Qualified Production Activities Deduction
The Section 199, qualified production activities deduction, went into effect in 2005 and will benefit any business that produces property in the U.S. It provides a 3 percent deduction for the lesser of: (1) the entity's qualified production activities income for the year, or (2) the entity's taxable income (for an individual, adjusted gross income is used to calculate the limitation), not to exceed 50% of W-2 wages paid by the entity.
Six-Month Automatic Extensions Available for 2005 Tax Returns
The IRS has streamlined the process for extending the due date of individual, small business, and partnership returns. Automatic six-month extensions are now available.
IRA Deduction Expanded
The IRA deduction increased from $3,000 in 2004 to $4,000 in 2005 plus an additional $500 for clients age 50 or older at the end of 2005.
Elective Salary Deferrals Increased
The amount a client can defer under all elective salary deferral plans increased in 2005 to $14,000 ($10,000 in a SIMPLE plan; $17,000 for a Section 403(b) plan if the taxpayer qualifies under a special rule). The catch-up contribution limit for clients 50 or older increased to $4,000 ($2,000 for SIMPLE plans) in addition to the basic contribution. The maximum 401(k) contribution by a client over 50 is $18,000.
Vehicle Donations
The rules for vehicle donations changed in 2005, possibly making such donations less attractive. Under the old rules, clients could deduct the "fair market value" of cars donated to charity. The new rules provide that if the charity sells the car, the donor's deduction is limited to the proceeds received by the charity. If the charity does not sell the vehicle, but uses it in furthering the charity's exempt purpose, the client may be entitled to deduct the vehicle's fair market value.
Standard Mileage Rates
The 2005 standard mileage rate for business use of a vehicle is 40.5 cents for January through August. Beginning in September, that rate increases to 48.5 cents. The 2005 rate for using a vehicle to get medical care or to move is 15 cents a mile for January through August, and 22 cents a mile thereafter. The charitable mileage rate was 22 cents, but changed to 70 percent of the standard rate beginning in September. Effective January 1, 2006, the standard rate will be 44.5 cents per mile.
Dependents Can't Claim Exemptions for Dependents
Starting in 2005, an individual that can be claimed as a dependent on someone else's return cannot claim any exemptions for dependents.
Katrina Emergency Tax Relief Act of 2005
The Katrina Emergency Tax Relief Act of 2005 (the Act) provides a variety of tax incentives for those affected by the hurricane and those helping those affected.
Charitable donations
The Act removed limitations on some charitable contributions, allowing generous donors to substantially reduce their 2005 taxable income. Contributions need not be related to Hurricane Katrina to qualify.
The Act allows your client to elect to have the 50 percent income limitation rule not apply to cash contributions starting on August 28, 2005, through December 31, 2005, to charitable organizations (other than private foundations). Since this provision expires at the end of 2005, clients should consider accelerating any planned giving into 2005, if possible.
For corporations, the 10 percent of income limitation is waived for cash contributions to charitable relief efforts related to Hurricane Katrina made before 2006. In addition, these contributions are not considered in applying the charitable donation carryover rules to other contributions.
The Act increased the standard mileage rate for individuals providing Hurricane Katrina relief to 29 cents per mile from August 25 through 31, 2005, and 34 cents per mile for the rest of 2005.
Emergency Access to Retirement Plans
The Act includes special provisions relating to "qualified Hurricane Katrina distributions."
For persons affected by Hurricane Katrina, the Act waives the 10 percent tax on early distributions from IRAs and pensions after August 25, 2005 and before January 1, 2007. Eligible individuals may withdraw a maximum of $100,000 from their IRAs and pensions without incurring the 10 percent penalty tax. Amounts withdrawn will not be taxed at all if they are repaid to the retirement account within 3 years.
A distribution from a 401(k) plan, 403(b) annuity, or IRA to buy a home in the Hurricane Katrina disaster area can be re-contributed to the plan, annuity, or IRA if it was to be used to purchase a residence in the affected area but the residence is not purchased or constructed because of Hurricane Katrina.
Employer and employee tax relief
The Act extends the work opportunity tax credit to "Hurricane Katrina employees" (individuals who, before Hurricane Katrina, resided in portions of the disaster area that are now eligible for federal assistance) beyond the cut-off date of December 31, 2005. Employers located in such an area may claim the credit for Hurricane Katrina employees hired over the next two years. Employers located outside the Hurricane Katrina disaster area may claim the credit for Hurricane Katrina employees hired through the end of 2005.
Small employers (those with an average of less than 200 employees) located in a disaster area that is eligible for assistance may claim a tax credit through the end of the 2005 calendar year if they retain an eligible employee on their payroll. The tax credit equals 40 percent of the first $6,000 of wages paid to the employee between August 28, 2005, and January 1, 2006.
Deduction for housing assistance
A $500 exemption deduction is provided for individuals who provide rent-free housing in their principal residences for at least 60 days to dislocated persons. The deduction is $500 per person housed, with a maximum of $2,000, and can be claimed in either 2005 or 2006, but not in both years for same person.
Additional relief provided by the Act includes:
(1) exclusion from income for certain forgiveness of debt;
(2) a full deduction for personal casualty losses (i.e., elimination of the $100 and 10 percent floors); and
(3) increased time to replace property involuntarily converted.
Qualified Leasehold and Restaurant Improvement Depreciation Changes
Qualified leasehold and improvement property and qualified restaurant property placed in 2005 may be depreciated over 15 years. However, such property placed in service after 2005, must be depreciated over 39 years.
Estate Provisions
For decedents dying after 2004, a deduction is allowed to the estate for any death taxes, (any estate, inheritance, legacy, or succession taxes) paid to any state or the District of Columbia, on property included in the gross estate of the decedent. For earlier years, these taxes were usually creditable against the federal estate tax (up to a limit).
Big new tax breaks for hybrid cars
Category:Taxation | Posted: December 26, 2005
NEW YORK (CNNMoney.com) - If you just bought a brand new fuel-efficient hybrid vehicle, sorry but you should have waited.
Starting Jan. 1, 2006, buyers of some hybrid vehicles can get a hefty tax credit. But the credits vary a lot and some very fuel-efficient vehicles still get no credits at all.
In some cases, though, the credits are large enough to almost entirely make up the additional cost of the hybrid vehicle as compared to a non-hybrid. That means any money you save on gas will actually go directly into your pocket.
Previously, some hybrid vehicle purchases have been eligible for tax deductions. The new credits, however, are subtracted directly from the money you owe the IRS. That makes these credits much more valuable than deductions.
Even though the new tax law covers diesels as well as hybrids, no diesel vehicles will get tax credits in spite of the fact that some get extremely high gas mileage, according to an analysis by the American Council for an Energy Efficient Economy.
The Internal Revenue Service has not officially said, yet, what the tax credits will be, but the ACEEE based its figures on what is currently known about 2006 vehicles and the wording of the law.
The amount of the credit for each vehicle is based on three factors:
First, how large is the vehicle? The amount of the credit is based on the vehicle's fuel economy as compared to a similar 2002 model-year vehicle. To get any credits at all, a vehicle must get at least 25 percent better fuel economy than a similar 2002 vehicle.
A vehicle could also get a smaller credit if it is estimated to save at least 1,200 gallons of fuel over its lifetime.
Vehicles also must meet certain emissions standards to qualify for a tax credit. Regardless of their fuel economy, no diesel vehicles currently meet the emissions requirement for a tax credit.
Senators propose taxing Internet shopping
Category:Taxation | Posted: December 26, 2005
This may be the last holiday season to enjoy tax-free Internet shopping, thanks to new legislation in the U.S. Congress.
Two bills introduced Wednesday propose sweeping changes to how Americans are taxed for online and mail order purchases. Businesses initially would be required to collect sales taxes on purchases shipped to roughly half of the country, and that percentage is expected to rapidly increase.
"Main Street retailers collect sales taxes, while many online and catalog retailers are exempt from collecting the same taxes," said a statement published by Sen. Mike Enzi, a Wyoming Republican. "This is costing states and localities billions in lost revenue." (A related bill has been introduced by Sen. Byron Dorgan, a North Dakota Democrat, who is a former state tax commissioner.)
At the moment, if you order something from a company that's located entirely out of state, you're typically not charged sales tax. Seattle-based Amazon.com, for instance, does not collect sales taxes when shipping to California.
Technically, you're supposed to estimate and pay these taxes voluntarily to your home state every April 15. But practically nobody does.
State tax collectors would like to change that. They complain that the Internet is sapping tax revenues and are supporting Enzi's bill to force companies to collect taxes on many out-of-state shipments in the future. Traditional retailers such as Wal-Mart Stores, which collects taxes on shipments from Walmart.com because it has physical locations in every state, are also supporting the bill.
"It is now time for Congress to provide states...with the authority to require remote retailers to collect sales tax just as Main Street retailers do today," Enzi said. Four years ago, in a CNET News.com editorial, Enzi warned: "Other forms of taxes, such as property or income taxes, may then have to be increased to offset these lost revenues."
Critics of this approach warn that it will complicate life for small businesses and be an unfair burden on states like Delaware, Montana and New Hampshire, which do not have sales taxes.
"The tax commissioners are overreaching by pressing Congress for a national mandate on a collection scheme that is still in the oven," said Steve DelBianco, director of the NetChoice coalition, which represents companies such as America Online, eBay, Oracle, VeriSign and Yahoo. "They haven't worked out the software they need to collect, a compensation system for sellers, and the states themselves are still struggling (to put policies into place). In other words, there's a lot of work left to do before pressing Congress for a national mandate."
Tax "fairness and simplification"
Enzi's bill, called the Sales Tax Fairness and Simplification Act (click here for PDF), would affect only shipments sent to participating states. If California joined the so-called compact, for instance, the bill would require Amazon to collect sales taxes even if the state of Washington objected and did not sign up.
The legislation would apply only to businesses with more than $5 million in "gross remote taxable sales" each year.
So far, 18 states have fully signed on. Those include Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Utah, West Virginia and Wyoming. Twenty-two other states, including California, Illinois and Texas, have moved in this direction.
Dorgan's office did not make the second bill, which he also introduced Wednesday, immediately available. But a "discussion draft" seen by CNET News.com would order the Small Business Administration to determine which businesses would be required to comply with the tax collection rules. Congress would be required to ratify that decision.
For mandatory tax collection to take place on mail order and online purchases, the Supreme Court has said, Congress must act. A 1992 case, Quill v. North Dakota, said remote taxing--in the absence of a federal law--violated the U.S. Constitution's interstate commerce clause.
Earlier efforts in Congress to enact such a law have failed, in part because e-commerce companies pointed to the dizzying complexity of taxes. But the states participating in the so-called Streamlined Sales Tax Project hope that if they pledge to simplify their tax systems, they can persuade Congress to make collection mandatory.
ZDNet News -- 12/23/05
Articles 
