From TaxAlmanac

Summary

Revenue Procedure 2005-70, containing a complete rundown of inflation adjustments, is posted on the IRS Web site and will appear in Internal Revenue Bulletin 2005-47, dated Nov. 21, 2005.

Exemption Amount Increases

The amount you can deduct for each exemption has increased from $3,100 in 2004 to $3,200 in 2005.

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 phaseout begins depends on your filing status. For 2005, the phaseout begins at:

• $109,475 for married persons filing separately,
• $145,950 for single individuals,
• $182,450 for heads of household, and
• $218,950 for married persons filing jointly or qualifying widow(er)s.

Standard Deduction Amount Increases

The standard deduction for people 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 person. The 2005 Standard Deduction Tables are shown in Publication 505, Tax Withholding and Estimated Tax.

Earned Income Credit (EIC) Amounts Increase

The following paragraphs explain the changes to the credit for 2005.

Earned income amount. The maximum income you can earn and still get the credit is higher for 2005 than it is for 2004. You may be able to take the credit for 2005 if:

• You have more than one qualifying child and you earn less than $35,263 ($37,263 if married filing jointly),
• You have one qualifying child and you earn less than $31,030 ($33,030 if married filing jointly), or
• You do not have a qualifying child and you earn less than $11,750 ($13,750 if married filing jointly).

The maximum adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount. The maximum investment income you can have in 2005 and still get the credit increases to $2,700.

Standard Mileage Rate

Business-related mileage. For 2005, the standard mileage rate for the cost of operating your vehicle is increased from 37½ cents a mile to 40½ cents a mile for all business miles.

Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Medical and move-related mileage. For 2005, the standard mileage rate for the cost of operating your vehicle for medical reasons or as part of a deductible move is increased from 14 cents a mile to 15 cents a mile. See Transportation under What Medical Expenses Are Includable in Publication 502, Medical and Dental Expenses, or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.

Gift Tax Exemption Increased

The annual gift tax exemption for 2006 will be $12,000, up from $11,000 in 2005.

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 2005 wages subject to the tax increased to $90,000. For Medicare tax, all covered 2005 wages are subject to the tax. For information about these taxes, see Publication 15 (Circular E), Employer's Tax Guide.

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