Personal Finance Guide

Every year seems to bring with it a rash of new tax law changes, and it is often difficult to keep up with all the laws governing how we pay our tax bill. This year’s changes are bigger than most, with a number of tax law changes designed to specifically address the needs of victims of the recent hurricanes.

For instance, victims of hurricanes Katrina and Wilma may be eligible for additional tax relief such as:

• While casualty losses are generally subject to certain limits, victims of hurricane Katrina will be able to deduct the full amount of the loss.
• In addition, those who provided housing to those displaced by Katrina may be eligible for an additional personal exemption amount.
• Those who were relocated due to Katrina also enjoy special rule for claiming dependents.
• A comprehensive list of relief provisions for hurricane victims is available on IRS Publication 4492.

In addition to hurricane related changes, there have been a number of other important tax law changes as well, including:

• New definitions of a qualifying child – A new and uniform definition of child is applicable when claiming a dependent, the child care tax credit, the earned income tax credit or head of household filing status.
• New rule covering foster children – In order to be claimed as a dependent, a foster child must be placed in the care of the taxpayer by a court order, judgment, decree or by a placement agency.
• Enhanced deductions for individual retirement accounts – Taxpayers can deduct up to $4,000 contributed to a traditional IRA account. Those who are 50 years of age or older are able to deduct an additional $500, for a total deduction of $4,500.
• There are higher contribution limits for 401(k) plans as well. For taxpayers under 50, the limit for 2005 is $14,000, while those 50 and older can contribute up to $18,000 of qualifying income.
• The earned income credit has changed as well. Those taxpayers with a qualifying child living at home and income less than $35,263 for a head of household or $37,263 for married couples filing jointly may be able to qualify for the earned income credit. Taxpayers without a qualifying child must have income equal to or less than $11,750 (single) or $13,750 (married filing jointly) in order to qualify for the credit.
• Mileage rates for tax purposes changed midway through the year, spurred on by skyrocketing gas prices in the wake of the Gulf Coast hurricanes. The rate for business mileage between January 1 and August 31, 2005 was 40.5 cents per mile, with the rate increasing to 48.5 cents per mile from September 1 through December 2005.