Holiday Season Tax Update for 2005

Added on 12/12/05

Dear Client,

Our entire organization joins in sending our warmest Season’s Greetings to you and best wishes for good health, peace and prosperity in the coming year.

It is never too early to start organizing your financial records, so please read on for the latest changes and some helpful hints for the upcoming tax season. Please note that if you have any questions and would like to contact your preparer, you may call our office or visit our web site.

If you are going to be eligible to start receiving Social Security benefits, contact the Social Security Administration 3 months before your eligibility date. You may do so by calling 1-800-772-1213 or reduce processing time by applying online at www.ssa.gov, click on “Apply for retirement benefits”.

Form 1040 for tax year 2005 will have a check-off box giving your tax preparer permission to discuss minor tax problems with the Internal Revenue Service. The “Yes” box will be automatically checked unless you advise your tax preparer otherwise. This will enable your tax preparer to correct common errors. Major tax issues will still require your consent with a power of attorney.

YOUR TAX DEDUCTIONS
 

• The standard deduction for 2005 for a married couple filing a joint return has been increased to $10,000; for a single person $5,000; and head of household $7,300.

• The personal exemption for 2005 is $3,200.

• The reimbursement rate for mileage is $0.405 for business miles up to August 31, 2005 and 0.485 after September 1, 2005; $0.14 for medical and $.014 for charity.

• Special Katrina related charity mileage rate is 0.29 per mile from August 25 thru August 31 and 0.34 per mile after September 1, 2005

• The meal rate for truckers is $41 per day. Per diem rates have changed depending on the area in which you have traveled.

HIGHLIGHTS OF THE NEW TAX LAW

CHILD TAX CREDIT
The child tax credit is $1,000 for 2005. If you are eligible the amount will be claimed on the 2005 tax return. The $1,000 credit has been extended until 2010.
 

MARRIAGE PENALTY RELIEF
The basic standard deduction for a married couple filing a joint return is double the single standard deduction. The end of the 15% tax bracket for joint returns is twice that for single filers. These provisions are for 2004 to 2010.

 

INCREASED 10% TAX BRACKET
For 2005 the 10% Tax Bracket is increased to $14,600 of taxable income for joint filers and $7,300 for single filers. The  10% bracket for head of household is $10,450.

 

REDUCTION IN RATES

The tax rates above 15% are 25%, 28%, 33%
and 35%.

 

DEPRECIATION CHANGES
The additional 50% depreciation expired December 31, 2004.The limit on Section 179 expense has been increased to $105,000 for federal only.

 

START-UP EXPENSES
If you start a business in 2005 there is a change in the way you deduct expenses you paid before the business began operations. You can now deduct, for federal purposes, up to $5,000 of start-up expenses in the year the business begins operations. There are some limitations, so please consult your preparer about this deduction.

 

DOMESTIC PRODUCTION ACTIVITY
If you are in a specific business in the USA and pay wages, you may be eligible for the Domestic production activity deduction. Some of the eligible business include manufacturing, growing, construction and engineering.

SCHOOL TEACHER DEDUCTION
The $250 deduction for qualified classroom expenses has been extended for 2005.

 

KATRINA TAX RELIEF
There was a special tax law to assist the victims of Hurricane Katrina passed on September 23, 2005. There are many provisions aimed at helping people effected by the disaster and people that volunteered or contributed to help the victims. Some of the changes deal with use of retirement funds, employment relief, increased contribution deduction limits and exemptions for housing displaced Katrina victims. If you are a member of any of these groups please consult your preparer on any new rules that may impact your taxes.
 

FROM PENNSYLVANIA …
Pennsylvania had several law changes in 2005. Their forms will look some what different for 2005. Many of the federal law changes do not effect PA. Most of the changes will not have a major effect on the PA tax for most residents. PA is requesting that taxpayer verify their school district codes reported on the PA-40.

We look forward to working with you in 2005. If you have any questions please call our office or send us an email.

There is no nicer time than the holidays to say thank you for your business. All of us join in wishing you a wonderful holiday season.