Tax returns for 2005 have new rules

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Dependency exemption
There’s also a new uniform definition for “qualifying child,” which is used for the dependency exemption, head of household filing status, earned income tax credit for lower- and moderate-income working individuals and families, child tax credit, and credit for child and dependent care expenses.

This standardized definition was designed to reduce confusion that sometimes resulted in multiple taxpayers claiming credits and exemptions for the same child. The IRS has devised several “tests” that determine who gets to claim the child, based on the child’s age, relationship to the taxpayer, length of time living with the taxpayer and amount of financial support the child provides. The tests vary with the tax benefit claimed.

Also for 2006, the IRS adjusted the standard mileage to reflect 2005’s increases in the price of gasoline. For business use of vehicles from Jan. 1 to Aug. 31, 2005, the standard mileage rate is 40.5 cents per mile, compared with 37.5 cents a mile in 2004. Beginning on Sept. 1, 2005, the rate rose to 48.5 cents.

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Ceilings for tax-deferred contributions to traditional IRAs have risen from $3,000 to $4,000 for most savers and from $3,500 to $4,500 for those age 50 and older, within certain income restrictions. Ceilings on Roth IRA contributions — which are taxed, although later distributions from the Roth aren’t — also increased.

Inflation adjustments
The IRS also made inflation adjustments for other credits, deductions and tax categories. For example: Each personal and dependency exemption rose to $3,200, up $100 from 2004. The standard deduction is $10,000 for married couples filing a joint return and qualifying widow(er)s, up $300; $5,000 for singles and married individuals filing separately, up $150; and $7,300 for heads of households, up $150.

And the IRS has streamlined state sales tax tables for itemizing taxpayers who choose to take the deduction for state and local sales taxes rather than the deduction for state and local income taxes.

At the IRS Web site, www.irs.gov, taxpayers can get answers to many tax questions, download and print tax forms, track refunds and find links for free electronic filing and hurricane-related tax assistance. The IRS tax information line is 1-800-829-1040 for individuals, 1-800-829-4933 for businesses, 1-866-562-5227 for hurricane victims.

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