What’s New for 2005 Returns

Inflation Adjustments

Earned Income Credit. The maximum amount of income you can earn and still get the credit has increased.  You may be able take the credit if you have more than one qualifying child and you earned less than $35,263 ($37,263 if married filing jointly), you have one qualifying child and you earned less than $31,030 ($33,030 if married filing jointly, or you do not have a qualifying child and you earned less than $11,750 ($13,750 if married filing jointly). Your adjusted gross income also must be less than the amount above that applies you.

Increase in the Standard Deduction. The standard deduction for most taxpayers who do not itemize deductions on Schedule A of Form 1040 is higher in 2005 than it was in 2004. The amount depends on your filing status. If your filing status is single or married filing separately your standard deduction is $5,000. If your filing status is married filing jointly or qualifying widow(er) with dependent child your standard deduction is $10,000. If your filing status is head of household your standard deduction is $7,300.

Exemption Amount Increases. The amount you can deduct for each personal 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 a certain amount. The amount at which this phaseout begins depends on your filing status. For 2005, the phaseout begins at $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)s.

Limit on Itemized Deductions. You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $145,950 ($72,975 if you are married filing separately).

Taxes, interest, gifts to charity, job expenses and most other miscellaneous deductions are subject to the overall limit on itemized deductions. The following Schedule A (Form 1040) deductions are not subject to the overall limit on itemized deductions: Medical and dental expenses, investment interest expense, gifts by cash or check made after August 27, 2005, that you elect to treat as qualified contributions, casualty and theft losses from personal use property, casualty and theft losses from income-producing property and gambling losses.

Continued next week.

This column is offered as a public service with the understanding that each person's tax situation is different; and that you should consult your CPA before taking any action based upon comments made in this article. Call me and I will be happy to explain my “CPA Quality tax preparation at H&R Block Rates”.  I can be reached at 825-2771.