2005 Tax Alert
Important tax changes for you and your family

Presented here are the major changes for 2005 that impact the broadest segment of taxpayers. Of special note are dramatic changes to the rules for deducting donations of vehicles to charitable organizations. There is also a unified definition of a Qualifying Child for several tax breaks. Note also that the more recent Energy Tax Incentive Act of 2005 primarily impacts 2006 and 2007 and only upholds the prior deductions for purchase of new fuel efficient hybrid vehicles for 2005.

Personal Exemption
The amount you may 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:
• $109,475 for married persons filing separately,
• $145,950 for single individuals,
• $182,450 for heads of household, and
• $218,950 for married persons filing jointly or qualifying widow(er).

Standard Deduction
The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2005 than it was for 2004. The amount depends on your filing status and whether an exemption can be claimed for you by another taxpayer.
The basic standard deduction amounts for 2005 are:
• Married taxpayers filing jointly (or qualifying widow(er) — $10,000
• Head of household — $7,300
• Married filing separately — $5,000
• Single — $5,000

Standard Mileage Rates
Business Miles For 2005, you may deduct business miles driven at a rate of 40.5¢ per mile from January 1st through August 31st and 48.5¢ per mile from September 1st through December 31st. These rates are up from 37.5¢ in 2004.

Medical and Moving Miles You may deduct 15¢ per mile when computing expenses for miles driven for medical or moving, up from 14¢ in 2004.

Charitable Miles You may deduct 14¢ per mile when computing expenses for charitable services, no change from 2004.

Retirement Savings Plans
IRA deduction expanded The amount you and your spouse may each be able to deduct as an IRA contribution increases to $4,000 ($4,500 if age 50 or older at the end of 2005).

Tip: New Bankruptcy Laws, effective October, 2005, now protect IRAs from creditors.

Limit on elective deferrals The maximum amount that can be contributed to a qualified plan [401(k), 403(b)] increases to $14,000 ($18,000 if you are age 50 or over). For SIMPLE plans, the amount increases to $10,000 ($12,000 if you are age 50 or over).

Sales Tax Deduction
A late 2004 law change allows you to now deduct EITHER your state and local income tax OR state and local general sales tax as an itemized deduction. The amount of sales tax allowed is based upon your income and a table published by the IRS or actual expenses paid by you.

Charitable Contributions of Autos
If you donate a car to a qualified organization after December 31, 2004, your deduction is limited to the gross proceeds from its sale by the organization. This new rule applies if the claimed value of the donated vehicle is more than $500. But, if the organization makes significant intervening use of or materially improves the car, you generally can deduct its “fair market” value. These rules also apply to donations of boats and aircraft.

Example: If you donate your old car which has a fair market value of $3,000 but the charity simply sells it for $1,700, you can only claim a $1,700 charitable deduction. However, if the charity uses the vehicle within its organization or materially improves the car,* you may deduct the full fair market value.
* An example would be a non-profit that teaches unemployed workers auto body work using donated vehicles.

Acknowledgement required If the claimed value of the car is more than $500, you must have a written acknowledgement of your donation from the organization and must attach it to your return. If you do not have an acknowledgement, you cannot deduct your contribution. The acknowledgement must include:
• Your name and taxpayer identification number.
• The vehicle identification number.
• Certification the car was sold in an arm’s length transaction between
unrelated parties.
• The gross proceeds from the sale.
• A statement that your deduction may not be more than the gross proceeds
from the sale.
• The date of the contribution.

However, if there was significant intervening use of, or material improvement to, the car by the organization, the acknowledgement does not have to include any sale information. Instead, it must contain a certification of the intended use, the intended duration of that use, and that the vehicle will not be transferred in exchange for money, other property, or services before completion of that use.
An acknowledgement must be provided within 30 days of the sale of the car or, if there is significant intervening use or material improvement of the car by the organization, within 30 days of your contribution.

Electric and Clean-Fuel Vehicles
You can claim the maximum deduction allowed for a qualified electric vehicle or a qualified clean-fuel vehicle you place in service in 2005. This is a once per taxpayer deduction and the vehicle must be new. The most commonly available deduction for 2005 is a $2,000 deduction for purchase of a new gas/electric hybrid auto such as Toyota’s Prius or Ford’s Escape. The Energy Tax Incentive Act of 2005 will expand this program in 2006 and 2007.

Earned Income Credit (EIC)
You may be able to claim the earned income credit (EIC) in 2005 if you have:
• 2 or more qualifying children and your earned income is less than $35,263
($37,263 if married filing jointly for 2005),
• 1 qualifying child and your earned income is less than $31,030 ($33,030 if
married filing jointly for 2005), or
• No qualifying children and your earned income is less than $11,750
($13,750 if married filing jointly for 2005).

Uniform Definition of a Qualifying Child
Beginning in 2005, one definition of a qualifying child will apply for each of the following tax benefits.
• Dependency exemption.
• Head of household filing status.
• Earned income credit (EIC).
• Child tax credit.
• Credit for child and dependent care expenses.

Tests to Meet Qualifying Child
Relationship Test The child must be your child (including an adopted child, stepchild, or eligible foster child), brother, sister, stepbrother, stepsister, or a descendent of one of these relatives.

Residency Test A child must live with you for more than half of the year.
Age Test A child must be under a certain age (depending on the tax benefit) to be your qualifying child.

Support Test A child cannot have provided over half of his or her own support during the year. This Support Test does not apply to the Earned Income Credit.

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