Your Money’s Alive in 2005

By Merra Lee Moffitt

Uncle Sam has given us a few gifts this year. Use them as that final catalyst to boost your retirement plan or to find the final dollars for that expansion plan. So get yourself going in 2005. As always, my bias is in helping the unsung heroes of our society, the business owners! Therefore, this is not a complete list of everything Uncle Sam did last year. Most items below apply to everyone, but those available only to business owners are signified with a in front of them.

For 2005, Congress Giveth: (it is a common misconception that the IRS makes tax law)

  • The 401(k) maximum contribution limit is raised to $14,000 (from $13,000). The Catch-Up Provision is raised to $4,000. So if you are over 50, you can put away $18,000, before taxes!
     
  • The SIMPLE IRA maximum contribution limit is raised to $10,000 (from $9,000). The Catch-Up Provision has been increased to $2,000. So if you are over 50, you can now sock away $12,000 before taxes! Plus any employer match!
     
  • The ROTH and Traditional IRA contribution limits have been raised a whopping 33% to $4,000. The Catch-Up Provision remains $500.
     
  • The IRA deductibility phases out at a slightly higher income level this year at 60K/80K/160K (Single/Married/Non-covered Spouse).
     
  • The mileage rate for business use now goes to 40.5 cents/mile! Wow! I guess they noticed the price of gas lately.
     
  • The 10% tax CREDIT for a clean fuel qualified electric vehicle was extended and is still $4,000. It is scheduled to end in 2006.
     
  • The child tax credit remains at $1,000 per child. It was scheduled to go down to $700, but they changed their minds until 2009. This is not new, but remember you can hire your kids, pay them and take the deduction. Double points if you put it into their 529 and let it accrue tax-free for college. Triple points if added to Roth IRA and it accrues tax free for their lifetime!
     
  • The top federal estate tax rate dropped to 47% (from 48%). But if your elderly parents still own the business, tell them to stick around because it goes down to 45% in2007-2009. Better still, they should be sure that their estate plans are in order to minimize taxes whenever they might pass away AND to be sure that their estate goes where they want it to go.
     
  • The section 179 Business expense is $105,000 for 2005. This can be used for all kinds of equipment, including trucks, and now software. Off the shelf computer software was just added to the definition. Real estate is excluded.
     
  • You may now itemize state sales taxes if you think they exceed your regular state income taxes and take that deduction on your federal tax instead. Taxes in Pennsylvania are high enough that this will probably NOT work in your favor unless you are buying a big ticket item this year such as a car or boat (hey, invite me!)

And Congress Taketh Away:

  • The marginal tax rates set point has been increased about 2.2% so if you were lucky enough to get a raise LARGER than that AND you were almost at the CEILING before, you will NOT have a smiley face come tax time! This is another good reason to check your withholdings and estimated taxes.
     
  • The Alternative Minimum Tax level is NOT raised. This could be called the Stealth Tax because basically if you make more than the AMT rate, $58,000 jointly, you LOSE some of the deductibility of whatever Congress thinks is a tax preference item. Thus, some of the exclusions, deductions and credits you THOUGHT you were entitled to might now be gone. More and more people are being caught by this tax once-thought for the rich. $58,000 per year is rich???
     
  • If you donate a vehicle to charity, beginning in 2005, you may ONLY deduct the amount that the charity ACTUALLY sells your vehicle for, which they must substantiate with written acknowledgement and containing a certification of sale.
     
  • The IRS now treats an SUV as a “luxury” vehicle for the purposes of the 179 equipment deduction. Thus the maximum allowable deduction is $25,000 for an SUV. Trucks and vans are not affected. There is a whole section on how to tell the difference, if you are not sure. As an SUV owner and devotee myself, I can imagine Marty will have fun explaining this one.

At least, on the whole there is way more good news than bad news. Call me at 610-488-7353 so we can chat to see how these IRS gifts can best benefit your business and your family in 2005. 

Because I am not a Tax advisor, nor do I play one on TV, I have asked Martin Darocha, CPA, to be my tax advisor. Thanks, Marty!  Marty, will be pleased to meet with you to discuss the above or other matters.

Your Money’s Alive in 2005,
M e r r a  L e e
 

Disclaimer: Neither Marty nor I are in any way offering tax advice via the above information. Each individual’s tax circumstances are unique.  Each individual should contact and consult with his or her own professional tax advisor prior to taking action on the above information. Whew! Tax details were confirmed using the Forefield Advisor website.

As a SCORE Counselor/trainer, small business profitability consultant, Financial Advisor and active member of the Berks chamber’s small business programs, Merra Lee Moffitt keeps her eye on the pulse of Berks Business.  Having created and built her own 30-person company, she KNOWS how to solve small business problems. A recognized source on Berks Business issues, Merra Lee can be reached at 610-488-7353 or MerraLee@CaptureProfits.com.  © Copyright 2005 Merra Lee Moffitt.