Earned Income Tax Credit The maximum amount of earned income allowed is higher for 2005 than it was for 2004. A taxpayer may be able to take the credit for 2005 if they: • have more than one qualifying child and earn less than $35,263 ($37,263 if married filing jointly), • have one qualifying child and earn less than $31,030 ($33,030 if married filing jointly), or • do not have a qualifying child and earn less than $11,750 ($13,750 if married filing jointly). The maximum amount of investment income also increased to $2,700. Generally, a qualifying child must meet relationship and residency requirement. Traditional IRA contribution and deduction limit The contribution limit to your traditional IRA for 2005 will be increased to the smaller of the following amounts: • $4,000, or • Your taxable compensation for the year. If you reach age 50 before 2006, the most that can be contributed to your traditional IRA for 2005 will be the smaller of the following amounts: • $4,500, or • Your taxable compensation for the year. For more information, see How Much Can Be Contributed? in chapter 1. Roth IRA contribution limit If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2005 will generally be the lesser of: • $4,000, or • Your taxable compensation for the year. If you are 50 or older in 2005 and contributions on your behalf are made only to Roth IRAs, your contribution limit for 2005 will generally be the lesser of: • $4,500, or • Your taxable compensation for the year. Tax Rate Schedule Schedule X — Single: If taxable income is over-- But not over-- The tax is: $0 $7,300 10% of the amount over $0 $7,300 $29,700 $730 plus 15% of the amount over 7,300 $29,700 $71,950 $4,090.00 plus 25% of the amount over 29,700 $71,950 $150,150 $14,652.50 plus 28% of the amount over 71,950 $150,150 $326,450 $36,548.50 plus 33% of the amount over 150,150 $326,450 no limit $94,727.50 plus 35% of the amount over 326,450 Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er): If taxable income is over-- But not over-- The tax is: $0 $14,600 10% of the amount over $0 $14,600 $59,400 $1,460.00 plus 15% of the amount over 14,600 $59,400 $119,950 $8,180 plus 25% of the amount over 59,400 $119,950 $182,800 $23,317.50 plus 28% of the amount over 119,950 $182,800 $326,450 $40,915.50 plus 33% of the amount over 182,800 $326,450 no limit $88,320.00 plus 35% of the amount over 326,450 Schedule Y-2 — Married Filing Separately: If taxable income is over-- But not over-- The tax is: $0 $7,300 10% of the amount over $0 $7,300 $29,700 $730 plus 15% of the amount over 7,300 $29,700 $59,975 $4,090 plus 25% of the amount over 29,700 $59,975 $91,400 $11,658.75 plus 28% of the amount over 59,975 $91,400 $163,225 $20,457.75 plus 33% of the amount over 91,400 $163,225 no limit $44,160.00 plus 35% of the amount over 163,225 Schedule Z — Head of Household: If taxable income is over-- But not over-- The tax is: $0 $10,450 10% of the amount over $0 $10,450 $39,800 $1,045 plus 15% of the amount over 10,450 $39,800 $102,800 $5,447.50 plus 25% of the amount over 39,800 $102,800 $166,450 $21,197.50 plus 28% of the amount over 102,800 $166,450 $326,450 $39,019.50 plus 33% of the amount over 166,450 $326,450 no limit $91,819.50 plus 35% of the amount over 326,450 Standard Mileage Rates For tax years beginning in 2005, the allowable deductions for the standard mileage rate for the period January 1, 2005, through August 31, 2005, are as follows: • Business miles: The standard mileage rate for the cost of operating your car becomes 44.5 cents a mile for all business miles driven. • Charitable services: The standard mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization is 14 cents a mile. • Charitable services: Hurricane Katrina relief services. If you used your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 29 cents a mile for miles driven after August 24, 2005, and before September 1, 2005. • Medical reasons: The standard mileage rate allowed for use of your car for medical reasons is 15 cents a mile. • Moving: The standard mileage rate for determining moving expenses is 15 cents a mile. The allowable deductions for the standard mileage rate for the period September 1, 2005, through December 31, 2005, are as follows: • Business miles: The standard mileage rate for the cost of operating your car becomes 48.5 cents a mile for all business miles driven. • Charitable services: The standard mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization remains at 14 cents a mile. • Charitable services: Hurricane Katrina relief services. If you used your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 34 cents a mile. • Medical reasons: The standard mileage rate allowed for use of your car for medical reasons is 22 cents a mile. • Moving: The standard mileage rate for determining moving expenses is 22 cents a mile. Standard Deduction Amount Increased The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2005 than it was for 2004. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. The basic standard deduction amounts for 2005 are: • Head of household — $7,300 • Married taxpayers filing jointly and qualifying widow(er)s — $10,000 • Married taxpayers filing separately — $5,000 • Single — $5,000 The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $800 or the sum of $250 and the individual's earned income. Exemption Amount Increased The amount you can deduct for each exemption has increased from $3,200 in 2005 to $3,300 in 2006. You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phase-out begins depends on your filing status. For 2006, the phase-out begins at: • $112,875 for married persons filing separately, • $150,500 for single individuals, • $188,150 for heads of household, and • $225,750 for married persons filing jointly or qualifying widow(er)s. Social Security and Medicare Taxes For 2005, the employer and employee will continue to pay: 1.6.2% each for social security tax (old-age, survivors, and disability insurance), and 2.1.45% each for Medicare tax (hospital insurance). Wage limits: For social security tax, the maximum amount of 2005 wages subject to the tax is $90,000. For Medicare tax, all covered 2005 wages are subject to the tax. Uniform Definition of a Qualifying Child Beginning in 2005, one definition of a qualifying child will apply for each of the following tax benefits. • Dependency exemption. • Head of household filing status. • Earned income credit (EIC). • Child tax credit. • Credit for child and dependent care expenses. Tests to Meet In general, all four of the following tests must be met to claim someone as a qualifying child. Relationship Test The child must be your child (including an adopted child, stepchild, or eligible foster child), brother, sister, stepbrother, stepsister, or a descendent of one of these relatives. An adopted child includes a child lawfully placed with you for legal adoption even if the adoption is not final. An eligible foster child is any child who is placed with you by an authorized placement agency or by judgments, decree, or other order of any court of competent jurisdiction. Residency Test A child must live with you for more than half of the year. Temporary absences for special circumstances, such as for school, vacation, medical care, military service, or detention in a juvenile facility count as time lived at home. A child who was born or died during the year is considered to have lived with you for the entire year if your home was the child's home for the entire time he or she was alive during the year. Also, exceptions apply, in certain cases, for children of divorced or separated parents and parents of kidnapped children. Age Test A child must be under a certain age (depending on the tax benefit) to be your qualifying child. Dependency exemption, head of household filing status, and EIC For purposes of these tax benefits, a child must be under the age of 19 at the end of the year, or under age 24 at the end of 2005 if a student, or any age if permanently and totally disabled. A student is any child who, during any 5 months of the year: 1. Was enrolled as a full-time student at a school, or 2. Took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or night school. Child tax credit For purposes of the child tax credit, a child must be under the age of 17. Credit for child and dependent care expenses For purposes of the credit for child and dependent care expenses, a child must be under the age of 13 or any age if permanently and totally disabled. Support Test A child cannot have provided over half of his or her own support during the year. Exception For purposes of the EIC only, the Support test does not apply. Qualifying Child of More Than One Person Sometimes a child meets the tests to be a qualifying child of more than one person. However, only one person can treat that child as a qualifying child. If you and someone else (other than your spouse if filing jointly) have the same qualifying child, you and the other person(s) can decide who will claim the child. If you cannot agree on who will claim the child and more than one person files a return using the same child, the IRS may disallow one or more of the claims using the tie-breaker rule explained in Table 1, next. When More Than One Person Files a Return Claiming the Same Qualifying Child (Tie-Breaker Rule) IF . . . THEN the child will be treated as the qualifying child of the. . . only one of the persons is the child's parent, parent. both persons are the child's parent, parent with whom the child lived for the longer period of time. If the child lived with each parent for the same amount of time, then the child will be treated as the qualifying child of the parent with the highest adjusted gross income (AGI). none of the persons are the child's parent, person with the highest adjusted gross income.