Tax Law Updates for the new taxable year from my accountant...

[whistle]

Sales Tax Deduction. State and local general sales taxes have been added to the list of taxes that individuals can write off as an itemized deduction. But there’s a trade-off for those who also pay state income taxes — the law doesn’t allow a deduction for both sales and income taxes. Actual receipts or an IRS table determines the amount of the sales tax deduction. (If the table is used, sales taxes paid on motor vehicles, boats, and other IRS-specified items may be added to the table amount.) The sales tax deduction is available for 2004 and 2005.

Marriage penalty. If you’re married, you’ll almost certainly benefit from a provision that keeps the end point of the 15% tax bracket for joint filers equal to twice the end point for single filers. And the standard deduction available to joint filers (claimed by married couples who don’t itemize their deductions) will be twice the standard deduction available to single taxpayers. Both changes are designed to counter the marriage penalty (quirks in the law that sometimes cause a married couple to pay more tax than two single individuals with the same incomes).

AMT. If you’ve ever had to pay alternative minimum tax, you’re not alone. This unpopular tax is hitting more individuals every year. The good news: The AMT exemptions, which had been scheduled to decrease after 2004, will remain the same for 2005. The bad news: The exemptions are still phased out for higher income taxpayers. We can help you review your potential AMT exposure and suggest strategies for minimizing AMT.

Child Tax Credit. Subject to phase-out for higher income taxpayers, this credit stays at $1,000 per eligible child under age 17. It was to have dropped to $700 in 2005.

Classroom Expenses. For 2004 and 2005, teachers and other qualifying educators will be able to deduct up to $250 of their out-of-pocket expenses for books, supplies, and other classroom materials.

Charitable Deductions for Cars: Charities often sell the vehicles they receive as donations. And they don’t always receive “blue book” value. Under the new rules, if your car is sold after you donate it, your charitable deduction will generally be limited to the sales proceeds. The charity must report the selling price to you and the IRS. Of course, the charity might decide to keep the car. If the charity uses the vehicle in a significant way or materially improves it, you’ll be entitled to a deduction based on the car’s fair market value at the time of your donation. The charity should send you a certification stating how it intends to use the vehicle (or the material improvement that will be made) and that the vehicle will not be sold before that use (or improvement) is completed.

SUV Write-Offs: Congress has put the brakes on full business write-offs for purchases of heavy sport utility vehicles placed in service after October 22, 2004. The American Jobs Creation Act of 2004 limits the Section 179 deduction with respect to such vehicles to $25,000.

Social Security Base:

You pay a 6.2% Social Security tax on your annual wages, but only up to a certain ceiling that is subject to adjustment each year. For 2005, the ceiling is $90,000, up from $87,900 in 2004. So, if you earn $90,000 or more in 2005, you’ll pay $5,580 of Social Security tax — an increase of $130.20 over last year’s maximum Social Security tax. You also pay 1.45% on all your earnings. There is no cap on the Medicaid portion.

If You’re Self-employed, you pay into the Social Security system by way of a self-employment (SE) tax figured on your net earnings from self employment. For 2005, the maximum amount of earnings subject to the 12.4% component of the SE tax is $90,000, increasing the maximum tax payable by $260.40 to $11,160.. In addition, you pay the Medicaid portion (2.9%) on all earnings.

[papau]

1. A nice summary - thanks for posting!

:-)