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CHANGES IN TAX LAWS AND SPECIAL TAX ISSUES THAT MAY AFFECT THE PREPARATION OF 2005 INCOME TAX RETURNS

Recent changes in federal tax laws will impact many federal tax returns prepared in 2006 … in one way or another.

LOWER TAX RATES

Last year’s tax rate brackets of 10%, 15%, 25%, 28%, 33%, and 35% remain in place.  The 10% and 15% tax brackets have been widened, thus lowering taxes for lower income persons.  The broadening of the 15% bracket has provided “marriage penalty” relief for those persons married, filing joint returns.

For most taxpayers, if your 2005 gross income (does not include social security payments) is under the following levels, you do not have to file a federal tax return: 

OPTIONAL STATE SALES TAX AS ITEMIZED DEDUCTION

New for 2005 only is the ability to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction.  You cannot deduct both.  While this deduction will mainly benefit taxpayers with a state sales tax but no income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) . . . it may give a larger deduction to any taxpayer who paid more in sales taxes than income taxes.  For example, a person may have bought a new car, boosting the sales tax total. 

If this election benefits you, a taxpayer may deduct actual sales taxes paid [which would require you to have a sales slip for every purchase made during the year], or a taxpayer may utilize the tables published by the Internal Revenue Service.  The IRS provides a table for the amount of sales tax that can be deducted, with different amounts deductible based upon income levels.  You may add to the table amount any sales (or use) tax paid on a motor vehicle, and a boat, home (including mobile or prefabricated), or home building materials -- as well as additional local option and school infrastructure sales taxes.

LOWER CAPITAL GAINS TAX RATES

Capital gain tax rates remain at a maximum of 15% (down from 20%) for taxpayers in higher income brackets, and 5% for taxpayers in the 10% or 15% tax brackets. 

DIVIDEND INCOME STILL TAXED AT CAPITAL GAIN RATES

The top federal tax for “qualified stock dividends” received by an individual at any time during 2005 is reduced to 15% -- and the rate is reduced to 5% for those persons whose incomes fall in 10% or 15% rate brackets.  The Forms 1099 taxpayers will receive will indicate the total amount of “qualified” dividends received.

INCREASE IN § 179 DEDUCTION – FAST DEPRECIATION WRITE-OFF

The maximum dollar amount that may be deducted under §179 has been increased to $105,000 for qualifying property placed in service in 2005.  In 2006 the amount will be $108,000; and in 2007 it will be $100,000.  As before, the deduction is limited to the aggregate taxable income of the taxpayer actively engaged in a trade or business.  The maximum dollar amount that may be deducted will return to $25,000 in 2008.

CHANGES IN 30% OR 50% FIRST YEAR (BONUS) DEPRECIATION

Generally, the provisions for the 30% or 50% extra first year “bonus” depreciation expired for property placed in service after December 31, 2004. 

However , the additional 30% or 50% first year “bonus” depreciation provision was extended only for property having a recovery period of at least 10 years, but not more than 20 years . 

INCREASED IRA DEDUCTIONS

Each taxpayer can contribute up to $4,000 to either a traditional or Roth IRA for 2005 subject in some cases to the amount of your adjusted gross income.  If you are age 50 or older you can make an additional $500 “catch-up” contribution to traditional or Roth IRAs for a total of $4,500.  You have until April 15, 2006, to make these contributions.

SAVER’S TAX CREDIT

The “saver’s credit” (new in 2002) may benefit single taxpayers with adjusted gross incomes of $25,000 or less, and married taxpayers (filing jointly) with adjusted gross incomes of $50,000 or less.

If you make IRA contributions or elective deferrals to 401(k) or other qualified plans (such as a Keogh or SEP plan), you may qualify for a tax credit that reduces federal income tax of up to $2,000 for married taxpayers and up to $1,000 for single taxpayers.

EDUCATION CREDITS AND STUDENT LOAN INTEREST

You may be able to claim a Hope Credit (reducing federal income taxes) of up to $1,500 per student for tuition and fees for each of the first two years of post-secondary education paid during 2005 for yourself or a dependent providing the student had not completed more than the first two years of college by January 1, 2005. 

Also, the Lifetime Learning Credit (reducing federal income taxes) is available, equal to 20% of the first $10,000 of tuition and fees expenses up to a maximum credit of $2,000, paid in 2005.  You may not, however, use the expenses for any student for whom you use the Hope Credit in the same year. 

The Higher Education Deduction is again available for 2005.  A deduction (that reduces adjusted gross income) may be available up to $4,000 for tuition and fees.  The deduction is subject to certain adjusted gross income rules, and may not be used if the Hope or Lifetime Learning Credithas been used for a student.  The deduction (rather than a credit) may be helpful for taxpayers whose adjusted gross income levels exceed the amounts permitted for the Hope or Lifetime Learning Credits.

Student loan interest expenses of up to $2,500 may be used to reduce taxable income.  The deduction however is limited and is phased out if adjusted gross income exceeds $50,000 for a single taxpayer or $105,000 if married filing jointly. 

HEALTH AND LONG-TERM CARE INSURANCE DEDUCTIBILITY

Please make sure you provide us with complete information concerning the total amount paid in 2005 for health insurance premiums for each member of your family.  A portion of the premiums paid for long-term care insurance may be deductible on federal returns (as an itemized deduction) as health insurance premiums.  The portion of long-term care premiums that is deductible depends on the age of each member of the family as of December 31, 2005 [ranging from $270 to $1020 up to age 60; $2,720 for ages 61-70; and $3,400 if over age 70].  Thus, long-term care premiums must be allocated between husband and wife on the worksheet.

For self-employed persons in 2005, 100% of the total of health insurance and eligible long-term care premiums is fully deductible on the federal returns without itemizing. 

The total of your health insurance premiums and all eligible long-term care insurance premiums is also 100% deductible for all individuals in computing net income on your Iowa return , without itemizing.  Thus, it is very important that you provide us with information on your insurance premiums, even if you do not itemize deductions.

MISCELLANEOUS NOTES OF TAX INTEREST

1. On Iowa returns a partial exclusion from income is provided for the receipt of pensions, annuities, self-employed retirement plans (such as Keogh), deferred compensation, IRA distributions, and other retirement benefits ( excluding social security ) by taxpayers 55 or older.  If your tax status is married filing jointly, the exclusion is up to $12,000.  For all other tax filing statuses the exclusion is up to $6,000.
   
   
2. Spousal IRA.   Deductible IRA contributions of up to $4,000 can be made for each spouse (including a spouse not employed outside the home ) if the combined compensation of both spouses is at least equal to the total contributed amount, and certain other rules are met.
   
   
3. Deductions for charitable contributions of $250 or more (each) are not allowed unless you have a written statement acknowledging the contribution from the charitable organization .
   
   
4. The business rate for automobile mileage between January 1, and August 31, 2005, is 40.5 cents per mile, and between September 1, and December 31, 2005, the rate is 48.5 cents per mile.  The rate will change to 44.5 cents in 2006.
   
   
5. If you claim the credit for child care for children under 13 you must provide the name, address, and social security number or E.I.N. for each child care provider.
   
   
6. The maximum amount of employment-related expenses for child care that qualify for the credit for child care is $3,000 for one child, and $6,000 for two or more children.
   
   
7. Single persons with earned income of less than $31,030 with one dependent child ($35,263 if you have two or more children), may be entitled to the earned income credit.  The credit also is available to those 25 years old or older, without children, who earned less than $11,750.  Higher amounts apply to those married filing jointly.
   
   
8. A “Clean-Fuel Vehicle Deduction” of up to $2,000 is available to taxpayers who purchased a vehicle in 2005 for personal use that utilizes “clean fuels” such as natural gas, liquefied petroleum gas, hydrogen, electricity and any other fuel that is 85% or more alcohol or ether.  For example, a qualified vehicle is a Toyota Prius or Highlander Hybrid; Ford Escape Hybrid; Honda Insight, Civic Hybrid, or Accord Hybrid; Lexus RX 400h; or Mercury Mariner Hybrid.  (This law changes for 2006.)
   
   
9. Taxpayers depreciating vehicles for business use should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service during 2005.  Businesses cannot take a first-year deduction of more than $25,000 for an SUV.  The business would depreciate the remaining cost. 

TUITION, TEXTBOOK AND ACTIVITY FEE CREDIT FOR IOWA TAXPAYERS

Taxpayers who have one or more dependent children attending grades K through 12 in an Iowa public or private accredited school may claim a twenty-five (25%) percent tax credit on the Iowa return for the first $1,000 paid for tuition, textbooks and activity fees for each dependent .  The definition of textbooks has been expanded to include books and materials for extracurricular activities as follows:

The cost of the following items are eligible for the credit:  activity fees; booster club dues; cleats for football, baseball, soccer, track, and golf shoes; costumes for a play; special clothing for a concert; rental of musical instruments for school or band or for lessons at a school; sheet music used in a school; cost of basic materials for shop class or mechanics class; and band, hockey and football uniforms. 

The cost of the following items are not eligible for the credit:  basketball shoes; purchase of musical instruments; clothing for a play or concert that is suitable for everyday wear; travel expenses for trips; cost of music lessons outside of school; and expenditures for wood or materials for making furniture or repair of personal vehicles.

DOMESTIC HOUSEHOLD EMPLOYEES

If you employed domestic employees in 2005 (e.g. cleaning persons, health aides, persons providing child care in your own home, etc.) and paid wages totaling $1,400 or more , you are required to pay employment taxes on these wages -- and the payment is made with your individual federal income tax return.  You should bring in all information regarding domestic employees (e.g. name, address, social security number, gross wages, etc.) with your regular income tax information.  Please note that Forms W-2 will need to be prepared and filed by January 31 for these employees regardless of the amount of wages paid.

1099 AND WAGE REPORTS DUE JANUARY 31

If you are required to issue Forms 1099 or W-2 in connection with your business or farm operation, please remember that these documents must be sent to the person paid on or before January 31, 2006.  If your tax appointment is after this date, please bring all necessary information to the office before January 31 so the proper reports can be prepared and filed by the due date.  Failure to comply with these information report-filing requirements can result in a penalty of $100 for each report not filed.

As in the past, if you have paid wages for agricultural labor during the year in the amount of less than $150, you do not have to pay social security tax on the wages.  However , if all of your agricultural wages total $2,500 or more, you must pay social security taxes on all employees ... whether a particular employee earned $25, or $125, or $1,000.

Agricultural wages, which are subject to social security taxes, also are subject to federal and state income tax withholding. You should contact the office if you have any questions.

COST BASIS FOR STOCK OR MUTUAL FUNDS SOLD

To correctly compute the capital gain on the sale of any stock or mutual fund, you must provide us with cost basis information .  This is the original cost plus any brokerage fees.  If there have been dividend reinvestments, we need information on all dividends reinvested each year you held the stock or fund. 

2005 FEDERAL INCOME TAX BRACKETS

-- December 20, 2005

To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.