By Paul Gada, CCH Financial Planning Toolkit Staff Writer
With the 2005 tax season at hand and the 2006 calendar tax year under way, it's a good time to spotlight some of the new tax law changes that may affect you this filing season and beyond. Hopefully, you'll find these changes to be especially rewarding this year, since 2005 was another banner year for tax developments.
In 2005, taxpayers continued to reap the benefits of several major tax-cut packages enacted in 2001 through 2004. In addition, the Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005 provide $14.7 billion in tax relief for individuals and businesses affected by hurricanes.
Here are some highlights of changes in effect for the 2005 filing season:
Personal exemption amount -- This amount has increased to $3,200 per person for 2005.
Standard deductions -- Standard deduction amounts have increased for 2005 as follows: singles and married filing separately, $5,000; heads of household, $7,300; married filing jointly, $10,000.
State and local general sales tax deduction -- For the 2005 tax year, individual taxpayers may still elect to deduct either state and local income taxes or state and local general sales taxes as an itemized deduction on their federal income tax returns.
Teachers' expense deduction -- Eligible educators continue to be entitled to an above-the-line deduction of up to $250 per year for unreimbursed expenses incurred in connection with books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used in the classroom through the end of 2005.
Standard mileage rate -- The standard mileage rate for determining your deduction for the business use of a car has increased to 40.5 cents per mile in 2005 through August. Due to the increased costs of gasoline, the IRS raised the SMR to 48.5 cents per mile from September 1, 2005, through the rest of the year. Those using their car for charitable purposes in 2005 can deduct 14 cents per mile. Cars used for deductible medical travel or moving can deduct 15 cents per mile through August of 2005 and 22 cents per mile through the end of the year.
Hurricane Tax Relief -- The Katrina Emergency Tax Relief Act of 2005 includes 21 major relief provisions which include: penalty waivers/income averaging for IRA/retirement plan withdrawals; exemptions for housing displaced individuals; higher standard mileage rate for vehicle use by volunteers; expansion of the Work Opportunity Credit to cover Hurricane Katrina employees; and a new Employee Retention Credit for small business.
The Gulf Opportunity Zone Act of 2005 appropriates an additional $8.6 billion into regional reconstruction efforts. Many provisions are very similar to the tax incentives enacted after 9-11, including bonus depreciation and enhanced small business expensing, but with more tax relief targeted to individuals. The new law also extends some tax incentives in the Katrina Emergency Tax Relief Act of 2005 to victims of Hurricanes Rita and Wilma.
Donations of motor vehicles, boats and aircraft -- The reporting requirements for charitable contributions of most vehicles will increase beginning in 2005. More significantly, the new rules generally limit the deductible amount of a taxpayer's donation to the true disposal value of the vehicle.
IRA deduction -- The maximum IRA deduction allowed per person continues to be $4,000 in 2005. Also through 2005, those who are at least 50 years old can make an additional catch-up contribution of $500 to their IRA each year.
Adoption tax credit -- In 2005 the maximum credit allowed for an adoption of a special needs child or other adoption is $10,630. The credit begins to phase out for taxpayers with modified adjusted gross income over $159,450 and is completely phased out at $199,450.
Retirement plan elective deferral limits -- An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan increases to $14,000 in 2005. Those 50 years or older can make additional catch-up contributions to their plans of $4,000 in 2005.
Elective deferrals to a SIMPLE plan increase to $10,000 in 2005. SIMPLE plan participants who are age 50 and over can make additional catch-up contributions of $2,000 in 2005.
Where to mail your return -- The IRS has changed the mailing addresses (again) for filing an income tax return in several areas, so make sure that your return gets to its proper filing location. Returns from Colorado, Delaware, Kansas, Maryland, Mississippi, Nebraska, New Mexico, Ohio, South Dakota, Virginia, West Virginia and the District of Columbia are affected. For taxpayers who file paper returns and received a tax instruction booklet from the IRS, the correct addresses are on labels inside the tax packages. The proper service center addresses can also be found on the back cover of the Form 1040 series instructions. Taxpayers who use the e-file system, however, are not affected by these changes.
Automatic six-month filing extension -- The IRS has extended from four months to six months the period for which individuals may obtain an automatic extension of time to file their income tax returns by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.
Changes in 2006 and Beyond
It would easily take an entire book just to explain the many tax law changes enacted in 2001 through 2005 that will be phased in through 2010. The following, however, are some of the highlights you can look forward to in 2006 and beyond:
Personal exemption amount -- This amount has increased to $3,300 per person for 2006.
Standard deductions -- Standard deduction amounts have increased for 2006 as follows: singles and married filing separately, $5,150; heads of household, $7,550; married filing jointly, $10,300.
Tax brackets increase -- Tax brackets have been adjusted for inflation to produce the following for 2006:
Married Filing Jointly (& Surviving Spouse)
2006 Taxable Income |
Tax Rate |
$0-$15,100 |
10% |
$15,100-$61,300 |
15% |
$61,300-$123,700 |
25% |
$123,700-$188,450 |
28% |
$188,450-$336,550 |
33% |
over $ 336,550 |
35% |
Married Filing Separately
2006 Taxable Income |
Tax Rate |
$0-$7,550 |
10% |
$7,550-$30,650 |
15% |
$30,650-$61,850 |
25% |
$61,850-$94,225 |
28% |
$94,225-$168,275 |
33% |
over $168,275 |
35% |
Single Filers
2006 Taxable Income |
Tax Rate |
$0-$7,550 |
10% |
$7,550-$30,650 |
15% |
$30,650-$74,200 |
25% |
$74,200-$154,800 |
28% |
$154,800-$336,550 |
33% |
over $ 336,550 |
35% |
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|
Head of Household
2006 Taxable Income |
Tax Rate |
$0-$10,750 |
10% |
$10,750-$41,050 |
15% |
$41,050-$106,000 |
25% |
$106,000-$171,650 |
28% |
$171,650-$336,550 |
33% |
over $336,550 |
35% |
Residential energy credit -- Beginning in 2006, you may be able to take a residential energy credit for the costs of having qualified energy saving items installed in your main home. The credit is subject to a lifetime limitation of $500 and no more than $200 of the credit can be used towards the purchase of energy efficient windows.
AMT exemption amount decreased -- The AMT exemption amount is scheduled to decrease in 2006 to $33,750 for singles, $45,000 if married filing jointly or a qualified widow(er), and $22,500 if married filing separately.
IRA deduction -- The maximum IRA deduction allowed per person continues to be $4,000 in 2006 and 2007. However, those who are at least 50 years old can make an additional catch-up contribution of $1,000 to their IRA in each of those year.
Retirement plan elective deferral limits -- An employee's maximum salary deferral to a 401(k) plan, a tax-sheltered 403(b) annuity, a salary reduction simplified employee pension (SEP) plan, or a government-sponsored 457 plan will increase to $15,000 in 2006. Those 50 years or older can make additional catch-up contributions to their plans of $5,000 in 2006 and thereafter.
Elective deferrals to a SIMPLE plan increase to $10,000 in 2006 and thereafter. SIMPLE plan participants who are age 50 and over can make additional catch-up contributions of $2,500 in 2006 and later years.
Estate taxes -- The amounts that can be excluded from an estate for estate tax purposes will increase from $1.5 million in 2005 to $2 million in 2006 through 2008 and $3.5 million in 2009. Estate taxes will be repealed for those dying in 2010, but may return unless Congress acts to make the repeal permanent.
- Related items:
- Permanent AMT Fix Poses Difficult Choices
- Congress Ends 2005 Session; Tax Reconciliation Conference Ahead in 2006
- Congress Finalizes Katrina Tax Relief, Turns to Reconstruction Funding
- Congress Wraps Up More Economic Gifts: New Tax Relief
- Tax Reform Panel Releases Final Report
- IRS Still Trying to Deliver 2005 Refunds
- AMT Negates Tax Relief for High Earners
- Tax Rate Projections for 2006
- IRS Temporarily Raises Standard Mileage Rate
Added to the news on January 30 2006.
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