|
The 2005 tax year is coming to an end, and it's time to think about
actions you should take by the end of the year and planning that
should be done for the future to minimize your taxes.
If you use your car for business, you may be entitled to a higher
deduction for miles traveled in the last four months of 2005.
Because of the rapid rise in gasoline prices this year, the IRS
increased the optional business standard mileage rate for the last
four months of the year to 48.5 cents. This is an eight cent
increase from the 40.5 cent rate in effect for the first eight
months of 2005.
The Katrina Emergency Tax Relief Act of 2005 encourages charitable
giving by allowing an election to lift the 50 percent adjusted gross
income limit and phase-out rule for eligible charitable cash
donations made by individuals from August 28, 2005, until the end of
the year. But stricter rules are in place in 2005 for donation of
vehicles to charity. Under these rules, if the claimed value of a
donated vehicle exceeds $500 and the charitable organization sells
the vehicle without any significant intervening use or material
improvement, the amount of the deduction is limited to the sale
proceeds.
The ability of bankrupt debtors to eliminate tax debt under Chapter
13 of the Bankruptcy Code has been curbed by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 which went into
effect this year. Under the Act, Chapter 13 debtors' tax liabilities
are treated like those of Chapter 7 debtors. Debtors in Chapter 7
proceedings generally cannot discharge taxes from a return due
within three years of the petition date, taxes assessed within 240
days before the date of filing the petition, or taxes related to an
unfiled or fraudulent return.
The maximum 401(k) or 403(b) contribution eligible for tax deferral
in 2005 is $14,000, plus an extra $4,000 "catch-up" contribution for
those who are 50 or older. For 2006, the maximum contribution
eligible for tax deferral is $15,000. The catch-up contribution
amount is $5,000.
You may see a new option for your 401(k) or 403(b) contributions
next year. Beginning in 2006, employers can offer Roth 401(k) or
403(b) plans. Similar to Roth IRAs, contributions to such plans will
be taxable, but earnings and post-retirement withdrawals from these
accounts will be tax-free. If offered, you can invest in the Roth
plan, the traditional plan, or both, but the combined Roth and
deferred amount is limited to the maximum deferred contribution
amount.
"High-income" taxpayers may be able to take a larger amount of
itemized deductions in 2006. That is because the reduction in
itemized deductions for high-income taxpayers starts to phase out
beginning next year.
Repairs to your house may save you taxes next year. Two new
residential energy credits are available under the Energy Policy Act
of 2005 -- the non-business energy property credit and the
residential energy efficient property credit. These credits are
available for the following types of energy-efficient property that
meet eligibility requirements: (1) exterior doors; (2) heat pumps;
(3) water heaters; (4) central air conditioners; (5) furnace or hot
water boilers; (6) fans used in natural gas, propane, or oil
furnaces; (7) insulation material or an insulation system
specifically and primarily designed to reduce the heat gain of a
dwelling unit; (9) exterior windows (including skylights); (10)
qualified property for producing solar electricity; (11) qualified
solar water heating property; and (12) qualified fuel cell property.
If you own a condominium or cooperative, these credits are also
available. For repairs made by your condominium association or
cooperative corporation, they may be available on a pro-rated basis.
If you live in a state with no income tax or otherwise paid more
state and local sales tax than state and local income tax in 2005,
there may be a tax advantage to making any anticipated purchases
subject to sales tax before the end of the year. After 2005,
taxpayers may no longer elect to deduct state and local sales taxes
in lieu of state and local income taxes.
Purchase of a new energy-efficient car may entitle you to a tax
credit next year. The Energy Policy Act provides credits for certain
energy-efficient motor vehicles placed in service starting in 2006,
including qualified fuel cell vehicles, advanced lean burn
technology vehicles, hybrid motor vehicles, and qualified
alternative fuel motor vehicles.
However, the electric motor vehicle credit is reduced from $4,000 to
$1,000 beginning in 2006 and the clean-fuel vehicles deduction
expires next year.
The deduction for qualified higher education tuition and related
expenses is scheduled to terminate for tax years beginning after
December 31, 2005. Also next year, educators will no longer be able
to deduct up to $250 of certain classroom material in computing
adjusted gross income.
In addition, non-refundable tax credits, with a few exceptions, can
no longer be used to offset alternative minimum tax liability for
tax years after 2005.
Given the number and complexity of issues facing taxpayers this
year, it is important that you contact our office at your earliest
convenience, so that we may complete both regular tax and
alternative minimum tax projections for you. By doing so, we can
ensure that you have all the information you need to make
tax-efficient choices by the end of the year.
If you are projected to owe additional income tax, a tax projection
can help determine which tax-minimizing strategies should be used
before the end of the year to reduce or eliminate any tax due. If
you are due a refund, we can ensure your tax return is filed as
early as possible, to allow you to receive your refund and enjoy
your money more quickly.
Sincerely,
Howard Smolen
|