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2005 TAX PLANNING & TIPS
The tax laws continue to provide opportunities for the wise and traps for the unwary. Often, tax savings can be achieved by taking action before the year end. The information and strategies discussed herein may or may not be appropriate for your situation. Remember to consult with your tax professional before implementing them. Click on the following links for information on selected topics.
Energy Tax Incentives Act of 2005
The Energy Tax Incentives Act of 2005 contains $14.5 billion in tax cuts to promote domestic energy production and conservation. Businesses and individuals are eligible for new credits, deductions and incentives. A few of the highlights are listed below. Energy-efficient improvements. Although the main thrust of the Energy Tax Incentives Act of 2005 is on energy producers and related industries, individuals, including homeowners, were not forgotten. Owners of existing homes will be entitled to a lifetime credit of up to $500 for energy-efficient improvements to their homes made in 2006 and 2007.
The energy-efficient improvements must be expected to remain in use for at least five years. In addition, the credit only applies to installations in your principal residence. Second homes don�t qualify for the credit.
Note: Energy-efficient improvements made or residential energy property installed before January 1, 2006, do not qualify for the credit.
New credits on purchase or lease of alternative vehicles. The Energy Tax Incentives Act of 2005 did not neglect a growing segment of the American driving public consisting of purchasers of vehicles that are powered by other than a traditional gasoline engine. Such vehicles, which include pure electrics and hybrids, as well as those that run on natural gas, liquefied petroleum or natural gas, or 85-percent methanol have been growing in popularity as gasoline prices continue to increase. Hybrid cars, such as the Toyota Prius and Honda Insight, as well as more recent luxury entries like the Lexus RX 400h, have been garnering the bulk of the publicity.
The Energy Act effectively terminates the current law deduction for clean fuel vehicles and replaces it with a series of credits for hybrids, and alternative fuel vehicles under the overall title of the "Alternative Motor Vehicle Credit".
Because a tax credit is worth more than a deduction, the new law provides a much greater incentive to purchase a hybrid car or other alternative fuel vehicle. You might consider delaying a planned purchase in 2005 until 2006.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
Katrina Emergency Tax Relief Act of 2005
The Katrina Emergency Tax Relief Act of 2005 contains tax breaks not only for victims of the disaster but also for individuals and businesses helping in the recovery.
Giving shelter to evacuees. Americans have opened their homes in unprecedented numbers to give shelter to evacuees. The new law rewards those generous homeowners (and renters) with a special tax deduction for tax years beginning in 2005 or 2006. Individuals who use their principal residence to provide housing free of charge to evacuees (referred to as Hurricane Katrina displaced individuals) for at least 60 consecutive days may claim a special $500 deduction from taxable income for each evacuee residing in the taxpayer�s home. The deduction is capped at $2,000 total (which effectively limits it to providing shelter for four evacuees). The shelter also must be in the taxpayer�s principal residence. In addition, the evacuee�s principal place of abode must have been in the Hurricane Katrina disaster area as of August 28, 2005. The income-based phase outs applicable to other exemptions do not apply to the special Hurricane Katrina exemption.
Note: A Hurricane Katrina displaced individual for purposes of the deduction does not include your spouse or any of your dependents. A nondependent cousin, aunt, or other relative, however, can qualify. This deduction may be taken whether or not you itemize your deductions. The evacuee�s taxpayer identification number must be included on your return if you are claiming this deduction.
Charitable Contributions. Generally, for individuals, contributions to tax-exempt charitable organizations are limited to 50 percent of the taxpayer�s contribution base (adjusted gross income) for the tax year. Any excess amount may be carried over for a period of up to five years. The new law removes the 50 percent limitation for all cash donations to a qualified charitable organization for the period beginning on August 28, 2005, and ending on December 31, 2005.
Under the provision, an individual�s deduction for qualified contributions is allowed up to the amount by which the taxpayer�s contribution base exceeds the deduction for other charitable contributions. Contributions in excess of this amount are carried over to succeeding tax years. The provision also exempts those donations from the application of the phase-out of itemized deductions for high-AGI taxpayers. A taxpayer must also elect to have contributions treated as qualified contributions under these provisions.
Note: This provision is one of the few that does not require a connection with Hurricane Katrina. Any and all cash contributions made by an individual taxpayer made after August 27th through the end of the year qualify for exemption from the contribution base rule.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
New Retirement Saving Option Roth 401(k)
Effective for post-2005 tax years, the Roth 401(k) is designed to allow 401(k) plan participants to make their contributions to the plan on an after-tax basis, and for these contributions to grow with tax-free earnings and to be distributed at retirement without any future income tax liability.
As you may already know, higher income employees have not had the right to use Roth IRAs because of the Roth IRA income limits. However, by adopting Roth 401(k) plans, these highly compensated employees will be able to save up to $15,000 per year (in 2006) without future income tax liability on the earnings on these Roth 401(k) contributions.
An additional benefit to both lower income and higher income employees is that contributions to a Roth 401(k), unlike a Roth IRA, may be matched by a participant's employer on a pre-tax basis.
The Roth 401(k) rules will also apply to employee contributions to tax-sheltered annuity Code Sec. 403(b) plans. But remember, plan sponsors will have to take several steps to implement Roth 401(k) programs in their defined contribution plans, so check with your employer to see if this provision applies to your retirement plan.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
STANDARD MILEAGE RATE
Taxpayers can use the standard mileage rate (in lieu of actual expenses) in computing the deductible costs of operating automobiles owned or leased by them (including vans, pickups or panel trucks) for business purposes. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for business travel.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2005. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
While gasoline is a major factor in the mileage figure, other items enter into the calculation of mileage rates, such as the price of new vehicles and insurance. The following rates are applicable for the 2005 tax year:
2005 Rates Jan-Aug Sep-Dec Business 40.5 48.5 Charitable 14.0 14.0 Medical & Moving 15.0 22.0 If you are an employee you may deduct an amount computed using the standard mileage rate only as an itemized deduction, subject to the 2% floor on miscellaneous itemized deductions.
If you are self-employed you may deduct an amount computed using the standard mileage rate in determining your net earnings for self-employment.
Remember, whether you are an employee or self-employed, the use of the standard mileage rate does not relieve you of the requirement to substantiate the amount of each business trip, or the time and business purpose of each use. You should keep a record of the time, place, business purpose and number of miles traveled for tax purposes.
Note: If you used a vehicle in providing donated services to a charity for relief related to Hurricane Katrina you can compute the charitable mileage deduction using a standard mileage rate equal to 70% of the business mileage rate in effect on the date of the contribution.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
Possible Grace Period for Sec. 125 Cafeteria Plans
Cafeteria plans (also known as flexible benefit plans or flexible benefit arrangements) allow employees to pay for qualified benefits with pre-tax dollars. Qualified benefits include employer-provided accident and health plans excludable under Code Sec. 106 and Code Sec. 105(b), group-term life insurance excludable under Code Sec. 79, dependent care assistance programs excludable under Code Sec. 129, and adoption assistance programs excludable under Code Sec. 137. A cafeteria plan can't defer the receipt of compensation or operate in a way that enables participants to defer compensation by, for example, allowing participants to use contributions for one plan year to buy a benefit that will be provided in a subsequent plan year. This rule is commonly referred to as the �use-it-or-lose-it� rule, requiring that unused contributions at the end of the plan year be forfeited.
New for 2005. IRS Notice 2005-42 permits (but does not require) an employer to amend its cafeteria plan to give all participants a grace period lasting no longer than 2-1/2 months immediately following the end of each plan year. Expenses for qualified benefits incurred during the grace period could be paid or reimbursed from benefits or contributions remaining unused at the end of the immediately preceding plan year. If the amendment is made, a participant who has unused benefits or contributions relating to a particular qualified benefit from the immediately preceding plan year, and who incurs expenses for that same qualified benefit during the grace period, may be reimbursed for those expenses from the unused contributions as if the expenses had been incurred in the preceding plan year.
During the grace period, unused benefits or contributions couldn't be cashed-out or converted to any other taxable or nontaxable benefit. Unused amounts relating to a particular qualified benefit could only be used to pay or reimburse expenses incurred for that particular qualified benefit. For example, unused amounts in a health flexible spending arrangement couldn't be used to pay or reimburse dependent care or other expenses incurred during the grace period.
Remember to check with your employer to see if this provision applies to your cafeteria plan.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
YEAR-END TAX PLANNING TIPS
You may also want to postpone income until 2006 and accelerate deductions into 2005 to lower your tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2005 that are phased out over varying levels of adjusted gross income. These could effect Roth-IRA contributions, child credits, higher education tax credits, and deductions for student loan interest.
Traditional IRA Conversion to Roth IRA. You may want to consider converting part or all of your traditional IRA to a Roth IRA as part of your year-end tax planning. A conversion completed before the stock market makes its comeback and while the value of many IRAs are still depressed may result in the reduction of the amount of income that must be recognized upon the conversion of a traditional IRA to a Roth IRA.
For 2005, you can deduct state and local sales taxes in lieu of state and local income taxes. Unless the law is changed, for 2006, you won't have this choice; you'll only be able to deduct income taxes. So if you are deducting sales taxes this year and are planning to buy a car soon, you may want to push the purchase into 2005 to increase your sales tax deduction.
Bunching deductions: If you file Schedule A, Form 1040, you may do well to �double itemize�. Essentially, you may be able to pre-pay deductible expenditures to generate almost twice the amount of itemized deductions every-other-year.
Note: Taxpayers who are subject to the alternative minimum tax (AMT) may not find �double itemizing� helpful because some taxes are deductible for regular income tax purposes but not for AMT purposes.
In addition, there are other tax law changes taking effect at the beginning of 2006 that you should take into account in your end-of-2005 planning. For example, a deduction for college tuition is scheduled to go off the books unless Congress extends it. You may want to prepay in 2005 tuition not due until early 2006 if that lets you increase your tax savings from the expiring deduction.
We urge you to call for a personal appointment with Carl Bosch using one of the telephone numbers at the top of this page or email us by clicking here. Remember, all business owners are offered a FREE initial consultation.
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