To Avoid Overpaying Income Taxes, Know These Tax Law Changes
Exemption Amount Increased
The exemption amount increased in 2005 to $3,200 (up from $3,100 in 2004). This is the amount you can deduct for each exemption as long as your adjusted gross income is below a certain amount. At certain income levels, the exemption begins to be phased out and you will receive only part of it or none at all. For 2005, this phaseout begins at:
- $109,475 if you're married filing separately
- $145,950 if you're single
- $182,450 if you're filing as head of household
- $218,950 if you're married filing jointly or a qualifying widow(er)
Deduction Amount Increased
For most people, the standard deduction (for those who do not itemize deductions on Schedule A of Form 1040) is higher in 2005. The amount depends on your filing status, whether you are 65 or older or blind, and whether another person can claim you. See Publication 505: Tax Withholding and Estimated Tax for the 2005 Standard Deduction Tables.
Earned Income Credit (EIC) Amounts Increased
In 2005, the maximum income you can earn and still qualify for the earned income credit increases. You may be eligible for the Earned Income Credit 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 don't have a qualifying child and you earn less than $11,750 ($13,750 if married filing jointly).
- The maximum investment income you can have in 2005 and still qualify for the Earned Income Credit increases to $2,700.
Standard Mileage Rate Increased
The standard mileage rate for the cost of operating your vehicle for business purposes increased from 37.5 cents a mile to 40.5 cents per mile for the first eight months of 2005 and 48.5 cents per mile for miles driven between September 1st and December 31st, 2005. For an explanation of how the standard mileage rate works and what expenses are included, see Publication 463: Travel, Entertainment, Gift, and Car Expenses (Chapter 4).
Medical and Relocation Mileage Increased
The standard mileage rate for using your vehicle for medical reasons or as part of a tax-deductible relocation increased from 14 cents a mile to 15 cents a mile for 2005. See Publication 502: Medical and Dental Expenses, and Publication 21: Moving Expenses, for details.
Social Security and Medicare Taxes Change
Social Security and Medicare Tax percentages remain the same for 2005 (6.2% for Social Security and 1.45% for Medicare, payable by both the employer and employee. Wages subject to Social Security tax increased to $90,000 for 2005. All covered wages are subject to the Medicare tax. See Publication 15 (Circular E): Employer's Tax Guide.
Contributions of Cars, Boats, and Aircraft Documentation Required
If you donate a car, truck, boat, or airplane to a charitable organization and they sell the item, you can claim only as much as the organization receives for it, if you claim more than $500 as a deduction on your tax return for the item. If the organization significantly improves the vehicle, you may be able to deduct its fair market value. To do so, you'll need a written acknowledgement from the organization that you donated the car, and you must attach that acknowledgement to your tax return. That acknowledgement must include certain information. See the IRS Web site for details.