Income Tax Changes 2005

Each year the laws outlining the collection of federal income taxes expire, are extended, or modified, just a little bit.  Here we're going to explain some of the income tax changes taking place in the tax year 2005 - including some good news concerning deadlines for filing your taxes with the IRS.

Income Tax Filing Deadlines

In 2006, we've got some great news for those of you that like to wait until the last minute to file you tax return.  This year, April 15th falls on a weekend, so tax returns need to be filed by April 17th.  And because there is a state holiday in Massachusetts, where the IRS processes tax returns, taxpayers living in Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont, and the District of Columbia have a filing deadline of April 18th.

Another change in 2005 gives late filers up to six months to file their returns.  If you cannot meet the April deadline, you need to file an IRS Form 4868, which is an Application for Automatic Extension.  Previously, taxpayers got a four month extension with this form; in 2005 the new date is October 16th - which is a six month extension.

Social Security and Medicare

In 2005, there really weren't very many changes to Social Security and Medicare.  Employers continued to pay a Social Security tax of 6.2% and a Medicare tax of 1.45%.  The wage limit, which normally changes each year for Social Security, was increased to $90,000.

Standard Deductions

For those of you that do not itemize your tax deductions via Schedule A, there is more good news in 2005.  Depending on your tax filing status, the 2005 standard deductions were raised from 2004 levels.  The schedule of these deductions in 2005 is as follows:

• Single - $5,000
• Married filing separately - $5000
• Head of household - $7,300
• Married filing jointly / qualifying widow(er) - $10,000

Exemptions Increased

In 2005, you can now deduct $3,200 for each exemption claimed on your tax return, that's up from $3,100 in 2004.  These exemption deductions, however, are phased-out beginning at the following adjusted gross income levels:

• For married persons filing separately at $109,475
• For single individuals at $145,950
• For heads of households at $182,450
• For married persons filing jointly or qualifying widow(er)s at $218,950

Retirement Savings Plans

In 2005 there were scheduled changes to the contribution rules and limits for 401k plans, 403b plans, Roth IRAs and Traditional IRAs.  One of the biggest changes has to do with elective deferrals to qualified plans - such as 401k plan.  In 2005, the maximum elective deferral was increased to $14,000 or $18,000 if you were age 50 or older by December 31, 2005.

We've already covered many of these changes in detail for 2005. If you're interested in the retirement savings plan changes you might want to look at the following:

• IRA Rules
• 401K Rules
• 403B Rules
• Roth IRA Rules

Increase to Earned Income Credit

In 2005, you can make more money than in 2004 and still qualify for the earned income credit.  In 2005, the income caps to qualify for this credit are as follows:

• If you do not have a qualifying child and earn less than $11,750 or $13,750 and are married and filing jointly.
• If you have one qualifying child and you earn less than $31,030 or $33,030 if filing jointly.
• If you have two or more qualifying children and earn less than $35,263 or $37,263 if married filing jointly

Standard Mileage Deduction Rates

The standard mileage deduction rate moved around quite a bit in 2005.  This movement can really be attributed to two events - Hurricane Katrina and the sharp rise in gasoline prices.  Both of these events lead to a split in the deductions that could be taken during the year.  That is to say, two rates were in effect during 2005.  The first set of rates was in effect from January 1, 2005 through August 31, 2005 and the second set was in effect for the remainder of the year.

The following table summarizes the two standard mileage rates that apply to the calendar year 2005:

2005 Mileage Rates

Please note that the first set of mileage rates for Hurricane Katrina begin on August 24, 2005 through August 31, 2005.   For a more thorough explanation of these rates, see our publication on Mileage Reimbursement Rate.

Donations of Cars and Boats

Starting in 2005, if you donated a car or boat to a charitable organization, and the claimed value of the vehicle is greater than $500, then your deduction is limited to the proceeds from the sale of the vehicle by that organizations.  In other words, you can only claim up to what the organization gained from the sale of the car.

There are a couple of exceptions, which allow you to claim the fair market value of the car or boat - which could be higher or lower.  These rules apply if the organization:

• Makes significant use of the vehicle
• Materially improves the vehicle
• Transfers ownership of the vehicle to a needy individual

Keep in mind, that if the value you're claiming is greater than $500, there are additional recording keeping requirements.  For more information on this topic, see our article on Donating a Car.

Electric and Clean-Fuel Vehicles

Finally, there had been a proposed reduction of 50% in the maximum electric vehicle credit and clean fuel vehicle deduction scheduled for 2005.  The good news is that this proposed reduction was eliminated.

That means you can take the maximum electric vehicle credit allowed for qualifying vehicles placed into service in 2005.  You can also claim the maximum deduction allowed for qualifying clean fuel vehicles placed into service in 2005.

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