- The Washington Times - Monday, February 20, 2006

Taxpayers might encounter some confusing changes as they prepare their tax returns this year.

Although tax changes for 2005 affect fewer people than in previous years, tax advisers say there are plenty of pitfalls for the unwary.

“The tax code is just as complex as last year, if not a bit more so,” said Sophie Beckmann, financial planning specialist for St. Louis investment firm A.G. Edwards & Sons.

A survey by the tax and accounting information firm CCH Inc. of Riverwood, Ill., found that fewer than half of federal taxpayers could answer basic questions needed to complete their tax returns this year.

“The biggest change is, of course, the new uniform definition of a child,” said Karen Yeager, research director for tax-preparation service H&R; Block.

Anyone with children is likely to find the definition of “qualifying child” for exemptions and credits easier to understand.

Instead of five definitions for different kinds of exemptions or credits, there is one definition for all of them. It covers the child- and dependent-care credit, the child tax credit, the earned income tax credit, head of household filing status and the dependency exemption.

The new test depends less on the amount of support provided and more on the head of household’s relationship with a child.

Other tax law changes apply to anyone who makes contributions to individual retirement accounts (IRAs).

Taxpayers can contribute up to $4,000 to an IRA this year, up from $3,000 last year. People at least 50 years old can contribute another $500 on top of that.

Anyone unable to file their returns before the April 17 deadline can get an automatic extension for six months instead of the four months of grace given in previous years.

Filing for the automatic extension spares taxpayers penalties for filing late, but it does not reduce their tax bill. They still must pay at least 90 percent of any tax due by April 17.

Most of the remaining changes apply only to taxpayers claiming one-time or unusual deductions.

“For those involved in the many disasters that occurred this year, their tax returns may be far more complex than prior years,” Mrs. Yeager said.

Victims of Hurricanes Rita and Katrina can benefit from at least a dozen changes in the tax law that allow them to claim special deductions.

Good Samaritans who provided housing to hurricane victims can claim a $500 exemption for each displaced person up to a maximum of $2,000.

Hurricane victims can withdraw money from their retirement plans without penalty through 2007. They also can get free help from the Internal Revenue Service by filing their returns at Federal Emergency Management Agency disaster-relief centers.

Tax code changes also created an incentive for charitable donations to hurricane victims.

The IRS suspended limits on the amount taxpayers can deduct for monetary charitable contributions made after Aug. 28 — the day before Hurricane Katrina hit the Gulf Coast — through Dec. 31. For 2005 taxes, taxpayers will be allowed to deduct up to 100 percent of their adjusted gross income instead of the usual 50 percent. The donations do not need to be hurricane-related. All contributions during that time are applicable.

“If you’re deducting charitable items, make sure you assess the value of your items properly or you’re likely to leave money on the table,” said Mark Steber, vice president of tax resources for Jackson Hewitt Tax Service.

Taxpayers who donated their cars to charity in 2005 no longer can make their own estimate of a vehicle’s value when claiming a deduction. Instead, they must rely on independent assessments provided by the charities themselves.

Purchasers of hybrid cars in 2005 can claim a one-time $2,000 deduction if their vehicle meets the government’s “clean fuel” standards for energy efficiency. IRS Publication 535 includes a list of vehicles that qualify for the deduction.

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