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QUALIFIED PRODUCTION ACTIVITIES INCOME DEDUCTION
Farmers may be entitled to an additional deduction authorized by Internal Revenue Code Section 199, called the Qualified Production Activities Income Deduction. The domestic production deduction for taxable years beginning in 2005 and 2006 is limited to the lesser of:
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3% of the qualified production activities income(QPAI)
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3% of taxable income of an entity or adjusted gross income for individual taxpayers– both computed without the I.R.C. §199 deduction, or
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50% of FormW-2 wages paid during the year by the taxpayer. The deduction rate increases to 6% for taxable years beginning in 2007, 2008, and 2009, and it further increases to 9% for taxable years beginning after 2009.
Qualifying activities include cultivating soil, raising livestock, and fishing, as well as storage, handling, and other processing (other than transportation activities) of agricultural products.
This deduction will not be available to farmers who do not pay farm wages.
IRA DEDUCTION EXPANDED
The IRA deduction increased from $3,000 in 2004 to $4,000 ($4,500 if age 50 or older at the end of 2005) in 2005. A taxpayer may be able to take an IRA deduction if the taxpayer was covered by a retirement plan and the taxpayer’s modified adjusted gross income (AGI) is less than $60,000 ($80,000 if married filing jointly or qualifying widow(er)).
CAR DONATIONS
Beginning in 2005, the rules for car donations changed, making such donations less attractive. Previously, taxpayers could deduct the fair market value of cars donated to a charity. However, if the charity sells the car, a taxpayer’s deduction is equal to the proceeds received by the charity. If the charity does not sell the car and instead uses the car in furthering its charitable purpose, the taxpayer may be entitled to deduct the vehicle’s fair market value if certain conditions are met.
DEPENDENTS CAN’T CLAIM EXEMPTIONS FOR DEPENDENTS
New for 2005, if an individual can be claimed as a dependent on someone else’s return, that individual cannot claim any exemptions for dependents.
MARRIAGE PENALTY RELIEF
Marriage penalty relief, which was to expire after 2004, has been extended from 2005 through 2010. The standard deduction for married individuals filing a joint return will be double that for a single taxpayer ($10,000 in 2005), and in the 15 percent bracket, a married couple filing a joint return can earn twice the amount for a single individual.
CHILD CREDIT
The child credit, which was scheduled to drop to $700, will remain at $1,000 through 2010.
REDUCED CAPITAL GAIN AND DIVIDEND RATES
2003 tax legislation reduced the 20 percent capital gain rate to 15 percent and the 10 percent rate (which is applicable to taxpayers in the 15 percent and 10 percent income tax brackets) to five percent. For 2008, the five percent rate is zero. The changes also apply for AMT purposes. The new rates apply to sales and exchanges and payments received after May 5, 2003 and before January 1, 2009. These rates apply to property held more than one year. Qualified dividends received by individual shareholders from domestic corporations and qualified foreign corporations are taxed at capital gain rates. This change also applies for AMT purposes. The changes sunset for all taxable years beginning after December 31, 2008.
LONG-TERM CARE
The deduction for long-term care services and long-term care insurance qualify as deductible medical expenses (subject to the 7.5 percent floor). Premium deductions, indexed for inflation, are subject to the following limits: age 40 or less - $270, age 40-50 - $510, ages 50-60- $1,020, age 60-70 - $2,720, over age 70 - $3,400. A couple, both over 70, may deduct up to $6,800 of long-term healthcare insurance premiums for 2005.
STANDARD MILEAGE RATES FOR 2005
The standard mileage rate for all business miles has increased to 40.5 cents a mile beginning January 1, 2005.
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The rate for charitable miles is 14 cents a mile.
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The rate has increased to 15 cents per mile when computing deductible moving expenses.
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The rate has increased to 15 cents per mile when computing deductible medical expenses.
NEW! The standard mileage rates increased to 48.5 cents per mile for the period beginning September 1, 2005 through December 31, 2005.
- The rate for charitable miles remains at 14 cents a mile.
- The rate has increased to 22 cents per mile when computing deductible moving expenses.
- The rate has increased to 22 cents per mile when computing deductible medical expenses.
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