2005 Tax Law Changes

The following is a list (in layman's terms) of tax law changes that could concern a large number of people (updated January 2005 from the IRS website). If these items affect you be sure to get the details when you prepare your tax return early next year.

The Educators' Deduction that expired at the end of 2003 has been restored for two more years. The IRS form (available on the irs.gov site) IR-2004-124 has information.

The Clean Fuel Vehicle Deduction has been retained at the $2,000 level through 2005. The maximum amount of this deduction was scheduled to drop, but it will not. See IR-2004-125 for more information on this deduction and the latest vehicles that qualify.

The Child Tax Credit: when filing last year (spring 2004), taxpayers with a credit amount more than their tax paid could get a refund of the difference up to 10 percent of the amount by which their 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for this year meaning a larger refund for many of these taxpayers.

Combat Pay: some military personnel who receive combat pay will get larger tax credits because of two law changes. Changes to tax laws now count excludable combat pay as income when figuring the Child Tax Credit. Other changes give taxpayers the choice of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit (EITC). Note: you can count combat pay as income when calculating these credits and still exclude combat pay from your taxable income.

You can find out more about the effect of excludable income on the EITC, on the irs.gov website, under Q&A-37 in "Miscellaneous Provisions - Combat Zone Service." For other details on combat pay see "Military Pay Exclusion - Combat Zone Service."

Sales Tax Deduction - Taxpayers itemizing deductions will now have a choice of claiming a state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns. Optional tables are available on the IRS website, which can be used to determine your deduction amount; relieving you of the need to save receipts throughout the year.

Expense Limit for SUVs - Businesses need to be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) put into service after Oct. 22. Under the American Jobs Creation Act of 2004 businesses cannot take a first-year deduction of more than $25,000 for an SUV. The limit before this date was $100,000. The new limit does not affect any other type of property where the taxpayer expenses the cost instead of depreciating the property.

There are a few other changes that might be relevant to a minor percentage of tax returns. See the IRS website for details. Be sure to keep a browser window open on the IRS.gov site open as you file your 205 tax return.