Casualty or theft losses arising from Hurricane Katrina are exempted from the $100 per loss and 10% of AGI floors. We are expecting the same treatment for Hurricane Wilma. These losses can be deducted in 2005 or carried back to 2004 and include losses not covered by insurance. The loss is based on the fair market value of the loss property before the casualty.
Optional Sales Tax Itemized Deduction
Since this deduction expires on December 31, 2005, consider the purchase of a “big ticket” item before year-end. For example, sales tax on autos, trucks, etc. can be deducted in addition to the general sales tax calculated.
Above-the-line Deduction for Teachers Expenses and Higher Education
The $250 deduction for supplies expires on December 31, 2005; therefore, purchase your 2006 supplies now. Another deduction expiring is for higher education. An individual may want to prepay tuition due for the first quarter 2006 term in 2005, if AGI limits are not exceeded and the deduction would create a tax savings.
Payroll Tax Issues
In November, you should have received “Your Year 2006 Federal Tax Deposit Requirements” from the IRS, your annual Unemployment Compensation Tax Rate Notice for 2006, and notification from Florida if you are required to file unemployment forms and taxes electronically. These notices should be forwarded to your payroll preparer.
IRS maintains a zero tolerance for incorrect W-2s and 1099s. A $50 penalty per incorrect form could be assessed against employers whose forms have mismatched names and social security numbers. You can verify up to five names and numbers by calling the SSA at 1-800-772-6270 or visiting their website at www.ssa.gov/employer for larger groups.
Bonus checks are considered salary income and are subject to payroll taxes.
The taxable wage base for Social Security in 2006 is increased to $94,300, making the maximum social security tax $5,840 (6.2%). Medicare wages are taxed at 1.45% with no limit.
Any individual independent contractor receiving compensation over $600 for the year must be issued a 1099-MISC. In addition, ALL attorneys who received ANY amount of payment must be issued a 1099-MISC as well.
Employee versus Independent Contractor
Under common-law rules, an individual generally is an employee if the company he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Otherwise, he is an independent contractor. Qualified real estate agents and certain direct sellers are considered statutory independent contractors, not employees for purposes of wage withholding, FICA or FUTA, and the income tax rules in general.
Company Provided Vehicles
Employees should be taxed for the personal use of any employer provided vehicle. Specifically, the employees gross income on Form W-2 is increased to the extent the fair market value of this benefit exceeds the amount paid, if any, by the employee. This fringe benefit is subject to payroll taxes and should be withheld from the employees salary by year-end.
2005 Standard Mileage Rates
For the business use of a car, van or truck use 48.5 cents per mile September 1 through December 31, 2005. The 2006 rate will be between 40.5 and 48.5 cents. When computing deductible medical or moving expenses, use 22 cents per mile and 14 cents per mile when providing services to a charitable organization.
Qualified Pension Plan Contribution Limits for 2006
There are several employer-sponsored tax-deferred retirement plans that were affected by 2001 legislation, all of which have increased contribution limits. The most common is the 401(k) having an increased contribution limit of $15,000 in 2006 from $14,000 in 2005. Many of the plans also have “catch-up” contributions for employees age 50 or older.
Please keep in mind that Ive described only highlights and some of the changes in the tax rules. There are many more questions and opportunities for proper tax planning. Please give me a call on how you may be affected by these important tax issues. Thank you.
Casualty Losses New Law
