New Tax Laws for 2006 Tax Season
By Rafique S.M. Ahmed

The progress report of the Internal Revenue Service for the fiscal year ended September 30, 2005 was recently released by the IRS Commissioner Mark W. Everson, who seems destined to work towards three goals: better serving the taxpayers, continuing modernization, and enhancing enforcement activities during his first five-year term.
According to Commissioner Everson, the following analysis shows great improvement by the IRS over the last year:
• Enforcement revenues - the funds received from collection, examination and document matching activities- are up by 10 percent to a record $47.3 billion over the last year.
• Individual tax return audits increased by 20 percent to 1.2 million in 2005.
• Audits of individuals with incomes over $100,000 also surpassed 221,000 - the highest figure in 10 years.
• Audits of small business corporations more than doubled from 7,294 in 2004 to 17,867 in 2005.
• Audits of larger corporations with assets over $10 million increased by 14 percent to 10,878.
Tax laws for tax year 2005 have changed. The following are important changes that may affect your 2005 tax returns:
• You no longer can use Telefile to file your tax returns. There are other IRS options available to file your tax returns electronically.
• A new uniform definition of a qualifying child applies for each of the following tax benefits:
Head of household filing status
Dependency exemption
Child and dependent care credit
Child tax credit
Earned income credit
• The maximum amount of elective deferrals under a salary reduction agreement that could be contributed to a qualified plan increased to $14,000.
• For SIMPLE plans, the amount increased to $10,000. (Age 50 or older $4,500)
• The amount you and your spouse if filing jointly, may be able to deduct as an IRA contribution increased to $4,000. (Age 50or older $4,500).
• The maximum amount of income you can earn and still get EIC increased. The amount depends on your filing status and number of children. The maximum amount of investment income you can have and still be eligible for EIC has increased to $2,700.
• The standard mileage rate for the cost of operating your car increased to 40.5 cents a mile for all business miles driven before September 1, 2005. For business miles driven after August 31, 2005, the rate increased to 48.5 cents a mile.
• The standard mileage rate allowed for use of your car for medical reasons increased to 15 cents per mile driven before September 1, 2005, and to 22 cents per mile driven after August 31, 2005. Same rates apply for moving expenses.
• Deduction for each personal exemption has been increased to $3,200 and is subject to phase out if you have high income.
• Some of your itemized deductions may be limited if your adjusted gross income is greater than $145,950 for married filing jointly. ($72, 975 if married filing separately).
• The adoption credit and the maximum exclusion from income of benefits under an employer’s adoption assistance program have been increased to $10,630.
• The maximum wages subject to social security tax @6.2% increased to $90,000. All wages are subject to Medicare tax @ 1.45%.
• If you donate a vehicle (including a boat or aircraft) to a qualified charitable organization after December 31, 2004, your deduction is limited to the gross proceeds from its sale by the organization. This rule applies if the claimed value of the donated vehicle is more than $500.
• You can now use Form 4868, Application for automatic extension of time to file US individual income tax return to obtain an automatic 6-month extension of time to file your tax return. Four-month automatic extensions have been abolished.
• Forms and publications are available online, or by calling 1-800-tax-form (1-800-829-3676). The IRS Tax Fax offers forms and instructions by return fax. You need to call 703-368-9694 from a fax machine. You can also call the writer’s office at (909) 599-1412 for assistance.

 

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