News

Overview of 2005-06 Tax Law Changes

13 September 2004

Plan Now for 2005-06 Tax Law Changes

If you’re not thinking ahead, you’re falling behind.

At The Rigby Group, these words are far more than a marketing slogan — planning for the future is integral to every aspect of our business. That’s why it’s important for us to communicate tax and financial law changes, as well as major legal/regulatory decisions, to our clients and other Web site visitors with plenty of time to account for their effects. For assistance with individual or corporate tax planning, contact Eric Rigby.

Tax Law Changes Starting In 2005:

Decreased Child Tax Credit: Taxpayers with a qualifying dependent child are eligible for the child tax credit, which decreases from $1,000 in 2004 to $700 in 2005.

Increased Retirement Contribution Limits:

  • The maximum IRA (traditional or Roth) contribution increases from $3,000 to $4,000 per person.
  • The maximum 401(k) and 403(b) employee contribution increases to $14,000.
  • The maximum SIMPLE employee contribution increases to $10,000.
  • Taxpayers at least 50 before the end of 2005 can increase their contribution limits by the following amounts for the following plans:
    • An additional $4,000 for 401(k), 403(b), salary reduction SEP plans, and 457 plans.
    • An additional $2,000 for SIMPLE plans.

Higher Income Limits for Deductible IRAs: If covered by a retirement plan at work, you can take an IRA deduction if your modified adjusted gross income is less than $80,000 (married filing joint) or $60,000 (single or head of household).

Marriage Penalty: Tax legislation of 2001 and 2003 made changes to reduce the “marriage penalty”; however, these changes expire after 2004, so the tax burden could worsen in 2005 for some couples filing jointly:

*In 2003 and 2004, the standard deduction for married couples is 200% of that for singles. In 2005, the married standard deduction drops back to 175% of the single filer’s deduction. *In 2003 and 2004, the endpoint of the married 15% tax bracket is 200% of that for singles. In 2005, the 15% tax bracket drops back to 180% of the single filer’s amount.

Tax Law Changes Starting In 2006:

Increased Retirement Contribution Limits:

  • The maximum 401(k) and 403(b) employee contribution increases to $15,000.
  • Taxpayers at least 50 before the end of 2006 can increase their contribution limits by the following amounts for the following plans:
    • An additional $5,000 for 401(k), 403(b), salary reduction SEP plans, and 457 plans.
    • An additional $2,500 for SIMPLE plans.
    • An additional $1,000 for IRAs (traditional and Roth).

Higher Income Limits for Deductible IRAs: If you’re covered by a retirement plan at work, you can take an IRA deduction if your modified adjusted gross income is less than $85,000 (married filing joint) or $60,000 (single or head of household).

Decreased Section 179 Expense Deduction: Taxpayers who purchase qualifying business property may elect to deduct the cost of the property (new or used) in the year that it is placed in service. This is referred to as a Section 179 deduction. In the tax years 2003-2005, the maximum amount of property that may be taken as a Section 179 deduction is $100,000. In 2006 and future years, the maximum deduction drops to $25,000.

First-Year Depreciation: Individuals who acquire qualifying property for use in their business are allowed to take an additional 50% depreciation deduction for property purchased in 2003, 2004, or 2005. This special depreciation allowance expires after 2005 and is no longer available in 2006.

College Tuition Deduction: This deduction expires for tax years after 2005.

Reduction in Itemized Deduction Limits for High-Income Taxpayers: Currently, itemized deductions are phased out (reduced) as your income rises. Starting in 2006, the deduction phase-out will be reduced by one-third. In 2008, it will be reduced by two-thirds, and in 2010, the phase-out will disappear entirely.