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| | The Ryze Washington D.C Network is not currently active and cannot accept new posts | | More Tax Law Changes to Consider | Views: 1628 | | Jan 19, 2006 9:57 pm | | More Tax Law Changes to Consider | # | 
Jason Silverberg | | Hi Everyone,
I thought this was interesting and thought you guys could benefit from it!
Take Care,
Jason
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More tax changes to consider
Tax-law tweaks bring added relief, and heavier burden
By Andrea Coombes, MarketWatch
SAN FRANCISCO (MarketWatch) -- Benjamin Franklin's famous axiom may have to be changed to: Nothing's certain but death and tax-law changes.
In the past two years alone, the federal government enacted four major tax laws, and some of the new rules will hit U.S. taxpayers as they prepare their 2005 returns this year.
Still, tax-law changes for 2005 are mainly targeted to specific groups -- unlike some of the sweeping revisions enacted in 2001 and 2003 -- so some taxpayers will see little or no difference from filing a year ago.
President Bush's tax cut bill of 2001, plus major changes in 2003, including to capital gains and dividend tax rates, were "fundamental rate changes affecting almost all taxpayers," said Mark Luscombe, a principal analyst with CCH, a tax-research, publishing and software firm in Riverwoods, Ill.
"Compared to that, the changes for 2005 and 2006 are much more modest, but certainly they don't add to simplification," he said.
The rules will be far more complex for some: Victims of Hurricane Katrina will benefit from a broad swath of tax relief but they'll also likely find filing is more complicated.
"If you live in those areas affected by the hurricane, you're going to have a lot of provisions apply to you," said Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals.
"But if you're in other parts of the country, you're going to find few" tax-law changes, Scharin said.
More time to file
Still, some changes apply to all taxpayers. For instance, there's good news for procrastinators. The automatic extension is now good for six months, whereas in the past, the IRS granted taxpayers an automatic four-month extension, and then required a good explanation to get the extra two months.
Remember: Extensions don't apply to your tax bill, just your tax return, so pay taxes owed on time to avoid interest and penalties.
Even those who file on time get a little more breathing room this year: Since April 15 falls on a Saturday, taxpayers have until Monday, April 17 to file.
Plus, taxpayers living in Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont and the District of Columbia will have until April 18th to file, because an IRS processing facility in Massachusetts will be closed on the 17th due to a state holiday, the IRS said in a press release.
Documenting the donated car
The IRS cracked down on the deduction for donating a car in 2005. The agency now requires taxpayers who claim a deduction that's more than $500 to deduct no more than the charity received for selling the car, and to attach to their tax return a written acknowledgement from the charity stating the sales price.
There are some exceptions. For instance, if the charity uses the car for its own purposes, or provides it to needy families, you can then deduct the fair market value of the car.
But "for the most part you're required to use the value the charity got at the sale," Luscombe said.
And you can't claim full market value by claiming the charity sold the car at auction to a needy family. "The charity has to deal directly with the needy family. They can't sell it at an auction and claim a needy family ended up with it," he said.
Still time to get a bigger deduction
It's not too late to increase your deduction for an IRA contribution. In 2005, the maximum IRA contribution rose to $4,000 (plus, there's an added $500 catch-up contribution for those 50 and older) from $3,000 in 2004.
"People who haven't done their IRA contribution who are qualified for a deductible one" -- subject to whether you participate in employment-related retirement plans and certain income limits -- "could still affect their tax return by making that contribution by April 17," Luscombe said.
Remember: If you don't have an IRA, you can set one up between now and April 17, then contribute to it by that date and apply the deduction to your 2005 tax return.
What's a child, exactly?
You'd think condensing five definitions of "qualifying child" into one would make life and taxes simpler, and in some cases that's true, but not always.
For your 2005 return, there's now essentially one test for determining whether your child qualifies for the purposes of claiming the child tax credit, dependent care credit, and earned income tax credit, plus for filing as head of household and claiming an exemption for a dependent.
The new definition is more generous in some cases. For instance, before the rule change, a single parent who provided less than half of support to a child (maybe a grandparent pitched in) might not be able to claim the beneficial head-of-household filing status, and would instead have to file as a single filer, Scharin said.
But one of the tests in the new definition simply requires the child not provide more than half of his or her own support, so even with a grandparent's contributions, a single parent could claim head of household status.
Still, in other cases, a couple might find they're now unable to claim that status -- for instance, an unmarried couple living together with one partner's child, if the nonparent is the sole source of income.
Under the old law "it was a support test, and so the nonparent who was earning the living could claim head-of-household status based on the child living in the household," Luscombe said.
"Under this new definition, it's a relationship test primarily and it appears that in that situation, if all the earnings are being made by the nonparent, they may not be able to claim head-of-household status and the parent ... who would be entitled to the exemption can't take advantage of it because they have no income," he said.
See this IRS page for more information on a qualifying child.
Hurricane of changes
There are at least a dozen tax-law changes related to Hurricane Katrina, and at least a couple apply to taxpayers nationwide as well as disaster victims.
For those who housed a hurricane victim in their home, there's an extra $500 exemption per displaced person, and taxpayers can claim that additional exemption for up to four people, for a maximum of $2,000.
Meanwhile, for the period from Aug. 28 through Dec. 31, 2005, the charitable contribution deduction is not limited to 50% of the taxpayer's adjusted gross income, so a generous person could have donated, and could now deduct, up to 100% of AGI, to any charity for any cause.
It's too late to take advantage of that now by donating more generously, but if you did donate a high percentage of your income in that time period, keep this perk in mind when doing your return.
Meanwhile, some hurricane victims can get penalty-free access to their retirement-plan funds through 2007, and more generous hardship withdrawals from those plans through March 31, 2006, just two among a slew of tax-law changes aimed at victims, according to the latest Ernst & Young Tax Guide.
The IRS is offering hurricane victims help with filing returns and answering tax-related questions at local disaster recovery centers set up by FEMA, the Federal Emergency Management Agency. See the IRS page on tax relief in disaster situations.
Inflation adjustments
If your income was the same in 2005 as in 2004, you may at least enjoy a lower tax rate due to "bracket creep."
That is, since the IRS adjusts higher -- to account for inflation -- the income brackets that apply to each tax rate, a taxpayer who did not enjoy a salary raise might benefit from a lower tax rate.
"If your income stayed the same, you might have a lower tax because of bracket creep," Luscombe said.
Because they're indexed to inflation, "the standard deduction goes up each year, the exemption amount goes up each year, and the dollar cut-off for various tax brackets are also adjusted for inflation each year," Scharin said.
"If you got a cost-of-living salary increase, you're likely to find that you're in the same tax bracket as last year. The concept is that inflation is probably not going to push you into a higher tax bracket."
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