| Your Master Tax Advisor Tax Season 2006: Should you file a tax return? Are you affected by UDC and KETRA? by Mei-Feng Moe |
| It's tax-filing season again. Have you received your W-2s, 1099s, or other tax reporting documents? Are you ready to file your 2005 income tax return? Do you have to file a tax return? This article reviews filing requirements and some important tax changes for the 2005 tax year. You must file a tax return if your income is above a certain level, based on your filing status, age, and type of income you received. If you have net profit from a self-employment activity of more than $400, you are required to file a tax return because this type of income is subject to self-employment tax (social security tax) even if you don't have any income tax liability. For other types of income, you are not required to file a tax return until your income reaches a certain amount: $16,400 for married filing jointly if both spouses are under age 65; $8,200 for single; $10,500 for head of household; and $13,200 for qualifying widow(er). For tax payers who are age 65 or over, the gross income filing requirements are increased by $1,250 for single and head of household; by $1,000 for qualifying widow(er) and for each spouse for married filing jointly. The filing requirement is $3,200 for married filing separately regardless of age. If you do not have to file a return because your income is under the requirement, you should file to get money back if income tax was withheld from your pay. You should also file if you qualify for certain refundable credits: Earned Income Tax Credit -- for eligible low-income workers; or Additional Child Tax Credit -- if you have three or more dependents or more than $10,750 earned income. (Note: Refundable credits for Wisconsin include Earned Income Credit, Homestead Credit, and the new Veterans and Surviving Spouses Property Tax Credit, which will be discussed in a future article.) Some of the important tax changes for 2005 include, the new uniform definition of a child (covered in the August, September, and October 2005 issues of Asian Wisconzine), Hurricane Katrina-related tax issues, and the Energy Tax Act of 2005 which will take effect after 2005. The new rules for the uniform definition of a child (UDC) will affect those taxpayers who live in the same household with the same child(ren). Some taxpayers who have been claiming different tax benefits on the same child won't be able to continue splitting tax benefits. Other taxpayers who were not eligible to claim a child before might be able to claim the tax benefits now. (For example: A brother lived with a married couple and their minor child more than six months in 2005. The couple provides all the support for their child and has always claimed the child. The brother was not eligible to claim the child in the past, but might be eligible under the new rules. This family will want to look into letting the brother claim the child if the overall tax benefit will be greater than if they claim the child themselves.) Be sure to check and see if you might be affected by the new UDC rules. The Katrina Emergency Tax Relief Act of 2005 (KETRA) provides a $6.1 billion package of tax breaks to help individuals and businesses affected by Hurricane Katrina. Volunteers and donors are all likely to be affected as well as the victims. The following is a brief review of KETRA: If you provided free housing for at least 60 consecutive days to someone displaced by Katrina, you may claim an additional $500 exemption per person, up to $2,000 for 4 people. The deduction can only be taken for one year, either 2005 or 2006.// You may claim a higher mileage rate for charitable services related to Katrina relief. Instead of 14 cents per mile for volunteer mileage, Katrina relief mileage is 70% of the business rate -- this translates to 29 cents per mile from 08/29 to 08/31/05 and 34 cents per mile from 09/01 to 12/31/05. Casualty losses from Hurricane Katrina are not subject to the usual $100 and 10% AGI limitation. Victims with casualty loss from Katrina may apply their loss to their 2004 or 2005 tax return. Victims whose debts are discharged (between 08/25/05 and 12/31/06) by commercial lenders due to damages suffered by Hurricane Katrina do not have to include the debts forgiven as income. Special rules for using retirement funds for relief Up to $100,000 distribution (made between 08/25/05 and 12/31/06) to a person whose home was in the Katrina-disaster area and sustained a loss due to Katrina, is exempt from the 10% premature distribution penalty. The qualified distributions are taxable, but may be spread ratably over three years. You may also repay the distributions as a rollover within three years after an initial distribution. Victims may elect to use their 2004 earned income (instead of 2005 earned income) amount to calculate earned income tax credit and additional child tax credit for 2005 if it results in higher credit(s). Employers who hire new employees who either locate their business in the core disaster area or hire workers displaced by the disaster may claim the Work Opportunity Tax Credit. Employers in the disaster area who pay employees while the business is inoperable may claim the Disaster Employee Retention Credit. About the author Mei-Feng Moe is a Master Tax Advisor certified by H&R Block. In addition to giving tax advice and preparing tax returns, she has also been teaching income tax courses for a number of years. She is an Enrolled Agent who may represent clients before the IRS. She also holds series 6 and series 63 security licenses. This column welcomes your questions on tax issues. Please e-mail your tax questions to dlc@triwest.net. The questions will be answered in a future issue. |
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