On Friday, President Bush signed legislation that would allow taxpayers to deduct January 2005 contributions to the tsunami relief on their 2004 returns. Normally, taxpayers can claim deductions for contributions only in the year they're made. The rule change was intended to encourage individual gifts to tsunami relief. However, you must itemize to claim the tax break and deductions are limited to U.S. charities.
Bigger is definitely better for taxpayers in 2005 -- bigger standard deductions, bigger retirement account contribution maximums, a bigger adoption tax credit and a host of other bigger breaks. The federal tax brackets also are wider in 2005 (see the table below).
However, when the IRS giveth, it also taketh away. Some tax incentives for small business owners shrink or disappear altogether.
Although most of us are focused on collecting the documents we'll need to file our 2004 taxes, it's a good idea to keep one eye on what's coming around the bend. Here's how you'll benefit (or lose out) from the tax law changes in 2005:
Changes for individuals
Standard deductions. The annual adjustment for inflation boosts the standard deduction for couples to $10,000 plus $1,000 for each spouse age 65 or older. Singles get $5,000 plus $1,250 for those 65 and older. Heads of household get $7,300 plus $1,250 once they're 65.
Itemized deductions. The income ceiling, the level at which certain itemized deductions begin to fade away, rises to $145,950 from $142,700. If your AGI exceeds $145,950, itemizations are cut by 3% of the excess. (But you can never lose more than 80% of your itemized deductions.)
Dependents. Claiming a child as a dependent no longer requires paying more than half the child's support, as long as the child doesn't provide more than 50% of his or her own support. And other tests must still be met, namely the child's age, relation to the taxpayer and living in the same home.
Education credits and student loan interest. You can also make more money and claim 100% of the Hope and Lifetime Learning credits. The credits begin to phase out when your AGI exceeds $43,000 for singles or $87,000 for couples filing jointly. Those thresholds increased from $42,000 and $85,000, respectively.
The interest deduction for student loans now begins to phase out when income hits $105,000 for joint filers, a $5,000 increase from 2004.
GETTING STARTED
