Recent Tax Changes That Affect You

New tax laws again? Yes, and you can't afford to ignore them. Here are some of the recent law changes that may affect you.

Reduction in Tax Rates

 

Tax rates are indexed for inflation each year. For 2005, the top tax bracket of 35 percent begins at taxable income over $446,550. If your income isn't that high, don't worry -- the tax rate reductions applied across the board. For example, the 25 percent bracket begins at income of $41,050 for 2005.

Increase in Deductions

 

For married couples, the basic standard deduction has been increased to $10,000 for 2005.

If you itemize deductions, for 2005 you can choose between claiming the state income taxes or sales taxes you paid on your tax return.

Even if you don't itemize, you can deduct $4,000 in college tuition and fees for 2005 as long as your income is under $65,000 ($130,000 on a joint return).

If you use your vehicle for business, you can claim an ever-changing mileage rate for business use. The rate was 40.5 cents per mile at the beginning of 2005 and increased to 48.5 cents on September 1, 2005. The rate for 2006 has decreased to 44.5 cents per mile. But with gas prices on the rise, stay tuned for future developments.

If your health insurance has a high deductible, you can contribute the amount of the deductible to a health savings account (up to $2,700 for individuals or $5,450 for families). You'll get a tax deduction for your contribution, and the funds will be tax free when withdrawn if you use them for medical expenses. Over 55? You can contribute an additional $700.

Teachers can deduct up to $250 of out-of-pocket costs for books and supplies.

Retirement Contributions

 

The IRA contribution limit remains at $4,000 for 2005 to 2007. It will increase to $5,000 in 2008. If you are at least 50, you can contribute an additional $500 for 2005, $1,000 after that.

Your 401(k) and 403(b) contributions are limited to $14,000 in 2005, increasing to $15,000 in 2006. Those 50 and older may contribute an additional $4,000 in 2005 and $5,000 in 2006.

If you contribute to a SIMPLE plan, the limit is $10,000 for 2005 and 2006. If you are at least 50, you can contribute an additional $2,000 in 2005 and $2,500 in 2006.

Estate Taxes

 

Beginning in 2006, if your estate is less than $2 million, there will be no federal estate tax when you die. In 2009, that exempt amount rises to $3.5 million, and there's a total repeal of the estate tax in 2010. Unfortunately, Congress has made no provisions beyond 2010, so as things stand, beginning in 2011, estates valued at over $1 million will be taxable.

In 2006, the top estate tax rate will be 46 percent and will drop to 45 percent in 2007.

And in 2006, the amount you can give to someone without having to file a gift tax return has increased to $12,000.

Energy Conservation Credits

 

Beginning in 2006, you will be eligible for a tax credit of as much as $3,400 when you purchase a hybrid vehicle. But hurry -- only buyers of the first 60,000 hybrids per carmaker sold after January 1, 2006 will get the full credit.

If you intend to do home improvements in 2006 and 2007, you may garner some additional tax credits. Purchase a residential solar water-heating system or photovoltaic equipment for solar-generated electricity, and you can get a 30 percent credit (up to $2,000) for each installation. Even if you don't get that fancy, you will be eligible for up to $500 in credits for installing insulation, central air-conditioning, hot-water heaters, thermostats and caulking.

Katrina Tax Act

 

If your home was in the disaster area, you can withdraw up to $100,000 from your IRA or retirement plan without penalty, and the distribution will be taxable over a three-year period.

Anyone who provided free housing to hurricane victims for at least 60 days is eligible for an exemption deduction of $500 per person on their 2005 tax return, up to a maximum of $2,000. And if you used your vehicle to provide services to a hurricane-related charity, you can deduct 34 cents per mile rather than the regular charitable deduction of 14 cents per mile.

If your property was damaged or destroyed, you can claim the full amount of your casualty loss on your tax return, rather than reducing it by the normal 10 percent plus $100 per occurrence.

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