How you can resist funding the government → about the IRS and U.S. tax law/policy → how is tax law/policy/administration changing? → standard deduction / personal exemption

The IRS has let us know a little more about what our tax forms will look like when we’re scrambling to get them done in April, 2006:

CCH Tax News has more:

The threshold amounts at which the phaseout of the tax benefit of the personal exemption begins and ends and the “applicable amount” for triggering the phaseout of itemized deductions have also been determined.

The standard deduction amount for individuals who may be claimed as dependents by other taxpayers for 2005 may not exceed the greater of $800, or the sum of $250 and the individual’s earned income. The additional standard deduction amounts for the aged and for the blind are $1,000 for each, and increase to $1,250 if an individual is unmarried and is not a surviving spouse. Further, the amount used to reduce the net unearned income of certain minor children subject to the “kiddie tax” at their parents’ marginal rate is $800. The maximum credit allowed in the case of an adoption of a child with special needs is $10,630; the maximum credit allowed with regard to other adoptions is the amount of qualified adoption expenses up to $10,630.

For tax years beginning in 2005, the value used in determining the potentially refundable amount of the child tax credit is $11,000. With respect to education credits, 100 percent of qualified tuition and related expenses not in excess of $1,000 and 50 percent of such expenses in excess of $1,000 are taken into account in determining the amount of the Hope Scholarship Credit. Additionally, a taxpayer’s modified adjusted gross income in excess of $43,000 ($87,000 for joint filers) is taken into account in determining the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits otherwise allowable under Code Sec. 25A(a).

Indexing has expanded the earned income credit (EIC) for 2005. The earned income limit for the maximum credit has increased to $7,830 for a qualifying individual with one child, $11,000 for a taxpayer with two or more children, and $5,220 for a taxpayer with no children. The EIC will be denied if the aggregate amount of certain investment income exceeds $2,700.

Other inflation adjustments announced by the IRS for 2005 concern:

1. the low-income housing credit;
2. the amount used in determining the exemption from the alternative minimum tax for a child subject to the “kiddie tax;”
3. the amounts deemed substantiated when paid by eligible employers in the transportation mainline pipeline construction industry under an accountable plan to employees;
4. the overall limitation on itemized deductions;
5. the limitations on the exclusion from gross income for qualified transportation fringes;
6. the income from United States savings bonds for taxpayers who pay qualified higher education expenses;
7. the maximum amount that an employer can exclude from an employee’s gross income under an adoption assistance program;
8. the amounts used to calculate the state ceiling for the volume cap for private activity bonds;
9. the election to expense certain depreciable assets under Code Sec. 179;
10. the eligible long-term care premiums;
11. the amounts used to determine if a health plan is a “high deductible health plan” for purposes of contributions to medical savings accounts;
12. the maximum deduction for interest paid on qualified education loans;
13. the dues paid to agricultural or horticultural organizations;
14. the insubstantial benefit limitations for contributions associated with charitable fund-raising campaigns;
15. the maximum amount of contributions that may be made to a “qualified funeral trust;”
16. the income and net worth levels for determining expatriation to avoid tax;
17. the maximum amount by which the estate tax valuation method may decrease the value of qualified real property included in a decedent’s estate;
18. the annual exclusion for gifts;
19. the amount of the excise tax on passenger air transportation;
20. the reporting exceptions for exempt organizations with nondeductible lobbying expenditures;
21. the reporting large gifts received from foreign persons;
22. the maximum amount of a casual sale of personal property below which a tax lien will not be valid against a purchaser;
23. the value of property exempt from levy under Code Sec. 6334(a)(2);
24. the dollar amount used to determine the “2-percent portion” (for purposes of calculating interest) of the estate tax payable in installments;
25. the hourly rate at which attorneys’ fees may be awarded to a prevailing party;
26. the periodic payments received under qualified long-term care insurance contracts or certain life insurance contracts;
27. the safe harbor rules for broker commissions on guaranteed investment contracts or investments purchased for a yield restricted defeasance escrow; and
28. the contribution limits for health savings accounts.

Whew! Bookmark this page and come back after you’ve finished this year’s taxes so you can set up your spreadsheet for next year and figure out how much you can safely earn. You can also get the numbers directly from the horse’s mouth at the Treasury Department’s web site.

Congress is wrapping up its tax legislation. Here is some of what I’ve learned about it — particularly those parts that might be important to people trying to eliminate their income tax as I do, by keeping our incomes low:

• This is expected to be costly to the U.S. Government. It is projected to lead to the government collecting $1 trillion dollars fewer in taxes over the next decade. This will likely show up as increased government debt, as the Republicans had a hard enough time doing the easy part (lowering taxes) and are unlikely to be able to muster enough courage to do the hard part (reducing spending). Republican optimists hope that by keeping this $1 trillion out of government hands and in the private sector, the economy will boom, leading to higher tax receipts after all, and so things will all balance out in the end. People who know how to run the numbers, though, don’t seem to be taking that scenario seriously.
• Early projections based on the House version of the legislation suggest that the number of “lucky duckies” who pay no federal income tax at all will rise somewhat.
• The bill reduces both corporate and individual tax rates. But for a lot of people, what really controls how much they’ll pay is not their rate, but how much of their income is subject to the income tax and how much is safely deducted out of harm’s reach. In any case, the lowest of the rates (10%) remains the same as before and covers just about the same amount of taxable income, so from the point of view of a low-income tax resister like myself, nothing much has changed here.
• Next year, the standard deduction had been scheduled to go up to $6,500, and the personal exemption to $4,150 — shielding $10,650 of a single person’s income from income tax. The new legislation eliminates the personal exemption, but boosts the standard deduction to $12,000 — thereby adding $1,350 to the amount that’s shielded in this way (people filing as married-joint, married-separate, or head-of-household also see rises to their standard deductions). Modifications to the child tax credit and credits for non-child dependents are meant to make up for the absent personal exemption for people with dependents.
• The bill eliminates some itemized deductions, but also eliminates the limitation on how much of such deductions you can take if you’re well-off. You will also be able to take a slightly higher proportion of your Adjusted Gross Income (60%, up from 50%) as a deduction for charitable contributions, and the law will become somewhat more generous about allowing you to take a deduction for medical expenses. I haven’t looked into this very closely, but it’s possible that this holds out some hope to high-rollers that they might eliminate their federal income tax through zealously pursuing itemized deductions.
• The bill would allow you to use tax-advantaged education savings accounts to pay for a child’s tuition at a private elementary/secondary school (in the past, these accounts could only be used for post-secondary education). This could be a useful tax shelter for people who would prefer not to inflict government-run schooling on their children.
• It’s surprising to me just how little actual change there is from the status quo. Everybody complains about the complexity of filing their income taxes, and politicians get lots of mileage about promising to let people file on the back of a postcard and the like. But after all of the wrangling, this new bill keeps the individual Alternative Minimum Tax and doesn’t even reduce the number of tax brackets — the cheapest trick in the “simplification” bag. It even introduces a lot of new complexity by means of its new method of taxing “pass-through” income — something that may cause some new headaches (or, may we hope, offer new tax-saving opportunities) to those of us with Schedule C income from sole proprietorships, gig economy work, or small businesses.
• I was also a little surprised to see neither the House nor Senate try to boost Health Savings Accounts. These are a more Republican-identified health care policy reform measure, and I would have thought that as they try to sabotage Obamacare that they would have put some effort into bolstering some of their own alternative ideas. No such luck. It makes me wonder if maybe Health Savings Accounts are a craze that has come and gone and that we might expect the program to atrophy at some point.