Topics — Tax Year 2005
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Tax Year 2005
Charitable Contributions of
Vehicles, Boats, and Aircraft
If you donate a vehicle
(including a boat or aircraft) to
a qualified organization after December
31, 2004, your deduction is limited to
the gross proceeds from its sale by the
organization. This rule applies if the
claimed value of the donated vehicle is
more than $500. However, you generally
can deduct its fair market value if the
organization:
-
Makes significant intervening use
of the vehicle,
-
Materially improves the vehicle,
or
-
Transfers the vehicle to a needy
individual in direct furtherance
of the donee's charitable purpose
of relieving the poor and
distressed or underprivileged who
are in need of a means of
transportation.
Boats, aircraft, and other vehicles.
These rules apply to donations of
boats, aircraft, and any vehicle
manufactured mainly for use on public
streets, roads, and highways.
Acknowledgement required.
If the claimed value of the car is
more than $500, you must have a written
acknowledgement of your donation from
the organization and must attach it to
your return. If you do not have an
acknowledgement, you cannot deduct your
contribution.
The acknowledgement must include the
following information.
- Your name and taxpayer
identification number.
- The vehicle identification number
or similar number.
- A statement certifying the car was
sold in an arm's length transaction
between unrelated parties.
- The gross proceeds from the sale.
- A statement that your deduction
may not be more than the gross
proceeds from the sale.
- The date of the contribution.
However, if there was significant
intervening use of or material
improvement to the car by the
organization, the acknowledgement does
not have to include the information in
items 3, 4, and 5 above. Instead, it
must contain a certification of the
intended use of or material improvement
to the car and the intended duration of
that use and a certification that the
vehicle will not be transferred in
exchange for money, other property, or
services before completion of that use
or improvement.
This acknowledgement must be provided
within 30 days of the sale of the car
or, if there is significant intervening
use or material improvement of the car
by the organization, within 30 days of
the contribution.
The organization also must provide
this information to the IRS.
Donations of inventory.
These rules do not apply to donations
of inventory. For example, these rules
do not apply if you are a car dealer who
donates a car you had been holding for
sale to customers.
More information.
More information can be found in Notice
2005-44 and the 2005 revision
of Publication 526, Charitable
Contributions (to be available
mid-December 2005).
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Uniform Definition of a Qualifying
Child
Beginning in 2005, one definition of
a qualifying child will apply for
each of the following tax benefits.
- Dependency exemption.
- Head of household filing status.
- Earned income credit (EIC).
- Child tax credit.
- Credit for child and dependent
care expenses.
Tests To Meet
In general, all four of the following
tests must be met to claim someone as a
qualifying child.
Relationship test.
The child must be your child
(including an adopted child, stepchild,
or eligible foster child), brother,
sister, stepbrother, stepsister, or a
descendent of one of these relatives.
An adopted child includes a child
lawfully placed with you for legal
adoption even if the adoption is not
final.
An eligible foster child is any child
who is placed with you by an authorized
placement agency or by judgement,
decree, or other order of any court of
competent jurisdiction.
Residency test.
A child must live with you for more
than half of the year. Temporary
absences for special circumstances, such
as for school, vacation, medical care,
military service, or detention in a
juvenile facility count as time lived at
home. A child who was born or died
during the year is considered to have
lived with you for the entire year if
your home was the child's home for the
entire time he or she was alive during
the year. Also, exceptions apply, in
certain cases, for children of divorced
or separated parents and parents of
kidnapped children.
Age test.
A child must be under a certain age
(depending on the tax benefit) to be
your qualifying child.
Dependency exemption, head of
household filing status, and EIC.
For purposes of these tax benefits, a
child must be under the age of 19 at the
end of the year, or under age 24 at the
end of 2005 if a student, or any age if
permanently and totally disabled.
A student is any child who, during
any 5 months of the year:
- Was enrolled as a full-time
student at a school, or
- Took a full-time, on-farm training
course given by a school or a state,
county, or local government agency.
A school includes a technical, trade,
or mechanical school. It does not
include an on-the-job training course,
correspondence school, or night school.
Child tax credit.
For purposes of the child tax credit,
a child must be under the age of 17.
Credit for child and dependent care
expenses.
For purposes of the credit for child
and dependent care expenses, a child
must be under the age of 13 or any age
if permanently and totally disabled.
Support test.
A child cannot have provided over
half of his or her own support during
the year.
Exception.
For purposes of the EIC only, the Support
test does not apply.
Qualifying Child of More Than One
Person
Sometimes a child meets the tests to
be a qualifying child of more than one
person. However, only one person can
treat that child as a qualifying child.
If you and someone else (other than your
spouse if filing jointly) have the same
qualifying child, you and the other
person(s) can decide who will claim the
child. If you cannot agree on who will
claim the child and more than one person
files a return using the same child, the
IRS may disallow one or more of the
claims using the tie-breaker rule
explained in Table 1, next.
Table 1. When More Than One Person
Files a Return Claiming the Same
Qualifying Child (Tie-Breaker Rule).
| IF
. . . |
THEN
the child will be treated as the
qualifying child of the. . . |
| only
one of the persons is the
child's parent, |
parent. |
| both
persons are the child's parent, |
parent
with whom the child lived for
the longer period of time. If
the child lived with each parent
for the same amount of time,
then the child will be treated
as the qualifying child of the
parent with the highest adjusted
gross income (AGI). |
| none
of the persons are the child's
parent, |
person
with the highest adjusted gross
income. |
Dependency Exemption
To claim the dependency exemption for
a qualifying child, all four tests
listed earlier under Tests To Meet
must be met. The child generally must
also be a U.S. citizen, U.S. national,
or a resident of the United States,
Canada, or Mexico. An exception applies
for certain adopted children. If
married, he or she cannot file a joint
return unless the return is filed only
as a claim for refund and no tax
liability would exist for either spouse
if they had filed separate returns.
A person who used to qualify as your
dependent but who is not your
"qualifying child" may still
qualify as your dependent as a
"qualifying relative." To
claim the dependency exemption for a
qualifying relative, the child cannot be
the qualifying child of any other person
and all five dependency tests discussed
under Dependency Tests in
Publication 501 must be met.
Note: If you are a dependent of
another person, you cannot claim any
dependents on your return.
Head of Household Filing Status
In general, you can use head of
household filing status only if, as of
the end of the year, you were unmarried
or " considered unmarried"
and you paid over half the cost of
keeping up a home:
- That was the main home for all the
entire year of your parent whom you
can claim as a dependent (your
parent did not have to live with
you), or
- In which you lived for more than
half of the year with either of the
following:
- Your qualifying child (defined
earlier, but without regard to
the exception for children of
divorced or separated parents).
But, if your qualifying child is
married at the end of the year,
see Married child below.
- Any other person whom you can
claim as a dependent.
But you cannot use head of household
filing status for a person who is your
dependent only because:
- He or she lived with you for the
entire year, or
- You are entitled to claim him or
her as a dependent under a multiple
support agreement.
Married child.
If your qualifying child is married
at the end of the year, both of the
following must apply for the child to be
your qualifying child for purposes of
head of household filing status.
- The child cannot file a joint
return unless the return is filed
only as a claim for refund and no
tax liability would exist for either
spouse if they had filed separate
returns.
- The child must be a U.S. citizen,
U.S. national, or a resident of the
United States, Canada, or Mexico. An
exception applies for certain
adopted children.
Earned Income Credit (EIC)
You may be able to claim the earned
income credit (EIC) in 2005 if you have:
- 2 or more qualifying children and
your earned income is less than
$35,263 ($37,263 if married filing
jointly for 2005),
- 1 qualifying child and your earned
income is less than $31,030 ($33,030
if married filing jointly for 2005),
or
- No qualifying children and your
earned income is less than $11,750
($13,750 if married filing jointly
for 2005). For purposes of the EIC,
a qualifying child must meet the Relationship
test, Residency test
(without regard to the exception for
children of divorced or separated
parents), and Age test,
earlier. A qualifying child does not
have to meet the Support test
for purposes of the EIC. But, if
your qualifying child is married at
the end of the year, see Married
child next.
Married child.
A child who is married at the end of
the year is a qualifying child for
purposes of the EIC only if you can
claim him or her as your dependent (see Dependency
Exemption, earlier) or this child's
other parent claims him or her as a
dependent under the rules for children
of divorced or separated parents in Publication
501, Exemptions, Standard Deduction, and
Filing Information.
Child Tax Credit
You may be able to take the child tax
credit if you have a qualifying child
that meets all four of the tests listed
earlier under Tests To Meet. For
additional rules that you must meet, see
Publication
972, Child Tax Credit.
Credit for Child and Dependent Care
Expenses
Generally, a qualifying person for
purposes of the credit for child and
dependent care expenses is:
- Your qualifying child (defined
earlier, but without regard to the
exception for parents of kidnapped
children), or
- Your dependent or spouse who is
physically or mentally incapable of
caring for himself or herself and
who lived with you for more than
half of the year.
For purposes of the credit for child
and dependent care expenses, a
qualifying child and dependent are
determined without regard to the
exception for children of divorced or
separated parents and the child is
treated as a qualifying person only for
the custodial parent.
For additional rules that you must
meet, see Publication
503, Child and Dependent Care Expenses.
However, you no longer need to meet the Keeping
Up a Home test discussed in
Publication 503.
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Earned Income Credit Amounts
Increase
Earned income amount.
The maximum amount of income you can
earn and still get the credit is higher
for 2005 than it is for 2004. You may be
able to take the credit for 2005 if:
- You have more than one qualifying
child and you earn less than $35,263
($37,263 if married filing jointly),
- You have one qualifying child and
you earn less than $31,030 ($33,030
if married filing jointly), or
- You do not have a qualifying child
and you earn less than $11,750
($13,750 if married filing jointly).
The maximum amount of adjusted gross
income (AGI) you can have and still get
the credit has also increased. You may
be able to take the credit if your AGI
is less than the amount in the above
list that applies to you.
Investment income amount.
The maximum amount of investment
income you can have in 2005 and still
get the credit increases to $2,700.
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Electric and Clean-Fuel Vehicles
For 2005, the proposed 50% reduction
of the maximum electric vehicle credit
and the clean-fuel deduction has been
eliminated. You can claim the maximum
electric vehicle credit allowed for a
qualified electric vehicle you place in
service in 2005. You can claim the
maximum deduction allowed for qualified
clean-fuel vehicle or other clean-fuel
property placed in service in 2005.
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Section 1202 Exclusion Increased for
Gain from Empowerment Zone Business
Stock
You generally can exclude up to 50%
of your gain on the sale or trade of
qualified small business stock held by
you for more than 5 years. This is
called the section 1202 exclusion.
Beginning in 2005, you generally can
exclude up to 60% of your gain if you
meet the following additional
requirements.
- You sell or trade stock in a
corporation that qualifies as an
empowerment zone business during
substantially all of the time you
held the stock.
- You acquired the stock after
December 21, 2000.
Condition (1) will still be met if
the corporation ceased to qualify after
the 5-year period that begins on the
date you acquired the stock. However,
the gain that qualifies for the 60%
exclusion cannot be more than the gain
you would have had if you had sold the
stock on the date the corporation ceased
to qualify.
The part of the gain that is included
in income is a 28% rate gain. See Capital
Gain Tax Rates and Section 1202
Exclusion in chapter 4 of Publication
550, Investment Income and Expenses.
For more information about
empowerment zone businesses, see Publication
954, Tax Incentives for Distressed
Communities.
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Exemption Amount Increased
The amount you can deduct for each
exemption has increased from $3,100 in
2004 to $3,200 in 2005.
You lose all or part of the benefit
of your exemptions if your adjusted
gross income is above a certain amount.
The amount at which the phaseout begins
depends on your filing status. For 2005,
the phaseout begins at:
- $109,475 for married persons
filing separately,
- $145,950 for single individuals,
- $182,450 for heads of household,
and
- $218,950 for married persons
filing jointly or qualifying
widow(er)s.
If your adjusted gross income is
above the amount for your filing status,
use the Deduction for Exemptions
Worksheet in the Form
1040 instructions to figure the
amount you can deduct for exemptions.
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Retirement Savings Plans
Traditional IRA income
limits. If you have a
traditional individual retirement
account (IRA) and are covered by a
retirement plan at work, the amount of
income you can have and not be affected
by the deduction phaseout 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 over). However, for a SIMPLE
plan, 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 older at the
end of 2005).
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Social Security and Medicare Taxes
For 2005, the employer and employee
will continue to pay:
- 6.2% each for social security tax
(old-age, survivors, and disability
insurance), and
- 1.45% each for Medicare tax
(hospital insurance).
Wage limits. For social
security tax, the maximum amount of 2005
wages subject to the tax is $90,000. For
Medicare tax, all covered 2005 wages are
subject to the tax.
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Standard Deduction Amount Increased
The standard deduction for taxpayers
who do not itemize deductions on
Schedule A of Form 1040 is, in most
cases, higher for 2005 than it was for
2004. The amount depends on your filing
status, whether you are 65 or older or
blind, and whether an exemption can be
claimed for you by another taxpayer.
The basic standard deduction amounts
for 2005 are:
- Head of household — $7,300
- Married taxpayers filing jointly
and qualifying widow(er)s —
$10,000
- Married taxpayers filing
separately — $5,000
- Single — $5,000
The standard deduction amount for an
individual who may be claimed as a
dependent by another taxpayer may not
exceed the greater of $800 or the sum of
$250 and the individual's earned income.
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Standard Mileage Rates
For tax years beginning in 2005, the
allowable deductions for the standard
mileage rate for the period January 1,
2005, through August 31, 2005, are as
follows:
- Business miles. The
standard mileage rate for the cost
of operating your car increases to 40.5
cents a mile for all business miles
driven.
- Charitable services. The
standard mileage rate allowed for
use of your car when you use your
car to provide charitable services
to a charitable organization is 14
cents a mile.
- Charitable services
— Hurricane Katrina relief
services. If you used your
vehicle in giving services to a
charitable organization to provide
relief related to Hurricane Katrina, the
standard mileage rate allowed for
use of your car is 29
cents a mile for miles driven after
August 24, 2005, and before
September 1, 2005.
- Medical reasons. The
standard mileage rate allowed for
use of your car for medical reasons
is 15 cents a mile.
- Moving. The standard
mileage rate for determining moving
expenses is 15
cents a mile.
The allowable deductions for the
standard mileage rate for the period September
1, 2005, through December 31, 2005,
are as follows:
- Business miles. The
standard mileage rate for the cost
of operating your car increases to 48.5
cents a mile for all business miles
driven.
- Charitable services. The
standard mileage rate allowed for
use of your car when you use your
car to provide charitable services
to a charitable organization remains
at 14 cents a mile.
- Charitable services
— Hurricane Katrina relief
services. If you used your
vehicle in giving services to a
charitable organization to provide
relief related to Hurricane Katrina, the
standard mileage rate allowed for
use of your car is 34
cents a mile.
- Medical reasons. The
standard mileage rate allowed for
use of your car for medical reasons
is 22 cents a mile.
- Moving. The standard
mileage rate for determining moving
expenses is 22
cents a mile.
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2005 Tax Rate Schedules
The 2005
tax rate schedules are provided
so that you can compute your estimated
tax for 2005.
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