Last year was a busy year in Washington. Both the Working Families Tax Relief Act of 2004 and The American Jobs Creation Act of 2004 were signed by President Bush last October and both made significant changes to the way individuals look towards April 15th.
Most notable is the option to deduct state and local sales tax in lieu of state income taxes on a 2004 and 2005 return. If you are a resident of one of the seven states that imposes no income tax, it has been an even better year. Why? Taxpayers residing in states that do not impose a state income tax can actually now deduct sales taxes from their federal income tax liabilities. Endorsed by Governor Jeb Bush, Florida taxpayers can simply itemize sales tax deductions on a Schedule A for this tax break.
And to make things easier, for those who do not have the time or energy to keep all of those sales receipts throughout the year can use the IRS-provided optional tables for determining the deduction amount.
Anyone living in the other 43 states should weigh the two options to see which one is more beneficial and saves more money. As long as you itemize your deductions, you can examine the possibility of forgoing your state tax deduction in place of a sales tax deduction, especially if you purchase a "big-ticket"item with a high sales tax amount, such as a new car.
The following are other tax changes that may impact your personal tax situation:
If itemizing deductions on a Schedule A just isn't for you, you will be happy to know that the standard deduction has increased to $9,700 for joint filers, $4,850 for single and married/separate filers, and $7,150 for head of household filers. Not only that, the additional standard deduction for those age 65 or older or who are blind increases to $950 for married and married/separate filers, and $1,200 for single and head of household filers.
Contribution limits to traditional and Roth IRAs increase from $3,000 to $4,000 for 2005 and 2006. In addition, if you're 50 or older, you're entitled to a $500 catch-up provision in 2005 ($1,000 in 2006), which bumps the contribution limits up to $4,500 in 2005 ($5,000 in 2006).
Contribution limits to certain qualified retirement plans (i.e., 401(k) and 403(b)) also increase to $14,000 in 2005 and $15,000 in 2006. Those older than 50 are entitled to a catch-up provision of $4,000, which bumps the contribution limits up to $18,000. In 2006, the catch-up provision is increased to $5,000, raising the contribution limits up to $20,000.
Health Savings Accounts
If you missed the news about health savings accounts in 2004, you might want to take a closer look at it in 2005. An HSA allows qualified taxpayers to put away, tax-free, up to $2,600 (single) and $5,150 (families) to be used to pay for qualified medical expenses. And, if you're over age 55, those limits increase to $3,100 (single) and $5,650 (families).
Child Tax Credit
Parents of children under the age of 17 can continue to claim a $1,000 child tax credit for every child through 2010. Without the new law, the child credit would have dropped to $700 per child in 2005. In addition, taxpayers with two or more children can claim a 15% credit, up from 10% of the amount by which their 2004 taxable earned income exceeds $10,750.
Some military personnel receiving combat pay get larger tax credits because of two tax law changes. The new law counts excludable combat pay as income when figuring the Child Tax Credit, and gives the taxpayer the option of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit.
You can still drive away with a tax deduction for your donated vehicle in 2005, but you may not get exactly what your car is worth. This is because, beginning January 1, 2005, you cannot deduct the fair market value of your car; you can only deduct the amount the receiving charity gets from the sale of the car.
Clean Fuel Deduction
Scheduled to end, all those environmentally-friendly hybrid vehicle purchasers can continue to take the full clean-fuel deduction on a new hybrid vehicle, a deduction of $2,000 through 2005.
Even though hybrid owners get a tax break, business owners driving large sports utility vehicles may not have the same luck. The maximum first year depreciation for trucks and vans with a gross vehicle weight greater than 6,000 pounds, and used more than 50% for business, was reduced from $102,000 to $25,000, effective October 22, 2004.
Discrimination Suit Deduction
Although personal legal expenses are generally not deductible, a new deduction is available for those who pay attorney's fees and court costs in connection with discrimination suits. And, taxpayers can take this deduction whether they itemize or not. Itemizers can deduct these legal expenses on Schedule A as a miscellaneous itemized deduction. However, individuals may elect to deduct the costs directly from income on the front of the tax return.
Standard Mileage Rate
The standard mileage rate for operating a car for business increased in 2005 to 40.5 cents (from 37.5 cents) for each business mile. The standard mileage rate for medical reasons and moving expenses increased to 15 cents a mile (from 14 cents). Charitable mileage remains at 14 cents a mile.
Alternate Minimum Tax Relief
The AMT amount remains at $58,000 for married filing jointly or qualifying widow(er), $40,250 for single or head of household, and $29,000 for married filing separately for 2005. For tax years after 2005, the AMT exemption amount reverts to $45,000 for married filing jointly or qualifying widow(er), $33,750 for single or head of household, and $22,500 for married filing separately.
These are just a few of the tax changes taking place. It is always wise to consult a tax-preparation professional for complex tax questions. For more information, visit the IRS Web site at www.irs.gov.