Newsletter | Past Issues

January, 2006

In This Issue:

Ohio Sales Tax and Farmers

Production Contracts & Public Policy: Economic Implications and Outlook

Using the Internet to Buy and Sell Hay

Planning for Tomorrow

Income Tax Consequences for Demolishing Farm Buildings
Health Savings Accounts- A Valuable Alternative
Crop Production Input Outlook 2006

General Income Tax Changes for Tax Years 2005 and 2006

OFBF to Host Risk Management Seminar Series

Ohio Sales Tax and Farmers
Donald J. Breece, Farm Management Specialist, OSU Extension Center at Lima

Farmers have long enjoyed Ohio Sales tax exemption for many, but not all, items used for production of agricultural commodities.  The Ohio Department of Taxation web site has information about sales taxes and includes the following responses for commonly asked questions:  www.tax.ohio.gov .

As a farmer, may I claim exemption on my purchases and how?

"Farmers are entitled to claim exemption on the purchase of items of tangible personal property used directly in the production of a product for sale . This would include, but is not limited to: seeds, fertilizers, insecticides, pesticides, field tiles, tractors, plows, combines, and specially designed motor vehicles with PTO applicator units that travel from farm to farm to apply chemicals and fertilizers. This would not include: almost all motor vehicles licensed to operate on the highway [passenger cars; pick-up trucks; larger trucks and trailers that are primarily used to haul people, animals, raw materials (seeds, fertilizers, insecticides and pesticides) to the farm and finished goods (corn, wheat, soy beans, cattle, hogs, etc.) from the farm to market], lawn mowers, weed eaters, items used to maintain set-a-side fields, chain saws, all purposes vehicles that are primarily used for recreation, and home garden equipment."

"To claim exemption, a properly completed exemption certificate must be given to your supplier."
 

How do I obtain a sales tax exemption number?

"The State of Ohio does not issue a sales tax exemption number. A vendor's license number is NOT a sales tax exemption number. To claim exemption, you must provide a properly completed exemption certificate to your supplier."
 

How will I know if a sale is exempt from the tax?

"Sales tax must be charged on all retail sales unless the purchaser provides a properly completed exemption certificate stating the statutory reason for claiming exemption. The vendor must retain the certificate as proof of nontaxable sales. Exemption certificates are prescribed by the Tax Commissioner and can be obtained from a local printer or office supply store. Sample forms are available on the Ohio Department of Taxation website."

"Exemption certificates are not needed when the item sold is never taxable, such as prescription drugs and food sold for off-premises consumption. Certificates are not needed when the purchaser is clearly identified on the invoice as an entity that is always exempt, such as the federal government, the State of Ohio , or any local government of this state."

 EXEMPTION CERTIFICATE FORMS - Information Release May, 2005

"The following forms are authorized by the Ohio Department of Taxation for use by Ohio consumers when making exempt purchases.  Other than as noted below the use of a specific form is not mandatory when claiming an exemption.  So long as the consumer provides the vendor or seller with all data elements required for a valid exemption certificate, the vendor may accept the certificate and be relieved of the obligation to collect the tax.  Note also that exemption certificates may be presented in either paper or electronic form.  Paper certificates require, as one of the data elements, a signature from the consumer.  No signature is required on electronic certificates.  For more information on the proper use of exemption certificates in specific situations, see Rules 5703-9-03, 5703-9-10, 5703-9-14 and 5703-9-25 of the Ohio Administrative Code."

General Exemption Certificate Forms

Unit Exemption Certificate.  This exemption certificate is used to claim exemption or exception on a single purchase.

Blanket Exemption Certificate.  This certificate is used to make a continuing claim of exemption or exception on purchases from the same vendor or seller.

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Production Contracts & Public Policy: Economic Implications and Outlook

Steve Wu, Assistant Professor, AED Economics, The Ohio State University

Contract farming has become an increasingly common practice in the U.S. Rather than purchasing crops or livestock in traditional open markets, many processors and packers are relying on production contracts with growers to raise agricultural commodities. While production contracts offer many advantages to both contractors and farmers, they are not without controversy. Legislators in various states and at the federal level have proposed new policies to protect growers engaged in production contracts. The following article provides an overview of the main controversies surrounding production contracts, along with a summary and commentary of existing and proposed law designed to regulate production contracts. if you have any questions, contact Steve at Wu.412@osu.edu .

http://aede.osu.edu/programs/outlook/2005-06outlook/PRODUCTION%20CONTRACTS%20AND%20PUBLIC%20POLICY.pdf

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Using the Internet to Buy and Sell Hay

Gary W. Wilson, Hancock County Extension Educator, Agriculture & Natural Resources

Producers in the forage industry are often looking for ways to sell their hay, determine what the present hay market is, or even find out what hay is for sale, where it is located, or what quality levels are being offered. All of these tasks can be accomplished through an Internet site for free. The web site is http://hayexchange.com and it is created to facilitate the movement of hay and forage products between buyers and sellers. Producers and brokers with access to the Internet can list their products free of charge on the Hay Management System listed on the site. The online Hay Auction option offers a similar service for those who want to buy hay.

The Hay listings on this site can be very informative to the buyer or to anyone wanting to check out the market or where the hay is available. The price of the hay is a required entry. Other information available includes sellers name and contact information, location, hay type and size, quality analysis, and delivery options.

The Internet site also provides other information such as bagged shavings sources, forage testing laboratories, and even a US Drought Monitor update.

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Planning for Tomorrow

Chris Bruynis, Extension Educator, Wyandot County

There are two things that most people do not start planning for early enough in life. The first is retirement planning and the second is estate planning. These two plans should be though through simultaneously since the time frame each plan will be executed is uncertain.

I have always heard that farm families are cash poor and asset rich. The fact that historically farmers invested in the next farm or larger equipment reduces the availability of off farm investment to generate revenue for retirement. This leaves rent income from agricultural property or selling building lots the default retirement plan for many families. There is nothing wrong with this plan although I have seen many farms divided into building lots out of necessity when the preference of the owner would have been for the land to remain in agricultural production.

The point of the story is that planning is essential to protect the farm. People should incorporate life expectancy, income needs, and future inflation into their plan. If the retirement plan is close to accurate there should be an estate left to pass on to future generations.

Estate planning if often more difficult for farm families because some children may be involved in the farm business while others are employed off the farm. Parents need to consider treatment of the children that are equitable but not necessarily equal. Also it is highly recommended that parents discuss their plans with their children. Finding out that the farm is left to one sibling after the funeral might be the last time siblings talk to each other.

To learn more on succession planning, including estate planning, from one of the leaders in the field of agricultural estate law, plan on attending the meeting to be held at the Sycamore Center in Sycamore, Ohio (Wyandot County) on February 23, 2006. Details can be found at http://wyandot.osu.edu/ag/ag.htm and click on the succession planning link or by calling 419-294-4931.

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Income Tax Consequences for Demolishing Farm Buildings
Donald J. Breece Ph.D., Farm Management Specialist, OSU Extension Center at Lima

IRC Section 280B disallows deduction for the cost of demolishing buildings.  This cost, and the remaining building basis, is to be added to the lands' basis, therefore would only be recovered upon a future sale of the land. Here are some examples: 

First:  If a farm is purchased and the existing farmstead is to be demolished and buried, this cost is added to the lands'  basis and there is no current deduction.  If the buildings are used for a time, depreciation may be taken on the buildings.  In this case, at the time of demolition, the remaining basis on the building, yet to be depreciated, would also be added to the lands' basis as would the cost of demolition.

Second:  What if the buildings are abandoned?  Then the remaining basis of the buildings is treated as a disposition or as a sale for zero dollars.  Therefore, the remaining basis becomes an ordinary loss and is reported on Form 4797. 

Third:  What if abandoned buildings are later demolished, at least one year after these were no longer used in the farm business?  In this case, there is no remaining basis on the buildings and the only remaining addition to the basis of the land would be the cost of demolition.

The tax treatment for the cost of demolition, such as taking down trees and buildings, closing wells, and grading the site for future tillage, may only be deducted during the period of productive use of the buildings.  Since there is no productive state of the abandoned buildings, these costs are expenses for development and  are treated as a capital investment.  Therefore, these costs are added to the basis of the land.

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Health Savings Accounts- A Valuable Alternative
Donald J Breece Ph.D., Farm Management Specialist, OSU Extension Center at Lima

Medical expenses are an ever increasing drain on a families budget and a financial uncertainty for retirement.  In 2004 health savings accounts first became available.  These HSAs allows taxpayers to set aside tax-deferred money for future health needs.  The HSA is a marked improvement over the Archer MSA and is available to anyone who is under the age of 65 and who is not covered by another employer sponsored health plan. 

Contributions to HSAs are deductible and earnings on the amount in the HSA are not taxed.  Withdraws are tax-free to the extent of allowable medical expenses, including long term care.  Balances in the HSA that are not used may be withdrawn, after the owner reaches 65 as a taxable supplement to retirement income.  If employers contribute to employee HSAs, the payments are excluded from the employees' gross income and are not subject to withholding or payroll taxes.  If a taxpayer makes a HSA contribution, it is deductible even if the taxpayer does not itemize medical expenses.  The employee's HSA is also portable, if the employee changes jobs. 

Many insurance companies now carry the required HDHP or high-deductible health plan.  For 2005, the HDHP must have a $1,000 minimum annual deductible for self-only coverage, and a $2,000 for family coverage.  The maximum allowable deductibles and out-of-pocket costs for 2005 is $5,100 for self-coverage and $10,200 for a family.  Any eligible individual may have an HSA. For an employees HSA, the employee, the employees employer, or both may contribute to
the employees HSA in the same year. If an HSA is established by a self-employed (or unemployed) individual, the individual can contribute.  The 2005 contribution limits are: monthly 1/12th of the lesser of the HDHP deductible or $2,650 for an individual or $5,250 for family coverage.  Additional contributions are allowed for those ages 55-65 at $600 for 2005 and $700 in 2006. 

The lower premiums of a HDHP may be nearly enough to fund a HSA.  For younger people, financially stable and in good health, the health savings account is an attractive alternative to lower-deductible type health plans that carry higher premiums.  For more information, contact your health insurance provider and your income tax advisor.

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Crop Production Input Outlook 2006

Barry Ward, Ohio State University Extension, Leader, Production Business Management Department of Agricultural, Environmental and Development Economics

Click here for a PDF Version of this article

Crop production input prices have increased relentlessly during 2005 as fuel and fertilizer price increases have caused already small profit margins to shrink. Unfortunately, 2006 promises more of the same as fuel and fertilizer prices continue to climb. Although these input prices are causing margins to shrink, it is imperative that farmers plan with the best possible information available. The outlook numbers laid out in this article can be used a starting point in creating budgets for 2006. Outlook information presented here was developed with data from the Energy Information Administration, USDA, university research, futures markets and retail sector surveys.

Fuel

Fuel prices continue to increase in the U.S. driven by sharply higher crude oil prices and these increases have had a major impact on crop production input costs. The major fuels used directly in crop production are diesel and propane (LP). Indirectly, natural gas is very important to crop input costs as it is used in the production of ammonia (NH3) which is used as a nitrogen fertilizer and as an ingredient in the manufacture of other nitrogen and phosphorous fertilizers. Natural gas is also a major ingredient in the manufacture of propane.

Diesel is a distillate produced through the crude oil refinery process. Recent increases in diesel prices can be attributed to four major causes. First, the price of oil has caused all petroleum based products to suffer price increases. Second, the strong demand for distillates worldwide has contributed to high diesel prices with Europe and Asia seeing the largest demand increases. (This is the primary reason why diesel prices have been at a premium to gasoline prices.) Third is the short term disruption of refining capacity due to the devastating Gulf hurricanes. A fourth, but somewhat less important factor in fuel price increases has been the weakening of the U.S. dollar compared to many foreign currencies.

Propane is a by-product of natural gas production and to a lesser extent the crude oil refinery process. Although propane is produced from both natural gas production and the crude oil refinery process, it's price is mainly influenced by the price of crude oil. This is because propane competes mostly with crude oil based fuels.

Natural gas and propane prices have been increasing dramatically along with the price of other fuels. The primary reason for price increases is strong demand for these clean burning fuels for use in electricity generation, and increased demand for crop fertilizers in Asia and South America .

As of December 6 th , the Energy Information Administration (EIA) is pegging the average price for Crude Oil at $63.33 per barrel for 2006. The EIA indicates the Henry Hub Natural Gas prices are expected to average $9.30 per thousand cubic feet in 2006.

Examining oil and gas futures together with Ohio State University Extension Budgets and Outlook shows us that the average price of off-road diesel increased 54% from 2004 to 2005. With off-road diesel pegged at $1.85/gal average for 2005, prices are expected to increase 19-35% in 2006. Two scenarios are offered. The first scenario is a more optimistic one with off-road diesel averaging $2.20/gal giving us a price increase of 19% over 2005.

The second scenario is more costly with off-road diesel averaging $2.50/gal giving us a price increase of 35% from 2005 to 2006.

Propane prices increased approximately 20% from 2004 to 2005. The price of propane is expected to increase 17% and average $1.40/gallon in 2006.

Fertilizer

Fertilizer prices have increased dramatically over the last two years due to higher energy costs (primarily natural gas), strong world demand, transportation costs and U.S. currency devaluation.

Nitrogen

All major nitrogen (N) fertilizers begin with the fixation of nitrogen (N 2 ) into ammonia (NH 3 ). Anhydrous ammonia (NH 3 ) is manufactured with natural gas and air as the primary ingredients. Urea's components include carbon dioxide (CO2) and anhydrous ammonia (2NH 3 ). Ammonium nitrate is produced with nitric acid (HNO 3 ) and NH 3 . Urea Ammonium Nitrate (UAN) Solutions, more commonly referred to as 28%, are made by combining urea and ammonium nitrate in water.

All of these N fertilizers have natural gas or a derivative as an important ingredient and we can see how energy prices, particularly natural gas, play an important role in the price of our N fertilizers.

The average price of nitrogen increased 15% from 2004 to 2005. Evaluating Natural Gas, DAP, Urea and UAN Futures together with surveys of industry personnel leads to the conclusion of higher N prices again in 2006. Using anhydrous ammonia as our base for projections, N is expected to average $0.335 per pound in 2006. (NH3 price of $550/ton equals price per actual pound N of $0.335.) This is a 22% increase over 2005. A second and more optimistic scenario pegs N at $0.30 per pound which equals an NH3 price of $480/ton.

Nitrogen fertilizer prices are expected to remain relatively high in the next 12-24 months. One possible bright spot is the construction of new ammonia and urea manufacturing plants in the world. Ammonia production capacity is expected to increase 9% by 2008 and urea capacity by 17% which may ease some of the tightness in the market in the latter part of this decade and allow N prices to decrease or remain flat.

Phosphorous (P 2 O 5 )

Phosphorous fertilizers originate from rock phosphate deposits found primarily in North Carolina and Florida . The rock phosphate is then treated with sulfuric acid to form ag grade phosphoric acid. The phosphoric acid is reacted with anhydrous ammonia to form our primary phosphorous fertilizers: mono-ammonium phosphate (MAP), di-ammonium phosphate (DAP), and ammonium phosphate (APP or 10-34-0). The U.S. not only supplies most of our own P fertilizer needs, but we are also the world's largest exporter of P fertilizers.

The average price of phosphorous fertilizers increased around 24% from 2004 to 2005. Increases in anhydrous ammonia prices and transportation costs together with strong world demand continue to pressure phosphorous fertilizer prices. These pressures will lead to more price increases for the 2006 crop production year with the price for P 2 O 5 expected to average $0.3125 per pound or a 5% increase over 2005. (This equates to a MAP price of around $325/ton).

Potassium (K 2 0)

Potassium (K) salts are mined from the earth or from brines found in lakes and used to manufacture K fertilizers (potash). The U.S. imports practically 100% of our K fertilizer needs, primarily from Sasketchewan , Canada (93%). Although world potash production continues to increase, demand has increased at a faster pace. Demand in growth areas such as Asia and South America have contributed heavily to price increases in farm-gate potash. Potash prices increased 19% from 2004 to 2005. Potash prices for the 2006 crop year are expected to average $0.205 per pound compared to $0.155 per pound in 2005. This is a price increase of 32% over 2005. (K 2 O price of $0.205 per pound equals Potash at $250/ton.)

Seed

Seed prices are expected to increase marginally from 2005. Expect corn and soybean seed prices to keep pace with inflation and increase an average of 2.5%.

Crop Protection Chemicals

Crop protection chemical prices as a group are expected to remain relatively constant as downward price pressure from generic products keeps prices in check.

Interest Rates

Fed increases in the prime lending rate have caused most underlying lending rates to increase. Farm operating lines of credit are no exception as the cost of borrowing will continue to climb. Operating loan rates are expected to average 7.75% in 2006 compared to 6.5% in 2005.

Cash Rent

With smaller profit margins forecasted for this year and beyond, land rental rates should see little to no increase in 2006, although it may vary by region. Areas with exceptional crop yields in '05 may see more competition for available land and increases in land rents while areas suffering from drought may see stable to lower rents. Rental rate increases should be lower than the 2.5% increase seen from 04' to 05'. Land rents for Ohio as a whole are expected to increase 0-1%.

Summary of Crop Production Costs Outlook for 2006

Budgets -2006

Looking at each input separately doesn't have the same impact that the total increase in variable costs shows. The following is my summary of what total variable costs will look like in our corn and soybean budgets for 2006. Keep in mind that these total variable costs don't include cost of land, machinery and other capital investment, labor, or management charge.

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General Income Tax Changes for Tax Years 2005 and 2006

Donald J. Breece Ph.D., Farm Management Specialist, OSU Extension Center at Lima

Click here for a PDF Version of this article

Charitable Contributions of Vehicles, Boats, and Aircraft

If you donate a vehicle (including a boat or aircraft) to a qualified organization after December 31, 2004, your deduction is limited to the gross proceeds from its sale by the organization. This rule applies if the claimed value of the donated vehicle is more than $500. However, you generally can deduct its fair market value if the organization:

• Makes significant intervening use of the vehicle,
• Materially improves the vehicle, or
• Transfers the vehicle to a needy individual in direct furtherance of the donee's charitable purpose of relieving the poor and distressed or underprivileged who are in need of a means of transportation.

Boats, aircraft, and other vehicles.

These rules apply to donations of boats, aircraft, and any vehicle manufactured mainly for use on public streets, roads, and highways.

Acknowledgement required.

If the claimed value of the car is more than $500, you must have a written acknowledgement of your donation from the organization and must attach it to your return. If you do not have an acknowledgement, you cannot deduct your contribution.

The acknowledgement must include the following information.

1. Your name and taxpayer identification number.
2. The vehicle identification number or similar number.
3. A statement certifying the car was sold in an arm's length transaction between unrelated parties.
4. The gross proceeds from the sale.
5. A statement that your deduction may not be more than the gross proceeds from the sale.
6. The date of the contribution.

However, if there was significant intervening use of or material improvement to the car by the organization, the acknowledgement does not have to include the information in items 3, 4, and 5 above. Instead, it must contain a certification of the intended use of or material improvement to the car and the intended duration of that use and a certification that the vehicle will not be transferred in exchange for money, other property, or services before completion of that use or improvement.

This acknowledgement must be provided within 30 days of the sale of the car or, if there is significant intervening use or material improvement of the car by the organization, within 30 days of the contribution.

The organization also must provide this information to the IRS.

More information.

More information can be found in Notice 2005-44  and the 2005 revision of Publication 526, Charitable Contributions (to be available mid-December 2005).

Uniform Definition of a Qualifying Child

Beginning in 2005, one definition of a qualifying child will apply for each of the following tax benefits.

• Dependency exemption.
• Head of household filing status.
• Earned income credit (EIC).
• Child tax credit.
• Credit for child and dependent care expenses.

Tests To Meet

In general, all four of the following tests must be met to claim someone as a qualifying child.

Relationship test.

The child must be your child (including an adopted child, stepchild, or eligible foster child), brother, sister, stepbrother, stepsister, or a descendent of one of these relatives.

An adopted child includes a child lawfully placed with you for legal adoption even if the adoption is not final.

An eligible foster child is any child who is placed with you by an authorized placement agency or by judgement, decree, or other order of any court of competent jurisdiction.

Residency test.

A child must live with you for more than half of the year. Temporary absences for special circumstances, such as for school, vacation, medical care, military service, or detention in a juvenile facility count as time lived at home. A child who was born or died during the year is considered to have lived with you for the entire year if your home was the child's home for the entire time he or she was alive during the year. Also, exceptions apply, in certain cases, for children of divorced or separated parents and parents of kidnapped children.

Age test.

A child must be under a certain age (depending on the tax benefit) to be your qualifying child.

Dependency exemption, head of household filing status, and EIC.

For purposes of these tax benefits, a child must be under the age of 19 at the end of the year, or under age 24 at the end of 2005 if a student, or any age if permanently and totally disabled.

A student is any child who, during any 5 months of the year:

1. Was enrolled as a full-time student at a school, or
2. Took a full-time, on-farm training course given by a school or a state, county, or local government agency.

A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or night school.

Child tax credit.

For purposes of the child tax credit, a child must be under the age of 17.

Credit for child and dependent care expenses.

For purposes of the credit for child and dependent care expenses, a child must be under the age of 13 or any age if permanently and totally disabled.

Support test.

A child cannot have provided over half of his or her own support during the year.

Exception.

For purposes of the EIC only, the Support test does not apply.

Qualifying Child of More Than One Person

Sometimes a child meets the tests to be a qualifying child of more than one person. However, only one person can treat that child as a qualifying child. If you and someone else (other than your spouse if filing jointly) have the same qualifying child, you and the other person(s) can decide who will claim the child. If you cannot agree on who will claim the child and more than one person files a return using the same child, the IRS may disallow one or more of the claims using the tie-breaker rule explained in Table 1, next.

Table 1. When More Than One Person Files a Return Claiming the Same Qualifying Child (Tie-Breaker Rule).

Dependency Exemption

To claim the dependency exemption for a qualifying child, all four tests listed earlier under Tests To Meet must be met. The child generally must also be a U.S. citizen, U.S. national, or a resident of the United States , Canada , or Mexico . An exception applies for certain adopted children. If married, he or she cannot file a joint return unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.

A person who used to qualify as your dependent but who is not your "qualifying child" may still qualify as your dependent as a "qualifying relative." To claim the dependency exemption for a qualifying relative, the child cannot be the qualifying child of any other person and all five dependency tests discussed under Dependency Tests in Publication 501 must be met.

Note: If you are a dependent of another person, you cannot claim any dependents on your return.

Head of Household Filing Status

In general, you can use head of household filing status only if, as of the end of the year, you were unmarried or " considered unmarried" and you paid over half the cost of keeping up a home:

1. That was the main home for all the entire year of your parent whom you can claim as a dependent (your parent did not have to live with you), or
2. In which you lived for more than half of the year with either of the following:
1. Your qualifying child (defined earlier, but without regard to the exception for children of divorced or separated parents). But, if your qualifying child is married at the end of the year, see Married child below.
2. Any other person whom you can claim as a dependent.

But you cannot use head of household filing status for a person who is your dependent only because:

• He or she lived with you for the entire year, or
• You are entitled to claim him or her as a dependent under a multiple support agreement.

Married child.

If your qualifying child is married at the end of the year, both of the following must apply for the child to be your qualifying child for purposes of head of household filing status.

1. The child cannot file a joint return unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.
2. The child must be a U.S. citizen, U.S. national, or a resident of the United States , Canada , or Mexico . An exception applies for certain adopted children.

Earned Income Credit (EIC)

You may be able to claim the earned income credit (EIC) in 2005 if you have:

1. 2 or more qualifying children and your earned income is less than $35,263 ($37,263 if married filing jointly for 2005),
2. 1 qualifying child and your earned income is less than $31,030 ($33,030 if married filing jointly for 2005), or
3. No qualifying children and your earned income is less than $11,750 ($13,750 if married filing jointly for 2005). For purposes of the EIC, a qualifying child must meet the Relationship test , Residency test (without regard to the exception for children of divorced or separated parents), and Age test , earlier. A qualifying child does not have to meet the Support test for purposes of the EIC. But, if your qualifying child is married at the end of the year, see Married child next.

Married child.

A child who is married at the end of the year is a qualifying child for purposes of the EIC only if you can claim him or her as your dependent (see Dependency Exemption , earlier) or this child's other parent claims him or her as a dependent under the rules for children of divorced or separated parents in Publication 501, Exemptions, Standard Deduction, and Filing Information .

Child Tax Credit

You may be able to take the child tax credit if you have a qualifying child that meets all four of the tests listed earlier under Tests To Meet . For additional rules that you must meet, see Publication 972, Child Tax Credit .

Credit for Child and Dependent Care Expenses

Generally, a qualifying person for purposes of the credit for child and dependent care expenses is:

• Your qualifying child (defined earlier, but without regard to the exception for parents of kidnapped children), or
• Your dependent or spouse who is physically or mentally incapable of caring for himself or herself and who lived with you for more than half of the year.

For purposes of the credit for child and dependent care expenses, a qualifying child and dependent are determined without regard to the exception for children of divorced or separated parents and the child is treated as a qualifying person only for the custodial parent.

For additional rules that you must meet, see Publication 503, Child and Dependent Care Expenses . However, you no longer need to meet the Keeping Up a Home test discussed in Publication 503.

Earned Income Credit Amounts Increase

Earned income amount.

The maximum amount of income you can earn and still get the credit is higher for 2005 than it is for 2004. You may be able to take the credit for 2005 if:

• You have more than one qualifying child and you earn less than $35,263 ($37,263 if married filing jointly),
• You have one qualifying child and you earn less than $31,030 ($33,030 if married filing jointly), or
• You do not have a qualifying child and you earn less than $11,750 ($13,750 if married filing jointly).

The maximum amount of adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount.

The maximum amount of investment income you can have in 2005 and still get the credit increases to $2,700.

Electric and Clean-Fuel Vehicles

For 2005, the proposed 50% reduction of the maximum electric vehicle credit and the clean-fuel deduction has been eliminated. You can claim the maximum electric vehicle credit allowed for a qualified electric vehicle you place in service in 2005. You can claim the maximum deduction allowed for qualified clean-fuel vehicle or other clean-fuel property placed in service in 2005.

Exemption Amount Increased

The amount you can deduct for each exemption has increased from $3,100 in 2004 to $3,200 in 2005.

You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2005, the phaseout begins at:

• $109,475 for married persons filing separately,
• $145,950 for single individuals,
• $182,450 for heads of household, and
• $218,950 for married persons filing jointly or qualifying widow(er)s.

If your adjusted gross income is above the amount for your filing status, use the Deduction for Exemptions Worksheet in the Form 1040 instructions to figure the amount you can deduct for exemptions.

Retirement Savings Plans

Traditional IRA income limits. If you have a traditional individual retirement account (IRA) and are covered by a retirement plan at work, the amount of income you can have and not be affected by the deduction phaseout increases. The amounts vary depending on filing status.

Limit on elective deferrals. The maximum amount of elective deferrals under a salary reduction agreement that can be contributed to a qualified plan increases to $14,000 ($18,000 if you are age 50 or over). However, for a SIMPLE plan, the amount increases to $10,000 ($12,000 if you are age 50 or over).

IRA deduction expanded. The amount you, and your spouse if filing jointly, may be able to deduct as an IRA contribution will increase to $4,000 ($4,500 if age 50 or older at the end of 2005).

Social Security and Medicare Taxes

For 2005, the employer and employee will continue to pay:

1. 6.2% each for social security tax (old-age, survivors, and disability insurance), and
2. 1.45% each for Medicare tax (hospital insurance).

Wage limits. For social security tax, the maximum amount of 2005 wages subject to the tax is $90,000. For Medicare tax, all covered 2005 wages are subject to the tax.

Standard Deduction Amount Increased

The standard deduction for taxpayers who do not itemize deductions on Schedule A of Form 1040 is, in most cases, higher for 2005 than it was for 2004. The amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer.

The basic standard deduction amounts for 2005 are:

• Head of household — $7,300
• Married taxpayers filing jointly and qualifying widow(er)s — $10,000
• Married taxpayers filing separately — $5,000
• Single — $5,000

The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer may not exceed the greater of $800 or the sum of $250 and the individual's earned income.

Standard Mileage Rates

For tax years beginning in 2005, the allowable deductions for the standard mileage rate for the period January 1, 2005, through August 31, 2005, are as follows:

• Business miles. The standard mileage rate for the cost of operating your car increases to 40.5 cents a mile for all business miles driven.
• Charitable services. The standard mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization is 14 cents a mile.
• Charitable services — Hurricane Katrina relief services. If you used your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 29 cents a mile for miles driven after August 24, 2005, and before September 1, 2005.
• Medical reasons. The standard mileage rate allowed for use of your car for medical reasons is 15 cents a mile.
• Moving. The standard mileage rate for determining moving expenses is 15 cents a mile.

The allowable deductions for the standard mileage rate for the period September 1, 2005, through December 31, 2005, are as follows:

• Business miles. The standard mileage rate for the cost of operating your car increases to 48.5 cents a mile for all business miles driven.
• Charitable services. The standard mileage rate allowed for use of your car when you use your car to provide charitable services to a charitable organization remains at 14 cents a mile.
• Charitable services — Hurricane Katrina relief services. If you used your vehicle in giving services to a charitable organization to provide relief related to Hurricane Katrina, the standard mileage rate allowed for use of your car is 34 cents a mile.
• Medical reasons. The standard mileage rate allowed for use of your car for medical reasons is 22 cents a mile.
• Moving. The standard mileage rate for determining moving expenses is 22 cents a mile.

Earned Income Credit Amounts Increase in 2006

Earned income amount.

The maximum amount of income you can earn and still get the credit is higher for 2006 than it is for 2005. You may be able to take the credit for 2006 if:

• You have more than one qualifying child and you earn less than $36,348 ($38,348 if married filing jointly),
• You have one qualifying child and you earn less than $32,001 ($34,001 if married filing jointly), or
• You do not have a qualifying child and you earn less than $12,120 ($14,120 if married filing jointly).

The maximum amount of adjusted gross income (AGI) you can have and still get the credit has also increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you.

Investment income amount.

The maximum amount of investment income you can have in 2006 and still get the credit increases to $2,800.

Exemption Amount Increased in 2006

The amount you can deduct for each exemption has increased from $3,200 in 2005 to $3,300 in 2006.

You lose all or part of the benefit of your exemptions if your adjusted gross income is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2006, the phaseout begins at:

• $112,875 for married persons filing separately,
• $150,500 for single individuals,