You'll get new brackets, higher exemptions and standard deductions and larger mileage allowances.. Plus, there are a slew of breaks because of Hurricane Katrina. Here's a rundown.
By Charley Blaine
Tax rates are unchanged, but brackets are higher, and you can contribute more to retirement accounts for 2005.
If you suffered damages in Hurricane Katrina, there are additional breaks. And, if you just can't file on time and don't think you can file by August, relax. The IRS has changed the rules on filing for extensions. Now, you get one extension, but it's until Oct. 15.
Here's what you face on your 2005 taxes. For more check MSN Money's Tax Law Changes page.
Income tax brackets
Income tax rates are unchanged for 2005, compared with 2004. But income tax brackets have been adjusted for inflation. Here's how the new rates and brackets work for 2005.
| Tax rates and brackets for 2005 | If your taxable income
is over | But not over | Your tax is this | Plus this % | Of the excess over | | Singles | | | | | | $0.00 | $7,300 | $0.00 | 10% | $0 | | $7,300 | $29,700 | $730.00 | 15% | $7,300 | | $29,700 | $71,950 | $3,990.00 | 25% | $29,700 | | $71,950 | $150,150 | $14,715.00 | 28% | $71,950 | | $150,150 | $326,450 | $36,548.50 | 33% | $150,150 | | $326,450 | -- | $94,727.50 | 35% | $326,450 | | | | | | Married filing jointly
or widow(er)* | | | | | | 0 | $14,600 | $0.00 | 10% | $0 | | $14,600 | $59,400 | $1,460.00 | 15% | $14,600 | | $59,400 | $119,950 | $8,180.00 | 25% | $59,400 | | $119,950 | $182,800 | $23,317.50 | 28% | $119,950 | | $182,800 | $326,450 | $40,915.50 | 33% | $182,800 | | $326,450 | -- | $88,320.00 | 35% | $326,450 | | | | | | | Married couples filing singly | | | | | | 0 | $7,300 | $0.00 | 10% | $0 | | $7,300 | $29,700 | $730.00 | 15% | $7,300 | | $29,700 | $59,975 | $4,090.00 | 25% | $29,700 | | $59,975 | $91,400 | $11,658.75 | 28% | $59,975 | | $91,400 | $163,225 | $20,457.75 | 33% | $91,400 | | $163,225 | -- | $44,160 | 35% | $163,225 | | | | | | | Heads of household | | | | | | 0 | $10,450 | $0.00 | 10% | $0 | | $10,450 | $39,800 | $1,045.00 | 15% | $10,450 | | $39,800 | $102,800 | $5,447.50 | 25% | $39,800 | | $102,800 | $166,450 | $21,197.50 | 28% | $102,800 | | $166,450 | $326,450 | $39,019.50 | 33% | $166,450 | | $326,450 | -- | $91,819.50 | 35% | $326,450 |
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*Sometimes called "qualifying" widow or widower. This filing status is available for two years following the year of a spouse's death and basically applies the filing data afforded married joint filers.
Want to see what happens to tax rates in 2006? Check here.
Taxpayers in 7 states can deduct sales taxes
As in 2004, residents of seven states will be able to deduct sales taxes in 2005. Everyone else will have to make a decision.
The states where everyone will be able to deduct sales taxes are those without a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Residents of all the other states and the District of Columbia will have to decide: Deduct the sales taxes or deduct state and local income taxes. You won't be able to deduct both sales and income taxes.
This change came in the American Jobs Creation Act of 2004, the tax bill Congress passed in the fall of 2004.
How much will you be able to deduct? Everything you can document. But since few people expected this provision to be enacted, most taxpayers will have to settle for an IRS formula based on family size and adjusted gross income. For more, see this year's instructions for itemized deductions. You can find the tables in IRS publication 600.
Families with adjust gross incomes of up to $145,950 will be able to claim a full sales tax deduction. That's up from $142,700 in 2004. After those levels, the deduction will be phased out as your income rises.
While this deduction will mainly benefit taxpayers with no income tax, it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes. For example, you may have bought a new car, boosting your sales tax total, or claimed tax credits, lowering your state income tax.
This provision is set to expire after 2005 unless Congress extends it.
For more, see IRS publication 17 and IRS Publication 553
Married couples get a break
If you're married or were married in 2005, you get two sizeable breaks:
Expansion of bracket for couples filing jointly. Under the married filing jointly tax rate schedule, the 15% rate bracket ends at $59,400 ($29,700 x 2). That is up from $58,100 in 2004. If you add to that the lower tax rates, here's what could happen: Say you and your spouse have a joint taxable income of $80,000 in 2005; your tax will be $13,330, down $175 from $13,475 in 2004.
Expansion of the standard deduction. The standard deduction for married couples filing jointly is $10,000 in 2005, up from $9,700 in 2004. If you itemize your deductions, the break doesn't mean much. If you don't itemize, it could save $75 if you're in the 25% bracket.
Katrina breaks
The suffering from Hurricane Katrina is like nothing we've ever seen before. Congress and the Internal Revenue Service have stepped in with rule changes and tax-law changes to try to ease the pain. If you're a Katrina victim, keep this in mind. If you know someone who has been hit by Katrina problems, pass these items on.
No limits on all charitable giving for 2005. This applies to ALL taxpayers. Normally, charitable contributions are limited to 50% of your adjusted gross income and are subject to an overall itemized deduction limit. This year there are no limits.
Katrina-related casualty losses. Normally, casualty-loss deductions (for, say, storm damage) must be reduced by $100 per casualty. Only the excess over 10% of your adjusted gross income is deductible. But both these limitations are removed from losses attributed to Hurricane Katrina.
Housing Katrina evacuees. If you housed someone displaced by the storm, free-of-charge, for at least 60 days, you may claim an additional exemption of $500 for each individual -- up to $2,000. The displaced people, however, may not include a spouse or dependents. This additional exemption is not subject to any phase-outs and is allowed as a deduction in computing your Alternative Minimum Tax (AMT).
Charitable mileage for Katrina relief. The standard mileage allowance for charitable use of your car is 14 cents a mile. For Katrina relief, you can deduct up to 70% of the current business allowance. Since Sept. 1, 2005, thats 70% of 48.5 cents, or 34 cents per mile.
Filing deadlines extended. Deadlines for filing tax returns and making payments for income-, estate- and gift taxes have been extended to Feb. 28, 2006 for all affected taxpayers, including victims and volunteers.
For more on hurricane relief, check Publication 4492.
New definition of a child
If you expect to claim your child for any of five tax breaks -- dependent exemption, head of household filing status, earned income credit, child tax credit and the credit for child and dependent care expenses -- your child must pass four tests:
- Relationships. The person must be your child, brothe or sister (including if adopted), step-brother or -sister or descendants of any of these,
- Residency. A child must live with you for half the year. Temporary absenses such as school or military service count as time lived at home.
- Age. The child must be under age 19 at the end of the year or under age 25 if a student or disabled.
- Support. A child can not provide more than half his support during the year.
For more, check here.
Electric and clean-fuel Vehicles
For 2005, the proposed 50% reduction of the maximum electric vehicle credit and the clean-fuel deductions 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.
Standard adjustments:
Personal exemptions: 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 phase-out begins depends on your filing status. For 2005, the phase-out begins at:
- $109,475 for married persons filing separately,
- $145,950 for single individuals.
- $182,450 for heads of household
- $218,950 for married persons filing jointly or qualifying widow(er)s.
Standard deduction: 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
Mileage increases
Business miles: 40.5 cents per mile for mileage from Jan. 1, 2005 through Aug. 31. 48.5 cents a mile for mileage incurred after Aug. 31 through Dec. 31. In 2006, the rate drops to 44.5 cents a mile.
Charitable services -- non-Katrina: 14 cents a mile. It's still 14 cents in 2006.
Charitable services -- Katrina-related: 34 cents a mile.
Medical mileage: 15 cents a mile for mileage incurred before Aug. 31. 22 cents for
mileage incurred after Aug. 31. In 2006, the mileage rate is 16 cents.
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 phase-out increases. The amount varies depending on filing status.
New limits on elective deferrals. The maximum amount of elective deferrals under a salary reduction agreement, such as a 401(k) plan 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). This is subject to income limits.
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