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Weekly UpdatesDeduction limits and other rules that applied on 2004 returns may be entirely new for 2005 returns. Here is a roundup of key changes affecting personal returns for 2005.
Charitable Contributions
Vehicle donations. Those donating cars, boats or planes to charity must meet new substantiation requirements in order to claim deductions. New form 1098-C is used by charities to verify the amount of the deduction that can be claimed for vehicles valued at more than $500 that are sold, rather than used, by the organizations in their exempt purpose; deductions are limited to the charity's proceeds.
Tsunami relief. Those who contributed money to tsunami relief in January 2005 and deducted this amount on a 2004 return cannot deduct it in 2005. However, if the deduction was not claimed in 2004 (e.g., the donor did not itemize deductions), it may be deducted on the 2005 return.
Retirement Plans
Contribution limits. The basic contribution limit for IRAs (including Roth IRAs) increases to $4,000 (up from $3,000 in 2004). For individuals age 50 or older by Dec. 31, 2005, the limit increases by $500. Contribution limits to qualified retirement plans also increase:
* 401(k) plans: $14,000 ($18,000 for those age 50 or older by Dec. 31, 2005),
* Saving Incentive Match Plans for Employees (SIMPLE): $10,000 ($12,000 for those age 50 or older by Dec. 31, 2005),
* profit-sharing and simplified employee pension (SEP) plans: $42,000 annual contribution, and
* defined benefit (pension) plans: $170,000 in benefits.
Roth IRA conversions. Individuals with traditional IRAs can convert them to Roth IRAs if modified adjusted gross income (MAGI) does not exceed $100,000. Conversions mean that income earned on the account becomes tax free after five years if distributions are not taken until after age 59 1/2 or because of another permissible event. Starting in 2005, MAGI does not include required minimum distributions from qualified retirement plans and IRAs, allowing more individuals to qualify for Roth IRA conversions.
Indexing
More than two dozen tax limits were indexed for inflation (Rev. Proc. 2004-71, IRB 2004-50, 1). On 2005 returns, the new limits include:
* Personal and dependency exemption amount: $3,200.
* Standard deduction amounts: $10,000 for married couples filing jointly and surviving spouses, $7,300 for heads of households, and $5,000 for singles and married persons filing separate returns. For those age 65 and older and/or blind--who also are unmarried and not a surviving spouse--the additional standard deduction amount is $1,250 ($1,000 for other taxpayers).
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* Deductible limit for long-term care premiums: $270 for those under age 40, $510 for those age 41 through 50, $1,020 for those age 51 through 60, $1,720 for those age 61 through 70, and $3,400 for those age 70 and older.
* Exclusion for employer-paid transportation benefits: $200 per month for free parking, and $105 per month for transit passes and van pooling.
* Income limits also increased to qualify for the adoption credit, hope and lifetime learning credits, exclusion for interest on savings bonds used for higher education, and the deduction for student loan interest.
Business Deductions
A new deduction--the domestic production activities deduction--is 3 percent of net income from qualified activities. This deduction requires no cash outlay; instead, it is a break lowering the effective tax rate on a business's profits simply because the activities meet tax law requirements. Qualified activities include traditional manufacturing within the United States as well as other activities producing something domestically--such as construction, mining and software development. Use new form 8093 to figure the deduction.
The dollar limit for expensing equipment purchases in lieu of depreciating them over a number of years increases to $105,000 (up from $102,000 in 2004). However, bonus depreciation--an additional first-year write-off--expired at the end of 2004 and cannot be claimed on 2005 returns.
Sidney Kess has authored hundreds of books on tax-related topics. He probably is best known for lecturing to nearly every state society and more than 700,000 practitioners on tax and estate planning. In 2003 he received special recognition from AICPA and CCH for his many contributions to the tax profession. He created and moderates the annual AICPA Conference on Tax Strategies for the High-Income Individual. A graduate of Harvard Law School, Mr. Kess received his LL.M. from New York University.
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