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http://www.irs.gov/formspubs/article/0,,id=109876,00.html
Topics — Tax Year 2004
Topics — Tax Years 2005 and Later
Tax Year 2004
Charitable
Contributions
Charitable Contributions of Patents and Other Intellectual
Property
If you donate a patent or other intellectual property
to a qualified organization after June 3, 2004, your
deduction is limited to the basis of the property
or the fair market value of the property, whichever
is less. Intellectual property means any of the following:
- Patents.
- Copyrights (other than a copyright described in
Internal Revenue Code sections 1221(a)(3) or 1231(b)(1)(C).
- Trademarks.
- Trade names.
- Trade secrets.
- Know-how.
- Software (other than software described in Internal
Revenue Code section 197(e)(3)(A)(i).
- Other similar property or applications or registrations
of such property.
Additional deduction based on income.
You also may be able to claim additional charitable
contribution deductions in the year of the contribution
and years following, based on the income, if any,
from the donated property.
The following table shows the percentage of the organization's
income from the property that you can deduct for each
of your tax years ending on or after the date of the
contribution. In the table, "tax year 1," for example,
means your first tax year ending on or after the date
of the contribution. However, you can take the additional
deduction only to the extent the total of the amounts
figured using this table are more than the amount
of the deduction claimed for the original donation
of the property.
| Tax
year |
Deductible percentage |
| 1 |
100% |
| 2 |
100% |
| 3 |
90% |
| 4 |
80% |
| 5 |
70% |
| 6 |
60% |
| 7 |
50% |
| 8 |
40% |
| 9 |
30% |
| 10 |
20% |
| 11 |
10% |
| 12 |
10% |
After the legal life of the patent or other intellectual
property ends or after the 10th anniversary of the
donation, no additional deduction is allowed.
The additional deductions cannot be taken for patents
or other intellectual property donated to certain
private foundations.
Reporting requirements.
You are required to inform the organization at the
time of the donation that you intend to treat the
donation as a contribution subject to the provisions
discussed above. The organization is required to file
an information return showing the income from the
property, with a copy to you.
More information.
The IRS expects to issue more guidance on these rules
early in 2005. To find out if that guidance has been
issued, check the Internal Revenue Bulletin.
Charitable Contributions of Property over $500,000
If you claim a deduction of more than $500,000 for
a contribution of property made after June 3, 2004,
you must attach a qualified appraisal of the property
to your return. If you do not attach the appraisal,
you cannot deduct your contributions. This does not
apply to contributions of cash, inventory, publicly
traded stock, or intellectual property. Previously,
the appraisal was required for your records but did
not have to be attached to your return.
Dependent Care Benefits
Beginning in 2004, you may be able to include nontaxable
combat pay in earned income when figuring the amount
of dependent care benefits you can exclude or deduct
from income. Before 2004, earned income included taxable
earned income only. You should figure your exclusion
or deduction both ways and make the election if it
gives you a greater tax benefit. For details, see
Publication
503, Child and Dependent Care Expenses.
Earned Income Credit Amounts Increased
Earned income amount is more.
The maximum amount of income you can earn and still
get the credit has increased. You may be able to take
the credit if:
- You have more than one qualifying child and you
earned less than $34,458 ($35,458 if married filing
jointly),
- You have one qualifying child and you earned less
than $30,338 ($31,338 if married filing jointly),
or
- You do not have a qualifying child and you earned
less than $11,490 ($12,490 if married filing jointly).
Your adjusted gross income also must be less than
the amount in the above list that applies to you.
Investment income amount is more.
The maximum amount of investment income you can have
and still get the earned income credit has increased
to $2,650.
Income Limits Increased for Reduction of Education
Savings Bond Exclusion
For 2004, the amount of your interest exclusion will
be phased out (gradually reduced) if your filing status
is married filing jointly or qualifying widow(er)
and your modified adjusted gross income (MAGI) is
between $89,750 and $119,750. You cannot take the
deduction if your MAGI is $119,750 or more. For 2003,
the limits that applied to you were $87,750 and $117,750.
For all other filing statuses, your interest exclusion
is phased out if your MAGI is between $59,850 and
$74,850. You cannot take a deduction if your MAGI
is $74,850 or more. For 2003, the limits that applied
to you were $58,500 and $73,500.
The Education Savings Bond exclusion is explained
in chapter
10 of IRS Publication 970, Tax Benefits for Education.
Educator Expenses Deduction Extended
If you were an eligible educator in 2004, you can
deduct as an adjustment to income up to $250 of qualified
expenses you paid in 2004. This provision was scheduled
to expire after 2003. However, the Working Families
Tax Relief Act of 2004 extended it through 2005.
The educator expense deduction is explained in Publication
529, Miscellaneous Deductions.
Electric and Clean-Fuel Vehicles
You can claim the maximum clean-fuel vehicle deduction
or the qualified electric vehicle credit, as appropriate,
for vehicles or other clean-fuel property placed in
service in 2004. The scheduled 25% reduction of these
tax benefits has been eliminated.
The electric vehicle credit is generally 10% of the
cost of the vehicle reduced by certain amounts. The
credit is limited to $4,000 for each qualifying vehicle
placed in service in 2004.
Exemption Amount Increased
The amount you can deduct for each exemption has
increased from $3,050 in 2003 to $3,100 in 2004.
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 2004, the phaseout begins
at:
- $107,025 for married persons filing separately,
- $142,700 for single individuals,
- $178,350 for heads of household, and
- $214,050 for married persons filing jointly and
qualifying widow(er)s with dependent children.
Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a tax-exempt trust
or custodial account that you set up with a U.S. financial
institution (such as a bank or an insurance company)
in which you can save money exclusively for future
medical expenses. This account must be used in conjunction
with a High Deductible Health Plan (High Deductible
Health Plan), discussed later.
Important Note. If you currently
have an Archer Medical Savings Account (MSA), you
can roll it into a Health Savings Account tax-free.
What are the benefits of a Health Savings Account?
You may enjoy several benefits from having a Health
Savings Account.
- The interest or other earnings on the assets in
the account are tax free.
- You can claim a tax deduction for contributions
you make even if you do not itemize your deductions
on Form 1040.
- Distributions may be tax-free if you pay qualified
medical expenses.
- The contributions remain in your account from
year to year until you use them.
- A Health Savings Account is "portable" so it stays
with you if you change employers or leave the work
force.
Qualifying for a Health Savings Account
To qualify for a Health Savings Account, you must
meet the following requirements.
- You are an employee (or the spouse of an employee)
of an employer who maintains an individual or family
High Deductible Health Plan for you (or your spouse).
- You are a self-employed person (or the spouse
of a self-employed person) who maintains an individual
or family High Deductible Health Plan.
- You have no other health insurance or Medicare
coverage except what is permitted under Other
health insurance, later.
High Deductible Health Plan (High Deductible Health
Plan)
To be eligible for a Health Savings Account, you
must have a High Deductible Health Plan. A High Deductible
Health Plan has:
- A higher annual deductible than typical health
plans, and
- A maximum limit on the sum of the deductible and
the annual out-of-pocket medical expenses that you
must pay for covered expenses.
Limits. The following table shows the limits
for High Deductible Health Plans for 2004.
| Type of coverage |
Minimum annual deductible |
Sum of maximum annual deductible and annual
out-of-pocket expenses * |
| Self-only |
$1,000 |
$5,000 |
| Family |
$2,000 |
$10,000 |
| * This limit does not
apply if the plan uses a network of providers. |
Family plans that do not meet the high deductible
rules. There are some family plans that have deductibles
for both the family as a whole and for individual
family members. Under these plans, if you meet the
individual deductible for one family member, you do
not have to meet the higher annual deductible amount
for the family. If either the deductible for the family
as a whole or the deductible for an individual family
member is below the minimum annual deductible for
that year, the plan does not qualify as a High Deductible
Health Plan.
Example. Mr.
Orville has health insurance with company A in 2004.
The annual deductible for the family plan is $3,500.
This plan also has an individual deductible of $1,500
for each family member. Mr. Orville's wife had $2,200
of covered medical expenses. They had no other medical
expenses for 2003. The plan paid $700 to Mr. Orville
because Mrs. Orville met the individual deductible
of $1,500, even though the Orvilles did not meet the
$3,500 annual deductible for the family plan. The
plan does not qualify as a High Deductible Health
Plan because Mrs. Orville paid only $800 which was
less than the minimum deductible amount.
Other health insurance. You (or your spouse
if you file jointly) generally cannot have any other
health plan that is not a High Deductible Health Plan.
However, this rule does not apply if the other health
plan(s) only covers the following items.
- Accidents.
- Disability.
- Dental care.
- Vision care.
- Long-term care.
- Benefits related to workers' compensation laws,
tort liabilities, or ownership or use of property.
- A specific disease or illness.
- A fixed amount per day (or other period) of hospitalization.
Amount of Contribution
The amount you or your employer can contribute to
your Health Savings Account depends on the nature
of your coverage and your age.
If you have self-only coverage, you (or your employer)
can contribute up to the amount of your annual health
plan deductible, but not more than $2,600 ($3,100
if you are age 55 or older). If you have family coverage,
you (or your employer) can contribute up to the amount
of your annual health plan deductible, but not more
than $5,150 ($5,650 if you are age 55 or older). You
must have the insurance all year to contribute the
full amount.
For each full month you did not have a High Deductible
Health Plan, you must reduce the amount you can contribute
by one-twelfth.
Example. You
have a High Deductible Health Plan for your family
for the entire months of July through December 2003
(6 months). The annual deductible is $4,000. You can
contribute up to $2,000 ($4,000 ÷ 12 months × 6 months)
to your Health Savings Account for the year.
Tip. If you and your spouse each have a family
plan, you are treated as having family coverage with
the lower annual deductible of the two health plans.
The contribution limit is split equally between you
unless you agree on a different division.
Note. You must reduce the limits above by
any amount contributed to a Medical Savings Account
or other Health Savings Account.
Medicare eligible individuals. Beginning with
the first month you are entitled to benefits under
Medicare, you cannot contribute to a Health Savings
Account.
When To Contribute
You can make contributions to your Health Savings
Account for 2004 until April 15, 2005.
Setting Up a Health Savings Account
No permission or authorization from the Internal
Revenue Service is necessary to establish a Health
Savings Account. When you set up a Health Savings
Account, you will need to work with a trustee. A trustee
can be a bank, insurance company, or anyone already
approved by the Internal Revenue Service to be a trustee
of individual retirement arrangements. Your employer
may already have some information on Health Savings
Account trustees in your area. The Internal Revenue
Service intends to issue further guidance on setting
up a Health Savings Account. This guidance has been
published as Notice 2004-2 in the January
12, 2004, issue of the Internal
Revenue Bulletin (2004-2).
Income Limits Increased for Hope and Lifetime Learning
Credits
For 2004, the amount of your Hope or lifetime learning
credit is phased out (gradually reduced) if your modified
adjusted gross income (MAGI) is between $42,000 and
$52,000 ($85,000 and $105,000 if you file a joint
return). You cannot claim an education credit if your
MAGI is $52,000 or more ($105,000 or more if you file
a joint return). This is an increase from the 2003
limits of $41,000 and $51,000 ($83,000 and $103,000
if filing a joint return).
The Hope and Lifetime Learning credits are explained
in chapters 2 and 3 of Publication
970, Tax Benefits for Education.
Investment Income of a Child Under Age 14
For 2004, the amount of taxable investment income
a child under age 14 can have without it being subject
to tax at the parent's rate has increased to $1,600
from $1,500.
Meal Expenses When Subject to "Hours of Service"
Limits
Generally, you can deduct only 50% of your business-re-lated
meal expenses while traveling away from your tax home
for business purposes. Also, you can generally deduct
only 50% of certain reimbursements you make to your
employees for meal expenses they incur while traveling
away from home on business. You can deduct a higher
percentage if the meals take place during or incident
to any period subject to the Department of Transportation's
"hours of service" limits. (These limits apply to
workers who are under certain federal regulations.)
The percentage allowed is 70% for 2004.
Business meal expenses are covered in chapter 1 of
Publication
463, Travel, Entertainment, Gift, and Car Expenses.
Reimbursements for employee meal expenses are covered
in chapter 13 of Publication
535, Business Expenses.
Distributions From Privately-Sponsored Qualified
Tuition Programs (QTPs) May Be Tax Free
Beginning in 2004, a distribution from a qualified
tuition program (QTP) established and maintained
by an eligible educational institution (generally
private colleges and universities) can be excluded
from income if the amount distributed is used to pay
qualified education expenses. The amount that may
be excluded is limited to your qualified education
expenses. Tax-free qualified tuition program distributions
are discussed in Publication
970, Tax Benefits for Education.
Retirement Savings Plans
The following paragraphs highlight changes that affect
individual retirement arrangements (IRAs) and pension
plans.
Traditional individual retirement arrangement
income limits. If you have a traditional individual
retirement arrangement 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 $13,000 ($16,000 if you are age 50 or over). However,
for SIMPLE plans, the amount increases to $9,000 ($10,500
if you are age 50 or over).
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 2004 than it was for 2003. 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 2004 are:
- Head of household — $7,150
- Married taxpayers filing jointly and qualifying
widow(er)s — $9,700
- Married taxpayers filing separately — $4,850
- Single — $4,850
The full 2004 Standard Deduction Tables are shown
in the 2004 instructions for Form
1040 and Form
1040A.
Standard Mileage Rates
For tax years beginning in 2004, 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
37.5 cents a mile for all business miles driven.
- Medical reasons. The standard mileage rate
allowed for use of your car for medical reasons
is 14 cents a mile.
- Moving. The standard mileage rate for determining
moving expenses is 14 cents a mile.
Student Loan Cancellations
Beginning in 2004, student loan repayments provided
to you under certain federal and state repayment programs
are tax free. Whether or not the repayment qualifies
depends in part on the nature of your employment and
the type of lender who made you the loan. Beginning
in 2004, student loan repayment assistance you receive
from the National Health Service Corps (NHSC) Loan
Repayment Program and state programs eligible under
the Public Health Service Act are tax free.
The student loan cancellation program is explained
in chapter
5 of Publication 970, Tax Benefits for Education.
Student Loan Interest Deduction
Final regulations, issued May 7, 2004, changed the
rules for deducting student loan interest. The changes
apply to interest due and paid after December 31,
1997, on qualified student loans.
Longer period allowed for loan disbursement.
The 60-day safe harbor for disbursing loan proceeds
used to pay qualified education expenses has been
increased to 90 days before and 90 days after the
academic period to which the expenses relate.
Interest paid by a third party may be deductible.
The person legally obligated to make interest payments
on a student loan may be able to deduct interest payments
on that loan made by someone else (third party).
The student loan interest deduction is explained
in chapter
4 of Publication 970, Tax Benefits for Education.
2004 Tax Rate Schedules
The 2004
tax rate schedules are provided so that you
can compute your estimated tax for 2004.
Tuition and Fees Deduction
Beginning in 2004, the amount of qualified education
expenses you can take into account in figuring your
tuition and fees deduction increases from $3,000 to
$4,000 if your modified adjusted gross income (MAGI)
is not more than $65,000 ($130,000 if you are married
filing jointly).
If your MAGI is more than $65,000 ($130,000), but
not more than $80,000 ($160,000 if you are married
filing jointly), your maximum tuition and fees deduction
will be $2,000.
No tuition and fees deduction will be allowed if
your MAGI is more than $80,000 ($160,000 for married
filing jointly).
The tuition and fees deduction is explained in chapter
6 of Publication 970, Tax Benefits for Education.
Tax Years 2005 and Later
Charitable Contributions of Cars, Boats, and Aircraft
If you donate a car 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, if the organization
makes significant intervening use of or materially
improves the car, you generally can deduct its fair
market value.
Boats, aircraft, and other vehicles.
These rules also 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.
The IRS expects to issue more guidance on these rules
early in 2005.
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.
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.
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.
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.
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.
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).
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.
Standard Mileage Rates
For tax years beginning in 2005, 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
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.
- 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.
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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