New tax breaks included in 2005 legislation

Legislation passed by Congress in 2005 included various tax credits, deductions, and rules that may have an impact on your federal income taxes in 2005 and future years. Here is a brief overview of selected items contained in the new laws.

Credits for businesses

• Hiring workers displaced by Hurricane Katrina can earn your business a Work Opportunity Tax Credit. This credit is available no matter where the employee works, as long as he or she is on the payroll by December 31, 2005. The credit is available for jobs provided within the disaster area until August 28, 2007.
  
• Starting in 2006, home building contractors can benefit from a credit for building energy-efficient homes. New residential construction using products designed to reduce energy consumption generally qualifies for the credit.

Deductions for businesses

• Corporations making cash donations related to Hurricane Katrina may be able to claim a larger deduction in 2005. That’s because temporary rules lift the 10%-of-taxable-income limit on contributions. In addition, when employees donate the value of vacation, sick, or personal leave time, your business can deduct the cash amount contributed, and employees do not have to report it as income.
  
• Consider upgrading commercial buildings with energy-efficient improvements in 2006. That way you can take advantage of an immediate write-off instead of having to depreciate the assets over a longer term.

Credits for individuals

• The tax deduction for environmentally friendly vehicles expires in December 2005. But beginning in January 2006, new tax credits will be available for these autos. If you’re considering the purchase or lease of a new alternative fuel vehicle for personal or business use, you may want to wait until the new year to take advantage of this change.
  
Planning to make home improvements? Perhaps you should hold off until 2006, when new credits can ease the cost of installing certain energy-saving features. For instance, solar hot water heaters are eligible for a maximum credit of $2,000. In addition, a 10% credit ($500 limit) is available for improvements such as insulation and energy-efficient windows.

Deductions for individuals

• Taking Hurricane Katrina evacuees into your home may qualify you for a tax deduction of $500 per person ($2,000 maximum) for either 2005 or 2006. You can claim this one-time tax break even if you don’t itemize, but you’ll have to provide rent-free housing for at least 60 days.
  
• Consider making charitable contributions by year-end. Donations made between August 28 and December 31, 2005 – whether related to Hurricane Katrina or not – are exempt from phase-outs and certain other limits.
  
• Keeping track of vehicle mileage for charitable work related to Hurricane Katrina can help you claim an increased deduction. For September through December 2005, the rate is 34¢ per mile.