|Newsletter Volume 15 (December 2005)|
Dear Clients, Family & Friends,
It seems like only a few months ago I was writing this newsletter for last year. Time certainly does fly - I MUST be having fun!
Congress has certainly been having fun, too. I am not referring to the scandals, indictments & their other usual shenanigans but some of the other stuff they have done that affects many of us tax-wise. We have a new (and very weird) credit for certain fuel efficient vehicles, credits (hard to calculate and not very generous) for making your home more energy efficient, a greatly increased mileage deduction for business use of autos (only for the last four months of the year) and liberalizing of the Flexible Spending Account rules to name a few. More on these items and other tax changes are detailed in this newsletter.
Earlier this year I sent to clients whose e-mail addresses I have, two e-mail newsletters. If you did not receive them, please make sure I have your correct email address by writing to my email (below) & I will add you to the list. Hopefully they will be available on my website (also below) soon (if my future son-in-law continues to maintain my site).
In one of those newsletters I mentioned “T he Hot Women of Edmonds 2006 Calendar” that my wife Nancy and eleven like minded Edmonds business women put together to help support a transitional housing facility for less fortunate women. Some of those calendars are still available from my office for a mere $10 tax deductible donation to the YWCA. Please contact me if you would like one (or more).
In December of last year we witnessed the devastation of the Tsunami in my native Indonesia & throughout southern Asia. Congress allowed people who donated to the relief efforts through January 2005 to deduct those donations on their 2004 taxes. Many of you did. When we prepare your 2005 tax return, please remember NOT to include those donations in your 2005 deductions.
Congress also finally decided what a child is. Prior to this year we had a different definition of a child for the dependency exemption, the tuition credit, the earned income credit, head of household status and the dependent care credit. Sometimes your kid was apparently NOT your kid! Good job guys, what's next - finally a definition of what is is?
Some of the changes in law mentioned below affect 2005 & some not until 2006 and some are good for both years - I will point out the applicable years when necessary.
Sales Tax Deduction : This expires at the end of 2005 (so far). We enjoyed it for 2004 and again this year but it is currently scheduled to sunset soon unless Congress extends it. Please add up the sales taxes you paid in ‘05 for EVERYTHING or we can use the IRS tables. We can also add to those tables the sales taxes on certain purchases - cars, planes, boats, RVs & home improvements (note - last year none of you told me you bought an airplane - c'mon folks, Boeing needs our help!). Of course, when you read about the car credits below, you will have to decide on buying a new car before the end of the year for the sales tax deduction which may not be renewed, or next year if you are looking for the credit – sorry.
Energy Efficient Home Improvements : Credits for home energy enhancements have returned (I can't remember the last time we had them). Solar heating panels, qualified fuel cells, water heaters, skylights & windows are among the items that may qualify. This is a 2006 measure. The credits can add up to over $4000 but are VERY restrictive. Please check with me if you are going to undertake this kind of action to see what qualifies & for how much of a credit.Energy Efficient Autos : This one is a lot of fun! The deduction goes away at the end of this year for the Hybrid cars & is being replaced in January with a credit. So, if you are shopping for a car soon, don't listen to the salesman's spiel about the deduction now when in January the
credit may be better. The current law allows for a $2000 deduction for a hybrid car. The credits are based on the fuel savings of the new car over its lifetime, the vehicle's weight and the fuel economy (the difference between the new model year & the 2002 mileage). This credit also phases out after the manufacturer sells 60,000 units (who thinks this stuff up??) Please remember these provisions are only on new cars - not used.
Teacher's costs : For the last few years, teachers have been able to deduct up to $250 in out of pocket costs incurred on the job. This is scheduled to go away at the end of this year, so if you have not spent the money yet & will need to soon, go ahead & do so.(Of course they may extend this one too as they have for the last two years.)
Health Savings Accounts : I told you last year about this great new, less expensive health insurance. I still like it but not as much because my own insurance company (who I recommended to many of you) - Premera's Life Wise - raised my premium rates 34% after only the first year! You would think they would have given me a discount.
Leasehold Improvements : For businesses renting space, you may depreciate improvements made prior to 12-31-05 over 15 years instead of 39.5 years.
Flexible Spending Accounts : If you have one of these ‘cafeteria plans' at work you know you have had to spend the money in the account by year's end. Now you have until March 15 of the following year only if your employer changes the plan .
Vehicle Mileage : The mileage rate for business use of a vehicle was raised in January of 2005 from 37.5/mile to 40.5. A nice increase. However, with the surge in gas prices due do Hurricane Katrina gouging, the IRS has raised the rate to 48.5 cents/mile from September 1 through the end of the year. Of course they have not yet announced the 2006 rate. Due to the two tier rate for 2005, please be ready to split the miles you will tell me about between the first eight and the last four months of 2005.
Hurricane Katrina : There is normally a 50% of Adjusted Gross Income (AGI) limit placed of charitable contributions. Congress has raised that just for 2005 to 100% of AGI because of the hurricane. The donations do not have to be for Katrina related charities, though.
401(k) news : For 2006 there is yet another option for retirement & I think this one is great! It is a Roth 401(k). Like the Roth IRA, any contributions are not tax deductible but grow tax free & when taken as retirement income, the distributions are tax free. For someone under 50 years old the maximum contribution is $15,000 for 2006. If you are over 50, you can put in $20,000. This is a terrific planning opportunity as I doubt we are ever going to see lower tax rates than we have today & the old adage about retirees being in a lower bracket than they are while they work is not true for many people. If you are an employee of a company with a 401(k) plan now, the firm needs to amend their plan prior to you participating in it. If you own your own small business and do not have a 410(k) yet, you might want to think seriously about establishing one prior to Dec. 31, 2006.Manufacturer's Deduction : There is a new deduction for US producers of products. This includes builders, most other contractors, software developers, engineering & architectural services and get this - “certain music recordings ”. It is a rather complicated calculation but could be a good deduction if you are engaged in production in the US. The deduction is 3% for 2005 & 2006, 6% for the next two years & maxes out at 9% after that. You need to keep good records of income & expenses. Please call me for the details.
Deduction Phase-out : If you are one of the ‘lucky' ones who is not allowed to deduct all your otherwise deductible expenses because your income is ‘too high', relief is on its way next year. If so & you can control your income & expense stream, it would be worthwhile to push these into 2006.
If you have questions about any of these items, or other tax issues, please call me. You can also call me to confirm or schedule your appointment for next spring.
See you soon,
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