Topics — Tax Year 2005
Topics — Tax Years 2006 and later
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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Tax Years 2006 and Later
Earned Income Credit Amounts Increase
Earned income amount.
The maximum amount of income you can earn and still get the
credit is higher for 2006 than it is for 2005. You may be able to
take the credit for 2006 if:
- You have more than one qualifying child and you earn less
than $36,348 ($38,348 if married filing jointly),
- You have one qualifying child and you earn less than $32,001
($34,001 if married filing jointly), or
- You do not have a qualifying child and you earn less than
$12,120 ($14,120 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 2006
and still get the credit increases to $2,800.
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Exemption Amount Increased
The amount you can deduct for each exemption has increased from
$3,200 in 2005 to $3,300 in 2006.
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 2006,
the phaseout begins at:
- $112,875 for married persons filing separately,
- $150,500 for single individuals,
- $188,150 for heads of household, and
- $225,750 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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Social Security and Medicare Taxes
For 2006, 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 2006 wages subject to the tax has increased from $90,000 to
$94,200. For Medicare tax, all covered 2006 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 2006 than it was for 2005. 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 2006 are:
- Head of household — $7,550
- Married taxpayers filing jointly and qualifying widow(er)s
— $10,300
- Married taxpayers filing separately — $5,150
- Single — $5,150
The standard deduction amount for an individual who may be
claimed as a dependent by another taxpayer may not exceed the
greater of $850 or the sum of $300 and the individual's earned
income.
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Standard Mileage Rates
For tax years beginning in 2006, the allowable deductions for
the standard mileage rate are as follows:
- Business miles. The standard mileage rate for the
cost of operating your car increases to 44.5
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 32 cents a
mile.
- Medical reasons. The standard mileage rate allowed
for use of your car for medical reasons is 18
cents a mile.
- Moving. The standard mileage rate for determining
moving expenses is 18 cents a mile.
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2006 Federal Income Tax Rate Schedules
The 2006
tax rate schedules are provided so that you can compute
your estimated tax for 2006.
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