On the December 13 webcast of Tax Talk Today, a panel of IRS officials and tax professionals covered the tax law changes and other issues that will impact the 2005 federal returns of most individual taxpayers.

The panel focused on the new definition of a qualifying child as the change that will have the biggest effect on individual returns in the coming filing season. Changes to the definition of a qualifying child can affect five different tax benefits, including head of household filing status, dependency exemptions, the child tax credit, the child and dependent care credit and the earned income credit. Tax practitioners should assist their clients in examining each benefit to identify unique differences and requirements affected by the change.

According to the Tax Talk Today panel, there are now four tests to identify a qualifying child:

1. Relationship test – is the child the taxpayer's child, sibling or a descendent of the taxpayer's child or sibling?
2. Residency test – did the child live with the taxpayer for more than half of the tax year?
3. Age test – is the child younger than 19 years of age, or younger than 24 years if a student, or permanently and totally disabled?
4. Support test – did the child provide no more than half of his or her own support?

The panel advised tax practitioners to pay close attention to the far-reaching impact of this change to the definition of a qualifying child.

In additional news regarding Hurricane Katrina provisions, a new and potentially far-reaching deduction – the Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina (Form 8914) – is available for taxpayers that housed individuals for at least 60 consecutive days who were displaced by the hurricane.

This $500 exemption amount is for up to four individuals for a maximum total of $2,000 and will be available in 2005 and in 2006 – but the exemption can only be claimed one time per individual, and the $2,000 maximum is for both years combined.

The panel also advised that tax practitioners stay on the alert regarding charitable contributions made after August 27, 2005. The taxpayer may elect to treat most cash contributions made after the date as qualified contributions, which are not subject to the 50 percent of adjusted gross income limit or the overall limit on itemized deductions for high income taxpayers. Taxpayers can also claim charitable mileage rates for Hurricane Katrina, depending on the dates of the charitable driving:14 cents per mile before Aug. 25, 2005; 29 cents per mile from Aug. 25, 2005 to Aug. 31, 2005; and 34 cents per mile from Sept. 1, 2005 through Dec. 31, 2005.

Effective Jan. 1, 2005, new rules govern the charitable donation of a motor vehicle with a claimed value of more than $500. First, the donor must attach to his or her return a written acknowledgement of the donation (either new Form 1098C or the donee's own acknowledgment). The donee must furnish it within 30 days of either the donation or the sale of the vehicle. Second, the taxpayer may need to use gross proceeds instead of fair market value to determine the amount of the deduction.

“There could be a lot of pressure on charities to really get a good price for the vehicle,” said Bob Erickson, senior technical advisor, Tax Forms and Publications, IRS.

Other changes reviewed by the panel included the implementation of an automatic six-month extension using only Form 4868; the IRS’ decision to accept conditionally those electronically filed returns with reject codes 501 and 504 (related to dependents); changing addresses for IRS processing centers, for which updates are posted on the
IRS web site; significant changes to elective salary deferrals; energy tax incentives, including alternative motor vehicle credits for hybrid cars and the 2006 energy tax incentives for home improvements; and credit card payments.

“We also have the credit card option, and we've expanded that somewhat," said Pamela Walker, chief of IMF Policy & Procedures Branch of Wage and Investment, Submission Processing, IRS. "Balances due on any 1040 returns, even delinquent balances due, can be paid up to five years in arrears.”

Access a full transcript of this webcast – titled “Get Ready for Filing Season 2006 (Part 1 - Individuals).”

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