Recent tax legislation

The "Jobs and Growth Tax Relief Reconciliation Act" passed in 2003, and additional, related legislation since, included some significant, often temporary, and somewhat confusing changes. This is in addition to the already complex tax code changes passed by Congress in 2000. Below is a summary of the changes that impact most taxpayers in 2005.

1. Child tax credit: The child tax credit has been increased from $600 to $1,000 through 2010. Starting in 2010, the tax credit returns to the level originally passed in the 2000 tax bill. The credit is, however, still phased out for higher incomes.

2. Marriage penalty relief: The new law makes the standard deduction for married couples filing jointly and qualified widowers to be double that of single tax filers. This puts the standard deduction for 2005 at $10000. In addition to the increased standard deduction, the 15% tax bracket has been increased for married tax filers to further reduce the impact of the marriage penalty.

3. The 10% tax bracket: In 2004 and 2005, single taxpayers will pay 10% tax on income up to $7,150, increased from $6,000 under the old law. Likewise, married couples filing jointly will have an increase from $12,000 to $14,300.

4. Lower tax rates: While unchanged from 2004, the 2003 tax law accelerated rate reductions for all brackets above 15%. Below are the resulting tax rates and income ranges for 2005:
   

   Filing Status and Income Tax Rates 2005 Caution: Do not use these tax rate schedules to figure 2004 taxes. Use only to figure 2005 estimates.
   Tax rate	Married filing jointly or Qualified Widow(er)	Single	Head of household	Married filing separately
   10%	$0 - 14,600	$0 - 7,300	$0 - $10,450	$0 - 7,300
   15%	$14,601- 59,400	$7,301- 29,700	$10,451- 39,800	$7,301- 29,700
   25%	$59,401- 119,950	$29,701- 71,950	$39,801- 102,800	$29,701- 59,975
   28%	$119,951- 182,800	$71,951- 150,150	$102,801- 166,450	$59,976- 91,400
   33%	$182,801- 326,450	$150,151- 326,450	$166,451- 326,450	$91,401- 163,225
   35%	over $326,450	over $326,450	over $326,450	over $163,225

   Source: Revenue Procedure 2004-71 (http://www.irs.gov/pub/irs-drop/rp-04-71.pdf)  

5. Reduced Taxes on Capital Gains: Unchanged from 2004, the capital gains tax rates of 15% and 20% have been reduced to 5% and 15% respectively. These capital gains rates are for property that was held for at least one year. This calculator assumes that all of your long-term capital gains are taxed the new rates of 5% and 15%.

6. Reduced Taxes on Dividends: The new law applies the capital gains tax rates to qualified dividends paid from most U.S. corporations and certain qualified foreign corporations. This calculator assumes that all dividends are qualified, however, you should make certain that this is the case in your particular circumstance. All qualified dividends will appear in column 1b of Form 1099-DIV, which should be sent to you in January of the year following the dividend payment. Taxpayers in the 10% or 15% bracket pay a 5% rate of tax on dividends paid between January 1, 2003, and December 31, 2007, and zero percent in 2008. Taxpayers in tax brackets above 15%, pay a 15% rate of tax on dividends paid between January 1, 2003, and December 31, 2008.

7. Alternative Minimum Tax (AMT): The new tax law increases the AMT exemption for married filers to $58,000 for 2004 and 2005. It has also increased the AMT exemption to $40,250 for single filers for 2004 and 2005. Please note that calculating the impact of AMT on your taxes is beyond the scope of this calculator. Please see your tax professional for assistance if you believe that you will be required to pay the AMT.

8. IRA and retirement plan deductions: The new tax law did not change IRA deduction and contribution limits. However, the 2000 tax code increased the amount for most individuals to $4,000 for 2005. Those over 50 can contribute $4,500.

Dependents

• This calculator assumes that all of your long-term capital gains are taxed at either 5% or 15%.

• The tax is 5% for the portion of your gain that would have been taxed at 15% or lower tax if it were a short-term gain.

• The tax is 15% for any of your capital gain that would have been taxed at a rate higher than 15% if it were considered a short-term gain.

• This calculator assumes that none of your long-term capital gains come from collectibles, section 1202 gains or un-recaptured 1250 gains. These types of capital gains are taxed at 28%, 28% and 25% respectively (unless your ordinary income tax bracket is a lower rate).

For more information on capital gains tax rates and how they are applied, you may wish to read IRS Publication 17: Your Federal Income Taxes.