CyberTax Update
The following information is quoted from the IRS website. For the full text, please see the 2005 Tax Hints document.
Changes to the tax law for 2004 will affect the 2005 filing season. What follows are highlights
of these changes, but more detailed information can be found at the various IRS websites, in Publication 17, Your Federal Income Tax and in Publication 553, Highlights of 2004 Tax Changes.
Educators’ Deduction, IR-2004-124.
This had expired at the end of 2003, but was restored for two more years. Find more
information at: http://www.irs.gov/newsroom/ article/0,,id=130137,00.html
Clean Fuel Vehicle Deduction, IR-2004-125.
The maximum amount of this deduction was scheduled to drop for 2004 and 2005,
but has been retained at the $2,000 level. For information on this deduction and the
newest vehicles to qualify for it go to:http://www.irs.gov/newsroom/article/0,,id=
130146,00.html
Child Tax Credit. Taxpayers with a credit amount more than their tax could get a refund
of the difference, up to 10% of the amount by which their 2004 taxable earned income
exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for
many of these taxpayers.
Sales Tax Deduction. Taxpayers who itemize
deductions will have a choice of claiming a
state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns.
The IRS will provide optional tables for use in determining the deduction amount, relieving taxpayers of the need to save receipts throughout the year. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for sales or income taxes.
Expense Limit for SUVs. Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after October 22, 2004. Under the American Jobs Creation Act of 2004, businesses cannot take a first year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before October 23, 2004 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.
Sale of Personal Residence Acquired in a Like-kind Exchange. Taxpayers who convert
rental property to a principal residence should know that a tax law change may limit their
ability to exclude gain on the sale of that residence if they obtained the property through a
like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a
home, provided the individual has owned and used it as a principal residence for two out of
the five years before the sale. The exclusion is $500,000 for a married couple if both meet the
use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004.
This section summarizes the important changes that take effect in 2005 that could
affect your estimated tax payments for 2005.
Standard Mileage Rates: Beginning January 1, 2005 the optional standard mileage
rates will increase for computing the deductible costs of operating an automobile for
business, charitable, medical or moving expense purposes.
■ 40.5 cents a mile for all business miles driven, up from 37.5 cents a mile in 2004;
■ 15 cents a mile when computing deductible medical or moving expenses, up from 14
cents a mile in 2004; and
■ 14 cents a mile when giving services to a charitable organization.
http://www.irs.gov/newsroom/article/0,,id=131232,00.html
Retirement savings plans. The following paragraphs highlight changes that affect
retirement arrangements such as individual retirement accounts (IRAs), pension plans
or others.
■ Traditional IRA income limits. If you have a traditional IRA and are covered by a
retirement plan at work, the amount of income you can have and not be affected by
the deduction phase-out increases. The amounts vary depending on filing status.
■ Limit on elective deferrals. The maximum amount of elective deferrals under a salary
reduction agreement that can be contributed to a qualified plan increases to $14,000
($18,000 if you are age 50 or older). However, for SIMPLE plans, the amount increases
to$10,000 ($12,000 if you are age 50 or over).
■ IRA deduction expanded. The amount you, and your spouse if filing jointly, may be
able to deduct as an IRA contribution will increase to $4,000 ($4,500 if age 50 or over
at the end of 2005).
Deduction for clean-fuel vehicle. You can claim the maximum amount allowed for
a clean-fuel vehicle or other clean-fuel vehicle property you place in service in 2005.
The 50% reduction of the maximum amount for 2005 has been eliminated. See
Publication 535, chapter 12, for more information on the deduction.
http://www.irs.gov/pub/irs-pdf/p535.pdf
Tax credit for qualified electric vehicle. You can claim the maximum tax credit allowed
for a qualified electric vehicle property you place in service in 2005.
The 50% reduction of the maximum credit for 2005 has been eliminated.
Uniform definition of a child. Beginning in 2005, the definition of “qualified child” for
the following tax benefits will change:
■ Dependency exemption
■ Head of household filing status
■ Earned income credit (EIC)
■ Child tax credit
■ Child and dependent care credit.
To find more information on these and other changes check Publication 553.
