Taxes: What's New For 2005?
Each new year brings change, and the IRS is
no exception. Even when there are no big changes to the tax rules—like
those we saw in 2001 and 2003—annual inflation and previously scheduled
adjustments trigger a number of small changes, including:
- How much you can contribute to
- Eligibility limits based on adjusted
gross income (AGI).¹
- Income levels that determine which
marginal income tax bracket you fall into.
Here, we'll look at a few of the tax
highlights—is that an oxymoron?—for 2005. But first, let's review some
legislative action Congress took in 2004.
Here are the new federal tables for single filers and married
filing jointly. Check out the
IRS Web site for additional information on tax brackets, personal
exemption and standard deduction amounts, and more.
2005 federal income tax brackets
||$14,600 or less
$7,300 but not over $29,700
||Over $14,600 but not over
$29,700 but not over $71,950
||Over $59,400 but not over
$71,950 but not over $150,150
||Over $119,950 but not
$150,150 but not over $326,450
||Over $182,800 but not
Long-term capital gains and qualified stock dividends are still taxed at
15% (5% for people in the 15% bracket or less), at least through the end
of 2008—the 5% rate goes to zero in 2008 only.
Under current law, in 2009 we go back to the old rate structure: 20% for
long-term capital gains and ordinary treatment for dividends. Keep that in
mind if you're planning any future sales, particularly if you're selling a
small business and you're thinking about structuring an installment sale
One more note on income taxes: The limit on the so-called kiddie tax
remains at $800 for 2005. This means children under age 14 will pay no
income tax on the first $800 of unearned income, such as capital gains or
interest from a savings account, and will be taxed at their own rate (most
likely 10%) on the next $800 (5% for long-term capital gains). Anything
over that amount is taxed at the parents' rate. Children 14 and older
continue to pay tax at their own rate. If they're in the 15% ordinary
bracket or below, that means only 5% on long-term capital gains and
qualified dividends (0% in 2008 only).
Here are the maximum amounts you can contribute to various retirement
accounts for 2005, plus the catch-up contribution available to people 50
2005 federal limits for retirement accounts
||20% of net
self-employment income, up to $42,000
||20% of net
self-employment income plus $14,000, up to $42,000
Money you put in a traditional IRA is generally tax deductible—unless
you're an active participant in a qualified employer plan such as a 401(k)
or 403(b). In that case, for 2005, your traditional IRA contribution is
fully deductible if your AGI is $50,000 or below (partially deductible
between $50,000-$60,000 for singles). The phase-out range for
deductibility² is $70,000-$80,000 for married filing jointly ($150,000
limit for the non-participant spouse of an active participant, when filing
The AGI phase-out range for Roth IRA eligibility remains unchanged at
$95,000-$110,000 for singles and $150,000-$160,000 for married filing
Finally, a new rule takes effect in 2005 for those taking required minimum
distributions from their retirement accounts: You no longer need to
include your RMD for the purpose of calculating the $100,000 modified
adjusted gross income (MAGI) limitation on the conversion of a traditional
IRA to a Roth IRA.
- The maximum contribution of $2,000 per
year remains unchanged, as do the AGI phase-out ranges of
$95,000-$110,000 for singles and $190,000-$220,000 for married filing
- For ,³ there's still no limit to how
much you can contribute each year—each state's plan has its own lifetime
limit, typically over $200,000. You can still treat a 529 contribution
as being made over five years for gift tax purposes. So, a married
couple could contribute as much as $110,000 per child up front without
using any of their lifetime gift tax credit (see below).
- The AGI phase-out limits for the Hope
and Lifetime Learning tax credits go to $43,000-$53,000 for singles and
$87,000-$107,000 for married filing jointly.
- The AGI phase-out for eligibility to
deduct student loan interest remains at $50,000-$65,000 for singles but
is increased to $105,000-$135,000 for married filing jointly.
The changes implemented in 2001 are still
set to expire after 2010. In the meantime, here are the 2005 limits:
- Gift tax.
The $1 million lifetime gift tax exemption and $11,000 annual exclusion
remain unchanged, but the top gift tax rate drops to 47%.
- Estate tax.
The lifetime exemption amount remains at $1.5 million ($555,800
equivalent credit), but the top estate tax rate drops to 47%.
The wage base limit for Social Security (OASDI)
withholding goes to $90,000 (maximum of $5,580 withholding at 6.2%), while
the wage base for Medicare withholding remains unlimited (tax rate of
For more information on these and other 2005 changes, visit the
IRS Web site and see the official
Inflation-Adjusted Tax Items for Tax Year 2005.