Tax Saving
Tips for 2005
Advice from CPAs

• Reduced tax rates, new credits and increased phase-out limits
• Extension of individual and business tax breaks
• New definition of “qualifying child”

• Became effective in 2004
• For individuals with high-deductible health insurance plans and not eligible for Medicare
• Tax-deductible contributions
• Tax-free earnings
• Tax-free distributions for qualified medical expenses

Contributions are limited to the lesser of the plan’s annual deductible or:
• $2,650 for individuals
• $5,250 for families

• $1,000 child tax credit
• Expanded 10% tax bracket
• Marriage penalty relief

Additional Tax Breaks
• One year extension for AMT relief
• $250 above-the-line deduction for qualifying elementary and high school educator expenses – extended through
2005

• Uniform definition of “qualifying child” simplifies code
• New treatment of combat pay for earned income credit and refundable child tax credit

• Married filing jointly
• Married filing separately
• Single
• Head of Household
• Qualifying widow(er)

• 10%
• 15%
• 25%
• 28%
• 33%
• 35%

Filing
Status
Standard
Deduction
• Married filing jointly
• Married filing separately
• Single
• Head of Household
• Qualifying widow(er)
$10,000
$ 5,000
$ 5,000
$ 7,300
$10,000

Taxpayers 65 and older or blind get an additional standard deduction
• Married - $1,000
• Single or Head of Household - $1,250

• An alternative to the standard deduction
• Use when these deductions exceed standard deduction
• Phase-out rules apply
-- Single/joint/head of household --
$145,950
-- Married filing separately --
$72,975

Filing Status Phase-out starts
Phase-out ends
Joint return
Married filing separately
$218,950
Head of Household $182,450
Single $145,950
$109,475
$341,450
$304,950
$268,450
$170,725

Control tax bill by –
• Deferring income, such as bonuses
• Accelerating deductions, such as qualified charitable contributions
• Bunching deductions that are based on a percentage of AGI

• Family
• Education
• Home
• Investments
• Retirement

• Child Credit
• Dependent Care Credit
• Adoption Credit
• Earned Income Credit
• Shifting Income

• Child must be under 17 at year end
• Child must be claimed as a dependent
• $1,000 credit per child
• Reduces tax bill dollar-for-dollar
• Phase-out for higher income families

• Credit of up to $10,630 per eligible child
• Exemption for first $10,630 reimbursed by employer
• Parents adopting special needs child get full credit

• Child must be under 13 and a dependent
• Tax credit from 20% to 35% of qualifying expenses
• Use up to $3,000 of expenses
($6,000 for two or more dependents) to calculate credit
• Not restricted to children

Family Size
Two or more children
One child
Maximum Credit
$4,400
$2,662

• Make gifts to children
• Transfer appreciated stock to children
• Hire your children

•
Hope Credit worth up to $1,500 per student, per year
• Applies to first two years of college only
• Phase-out applies
Single -$43,000 -- $53,000
Joint -$87,000 -- $107,000

•
Lifetime Learning Credit of up to
$2,000 per year
• Applies to undergraduate, graduate and professional courses
• Phase-out applies

• Maximum deduction of $4,000
• No need to itemize
• Covers tuition and fees
• Phase-out applies
Single -- $65,000 - $80,000
Joint -$130,000 - $160,000

• Deduct up to $2,500
• No need to itemize
• No limit on repayment period length
• $50,000 to $65,000 – phase-out range for single filers
• $105,000 to $135,000 – phase-out range for married filing jointly

• Mortgage interest on first and second homes
• Up to $100,000 in home equity loan or line of credit interest
• Points paid on mortgage or refinancing
• Real estate property taxes

• Exclude up to $250,000 in capital gains from sale of home; $500,000 for joint filers
• Must own and use home as principal residence for two out of five years
• Eligible only once every two years
• Reduced exclusion available

• Top dividend tax rate of 15%
• Rate is 5% for taxpayers in 10% and
15% brackets
• Check ex-dividend date
• Does not apply to interest payments

• Maximum tax rate on long-term gains is 15%
• 5% for taxpayers in 10% and 15% brackets
• Asset must be held more than one year
• Does not apply to collectibles

• Capital losses offset capital gains
• $3,000 ($1,500 for single filers) in net capital losses can be deducted against ordinary income
• Beware of wash sale rule

• Contributions help reduce tax bill
• Take advantage of employer matches
• $14,000 is 2005 maximum contribution,
$15,000 in 2006
• $4,000 additional contribution for age 50 and older
• New for 2006 – “Roth 401(k)”

• $4,000 is maximum 2005 contribution
• $500 additional catch-up contribution for age 50 or older
• Phase-out applies
• Open by April 17, 2006

• C Corporation
• S Corporation
• Limited Liability Company
• Partnership
• Sole proprietor

• Deduct up to 100% of the cost of up to
$105,000 in property
• Applies to new or used property
• Equipment must be put into service by
December 31, 2005
• Now applies to software
• Phase-out rules apply

Credits extended through 2005:
• Research and Development
• Welfare to Work
• Work Opportunity

• Deduct 100% of health insurance costs if self-employed
• Defer income and accelerate deductions
• Write off bad debt
• Make the most of business-related deductions – travel, auto, meals and entertainment, interest expenses

• Donate appreciated property and avoid capital gains tax
• Donate clothing, household goods, furniture and deduct fair market value
• Volunteer your time and deduct qualified travel and related expenses

• Reduce taxable income
• Use up remaining 2005 balances
• Over-the-counter drugs are now allowable

AMT triggers:
• Higher than average dependency exemptions
• Large deductions for state and local income taxes and real estate taxes
• High miscellaneous itemized deductions and medical expenses
• Incentive stock options

• Focus on tax savings year-round
• Consider year-end opportunities
• Get help if you need it