Broker Check

January 26, 2005

Happy New Year!

The following tax rates and amounts are effective for 2005:

  1. OASDI rate remains at 6.2% but wage base rises to $90,000 from $87,900.
  2. Medicare rate remains at 1.45% and there is no wage limit.
  3. The maximum earnings one can earn before social security benefits will start to be withheld is $31,800 for those under age 65 and six months. Those between age 62 and age 65 and six months can earn $12,000. For each $2 earned above that, $1 of benefits is lost. There is no limit on earnings for those older than 65 and six months. The retirement age for social security continues to rise this year. Those turning 62 this year are affected. They will get reduced benefits if they start receiving payments before they attain age 66. Ultimately, anyone born after 1959 will not get full benefits before age 67. Social Security benefits will rise 2.7%.
  4. Personal exemptions rise to $3,200 from $3,100 and exemptions will begin to phase out at $218,950 of AGI for couples. For singles, $145,950. Taxpayers in the phaseout zones face higher marginal income tax rates. The effect is to add .86% per exemption for taxpayers in the 33% tax bracket. Filers in the 35% bracket effectively pay an extra .91% per exemption. This adds 3.64% to the effective marginal rate for a top bracket family of four. 
  5. Standard deduction will increase to $10,000 plus $1,000 for each spouse 65 or older, up from $9,700. For children age 14 who must file returns, it remains at $750. Can be as high as $4,750 if they have earned income.
  6. Income tax rates are remain at 10%, 15%, 25%, 28%, 33% and 35%. Those in the 15% or lower brackets receive a reduced rate on gains. 15% bracket is doubled for marrieds over singles for 2005-2007.
  7. Federal unemployment Tax Rate (FUTA) rises to 1.1% for NYS employers, remains at .8% for other states.
  8. IRS interest rate on refunds declines to 5% and 6% on taxes owed.
  9. Alternative Minimum Tax rate remains at 26% on first $175,000 of income for marrieds for 2005-2009 and 28% over that. More people will pay this since brackets and exemptions are not indexed and there are fewer deductions allowed. Exemptions remain constant.
  10. Back up withholding rate remains at 30%.
  11. 401(k), 403(b) and 457 contribution pay-in limitation rises to $14,000, up from $13,000, with $4,000 more for employees 50 and older.
  12. Maximum level of pay on which pay-ins to plans can be based upon rises to $210,000, with the maximum pay-in for defined contribution plans rising to $42,000 from $41,000. Percentage of compensation that can be put in remains at 100%. Profit Sharing percentage remains at 25%.
  13. Business meal and entertainment deductibility remains at 50%. Standard business mileage allowance rises to 40.5¢ per mile up from 37.5¢. Medical travel rate rises to 15¢ from 14¢ per mile. Charitable driving rate is still 14¢ a mile.
  14. Federal estate tax exemption remains at $1,500,000. Maximum Estate and Gift rate drops to 47% from 48%. Lifetime gift tax excemption remains at $1,000,000.
  15. Maximum amount of equipment eligible for expense election for small businesses rises to $105,000, from $102,000.
  16. Simplified per diem allowances are up slightly for ‘05. Up to $204 in high cost areas, $129 in others.
  17. Phaseout for IRA deductions start at $70,000 and ends at $80,000 for couples. Phaseout for singles is from $50,000 to $60,000. Contribution limit rises to $4,000. If 50 or older, can contribute up to $4,500.
  18. The interest exclusion on U.S. Savings Bonds redeemed to pay qualified higher education expenses starts to phase out at AGI above $91,850 for marrieds.
  19. Eligible portion of long term care premium rises to $3,400 for those age 70 and older, $2,720 between ages 60 and 70, $1,020 between ages 50 and 60, $510 from 40 to 50 and $270 for age 40 and under, deductible as medical expenses. It is the age at the end of 2004 that counts. Daily limits for payments is $240, up from $230.
  20. Medicare Part B premium rises to $78.20, up from $66.60.
  21. The maximum amount of compensation an employee may elect to defer under a SIMPLE plan rises to $10,000 from $9,000. If employee is born before ‘53, can contribute $12,000.
  22. The nanny tax threshold remains at $1,400. No social security tax is due for domestics paid $1,400 or less this year. It is not indexed for inflation. FUTA is due whenever a domestic employee is paid $1,000 or more in a calendar quarter in the current or prior year.
  23. The exemption from the Kiddie Tax for 2005 remains at $1,600. A parent will be able to elect to include a child’s income on the parent’s return for 2005 if the child’s income is more than $800 and less than $8,000.
  24. Low and middle income savers can still get a tax credit of up to $1,000 for contributions made to IRAs and qualified plans. Credit disappears for MFJ when AGI hits $50,000, $25,000 for singles.
  25. Adoption tax credit rises to 100% of up to $10,630 of expenses. Phaseout starts at $159,450 AGI.
  26. Hope and Lifetime Learning credit phaseout for MFJ starts at $87,000, $43,000 for singles.
  27. Gift tax exclusion remains at $11,000 per donee for gifts made in 2005.
  28. Business can deduct 3% of net income earned from U.S. production in 2005
  29. First year depreciation for autos declines to $2,960 from 10,610 as special 50% first year depreciation expires.
  30. The limit on deducting payins to Health Savings Accounts goes up to $5,250 for family coverage and $2,650 for individual coverage. Account owners born before 1951 can put in an additional $600. Ceiling on out of pocket cost rises to $10,200 for family coverage and $5,100 for individual coverage.
  31. Credit for state inheritance tax payments is eliminated. It has turned into an estae tax deduction. Kiplinger Tax Letter 12/30/04 
  32. The up to $250 above the line deduction for teachers' out of pocket classroom related expenses is extended through 2005.

Jobs and Outsourcing

For the record, one of the big fears and biggest political debates is over the outsourcing of U.S. jobs to China and India. Studies show the U.S. gains 8 million gross jobs each quarter, it loses just 55,000 to other countries. IBD 1/3/05 p. A22

2004 Charitable Deduction Time Period Extended

2004 Charitable Deduction Time Period Extended to January 31, 2005 for those donations to and victims of the Southeast Asia Tsunami. Undetermined is how to prove the contribution went toward Tsunami relief. NYT 1/5
As always, if you have any questions about these or any other matters, do not hesitate to call me. 
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