky,
the value for exemptions and deductions will increase.
If
you’re just starting to gather all of your tax
information and getting ready to sit down and prepare
your return, you only have about two weeks until the
April 15th deadline to get it all together and completed,
including mailing or electronically filing. To help ease
your pain, what follows is a brief summary of the many
tax law changes that may apply to your federal income
tax return.
The
first major change in the tax laws is that you can no
longer Telefile. You cannot “phone in” your
tax return. You must either prepare and mail a hard copy
tax return to the IRS or electronically file a return.
The 2005 standard deductions for individuals who do not
itemize are:
- Head
of household taxpayers $ 7,300
- Married
taxpayers filing jointly and qualifying widows and
widowers $10,000
- Married
taxpayers who file separately $ 5,000
- Single
taxpayers $ 5,000
Each
taxpayer’s personal exemption has been increased
by a whopping $100 per taxpayer. This brings a personal
exemption deduction on your 2005 return to $3,200. NOTE:
There will be a personal exemption phase-out beginning
in 2006, and the personal exemption will be eliminated
for tax years beginning after December 31, 2009.
Rather
than a number of definitions of a qualifying child, there
is one new definition that will be applied for all of
the following tax benefits: Head of Household, Dependency
Exemption, Child and Dependent Care Credit, Child Tax
Credit, and Earned Income Credit. In general, there are
four “tests” that must be met in order to
claim someone as a qualifying child. These four tests
are based on relationship, residency, age and support.
For expert clarification on the definition and the four
tests, please contact the IRS or a qualified tax professional.
If
you qualify, there are four categories under which you
may be able to utilize a deduction for standard mileage
rates. Not only are there four categories, but there
are two mileage rates applicable to each category:
- Strictly
businsess: 40.5 cents/mile before September 1, 2005,
48.5 cents for miles driven after August 31, 2005;
- Medical
reasons: 15 cents before September 1, 2005, 22 cents/mile
after August 31, 2005;
- Moving
expenses: 15 cents/mile before September 1, 2005, 22
cents after August 31, 2005;
- Charitable
services in connection with Katrina relief services:
29 cents for miles used between August 24, 2005; and
September 1, 2005; 34 cents a mile for services between
September 1, 2005 and December 31, 2005.
As to retirement savings plans, a few changes have taken
place.
- Deduction
phase-out increases are under way in connection with
traditional IRAs. However, if you have a traditional
IRA and you are covered by a retirement plan at work,
the amount of income you can earn may not be affected
by the phase-out. The amount of any deduction you may
claim will vary depending on your filing status.
- Under
certain circumstances, the amount you, and your spouse
if filing jointly, may be able to deduct as an IRA
contribution is $4,000 ($4,500 if you were more than
50 years of age at the end of 2005).
- If
you have a retirement plan at work, your IRA deductions
may be limited if your adjusted gross income on your
1040 is:
- $70,000-$80,000
(married filing jointly or qualifying widow(er)(s)
- $50,000-$60,000
(single or head of household)
- $0-$10,000(married
filing separately)
- The
limits on elective deferrals have been increased: The
maximum amount of an elective deferral under a salary
reduction agreement that can be contributed to a qualified
plan is $14,000 ($18,000 if you are over age 50). If
you have a SIMPLE plan, the amount is $10,000 ($12,000
if you are 50 years of age or older).
Charitable
cash contributions made to a qualifying charity after
August 27, 2005, also are not subject to the 50 percent
adjusted gross income limitation. These deductions are
also not subject to the itemized deduction phase-out
for high-income taxpayers.
There
are also two tax laws that apply to victims of the devastating
hurricanes that hit our shores and inland this past season:
- Housing
Hurricane Katrina Victims: If you provided free housing
to a victim or victims of Hurricane Katrina for at
least 60 days, you can claim an exemption deduction
of $500 per person, up to a maximum of $2,000. This
exemption is not subject to the income-based phase-out
of personal exemptions.
- Losses
due to Hurricanes Katrina, Rita, and Wilma: Personal
casualty loss deductions are usually reduced by $100
per occurrence and by 10 percent of a taxpayer’s
adjusted gross income. However, personal casualty losses
incurred due to these three hurricanes do not need
to be reduced by either of these amounts.
The
tax law changes that apply to 2005 individual federal
income tax returns are more numerous and much more complicated
than mentioned in this article. Although there are many
others available, a few of the Web sites visited in preparation
of this article are:
Be
sure to research your own income and tax circumstances.
Online and “store-bought” programs provide
a tremendous amount of assistance in the preparation
of your return. Most of them ask about every possible
cent of income you may have earned, but also inquire
about possible deductions you did not realize you could
claim. Don’t make yourself crazy during tax season.
Prepare well, have everything together, take your time,
and be accurate. In order to maintain your sanity, consider
hiring a tax professional to prepare your return(s).
Remember, though, that tax professionals are swamped
at this time of year, so make an appointment as soon
as possible.
If
all else fails and you feel overwhelmed over the thought
of preparing your federal tax return, you can get a reprieve,
although short-lived. You are entitled to an automatic
six-month extension of time in which to file your return.
Automatic does not mean that you can sit back a few more
months and do nothing until your six-month deadline is
almost up. In order to obtain your reprieve, you must
carefully read the instructions for preparation and filing
of IRS Form 4868, Application for Automatic Extension
of Time to File U.S. Individual Income Tax Return. Once
you file for the extension, be sure to get it together,
and start your return as soon as possible.
