October 2005 Tax Newsletter
New Business: IRS increases standard mileage rates
On September 9, the IRS
announced an increase in the optional standard mileage rates for the last four
months of 2005. For business miles driven between September 1 and December 31,
2005, the rate increases to 48.5 cents a mile, up from 40.5 cents a mile for
the previous eight months of 2005.
The new four-month rate for
medical and moving expenses is 22 cents a mile, up from 15 cents for the
previous eight months.
The rate for driving connected
with charitable activities remains unchanged at 14 cents a mile since that rate
is set by law and not adjusted by the IRS as vehicle operating costs fluctuate.
However, the recent Hurricane Katrina relief legislation increased the mileage
rate for charitable driving done for hurricane relief activities to 70% of the
business mileage rate.
The gift tax exclusion – use it or lose
it!
Did you know that this year you
can give gifts of up to $11,000 to as many individuals as you want without
being liable for gift tax? Normally, any gift you make counts towards your
lifetime exemption from gift and estate taxes. That’s so you don’t
just give away your estate shortly before death to avoid estate taxes.
But each year you can make an
unlimited number of gifts free of tax, provided they’re below a certain
amount. The limit for 2005 is $11,000 per gift. A husband and wife each have
their own separate limit, so they can jointly give up to $22,000 to any one
person.
You can put the gift exclusion
to good use in several situations. For example, you could use a multi-year gift
program to decrease the size of your estate and reduce estate taxes. A married
couple giving to each of their three children could reduce their estate by a
total of $66,000 every year, for example.
You could also use the gift
exclusion in an income-shifting strategy. You could make gifts of
income-generating assets to your child, who is in a lower tax bracket. If done
carefully to avoid the “kiddie tax,” the
result can be a lower overall tax bill for the family unit.
Two types of gifts are exempt
from the $11,000 limit. You can make unlimited gifts for tuition expenses or
medical expenses paid on behalf of any person, provided you make the payments directly
to the educational institution or health care provider.
Contact our office for advice
on how the 2005 gift exclusion could work for you.
What's New: Treasury will start selling 30-year bonds again
The Treasury Department
announced that it will begin selling 30-year Treasury bonds again in 2006.
Absent from the scene for the past four years, the 30-year bond will again be
sold twice a year according to a schedule to be released by the Treasury
Department next month.
The long bonds are advantageous
to the government because the current low interest rates will let it lock in these
low rates for decades on current borrowing. Institutional investors also like
the guaranteed rate on long bonds that allows them to plan for obligations that
will come due decades from now.
Since interest rates over such
a long period are very hard to predict, 30-year bonds are less attractive to
individual investors who may suffer very low returns if market interest rates
increase significantly during this period.
Check your credit information: Annual reports are free
It’s a good idea to
review your credit information periodically. You might spot credit inquiries or
applications that you didn’t make — a sign that you could be a
victim of identity theft. Or you might find errors in your personal data or
payment history, errors that could cause lenders to deny you credit or charge
you a higher interest rate.
As of last month, all consumers
can now request one free copy of their credit report each year. The three major
credit agencies have set up a centralized site to handle requests by phone,
mail, and over the Internet. Access to this site started in Western states last
year and was gradually rolled out across the country.
When you apply for a free copy
of your credit report, you’ll often be offered the chance to receive your
credit score, for a fee. It’s important to know the difference between
the two.
Your credit report shows
personal data and a record of your credit applications and credit usage,
including your payment history. In summary, it shows how often you’ve
applied for credit, how much you owe, and whether you make payments on time.
Each of the three major agencies will have its own report on you.
Your credit score is a single
number, usually ranging from around 300 to over 800. The number is based on
various factors in your credit history. Generally, the higher
the number, the better your credit. You might receive a different score
from each agency, depending on the model they use.
If you’re checking for
fraud or mistakes, you need to see your credit report. This provides the
details of your credit history and enables you to spot mistakes. On the other
hand, knowing your credit score may not tell you much, other than whether
it’s high or low. The score can change from day to day, depending on how
you use credit. Each agency might assign you a different score. And a lender
considering you for credit may use a completely different model, producing yet
another number.
So, before you pay to see your
credit score, consider whether you’d find a free copy of your credit
report more useful.
What's New: Congress passes tax relief for hurricane victims
On September 21, Congress
passed the Katrina Emergency Tax Relief Act of 2005 to provide immediate
assistance to individuals and businesses hit by Hurricane Katrina.
Among the tax relief provided
in this legislation:
* Taxpayers affected by
Hurricane Katrina will be allowed to borrow from qualified plans and to take
penalty-free distributions from their retirement plans.
* Distributions from retirement
plans can be averaged into income over a period of three years, and if amounts
are recontributed to the plans within three years,
amended returns can be filed to claim a refund of taxes paid on the
distributions.
* Employers who hire workers
displaced by Katrina may be eligible for the work opportunity credit of up to
$2,400 per worker. Those employers who continue to pay
workers, even though the business is not operating due to the disaster, may
qualify for the employee retention credit of 40% of up to $
* To encourage charitable
giving, the new law temporarily suspends certain limits on the amount of
charitable deductions a taxpayer can take, and it provides enhanced deductions
for contributions of food and books. It also increases the deduction for
charitable driving to 70% of the rate allowed for business driving.
* Those who provide housing for
displaced victims of Katrina may qualify for an additional $500 personal
exemption, with a four person or $2,000 additional
exemption limit. The additional exemption cannot be taken for family members.
* Tax filing and tax payment
deadlines are extended for those affected by the disaster.
For details on these and other
provisions in the Katrina Emergency Tax Relief Act, give us a call.
Take a Break
A few humorous words to the
wise
* Always read stuff that will
make you look good if you die in the middle of it.
* When everything's coming your
way, you're in the wrong lane.
* Birthdays are good for you.
The more you have, the longer you live.
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.