Accounting Aid Society Tax Assistance Program January 2006 Selected Individual Tax Changes for 2005

Selected Recent Tax Changes Dependency Exemptions (Uniform Definition of a Qualifying Child) Vehicle Donations Michigan Vehicle Donation Credit City of Detroit Changes

Dependency Exemptions for Qualifying Children and Qualifying Relatives (2005) Tests applicable to all dependents –Dependent of another (a dependent can have no dependents) –Joint return test –Citizenship or residency test (U.S., Canada, or Mexico)

Dependency Exemption Tests for Qualifying Children Relationship Test – Child, grandchild, brother sister (including stepbrother & stepsister, niece or nephew), foster child placed by agency Residency – Lived with taxpayer more than ½ of the year Age – Under 19, under 24 and a full-time student, or permanently and totally disabled Support – Did not provide more than ½ of his/her own support

Dependency Exemption Tests For Qualifying Relatives (old rules apply) Support Member of Household or Relationship Gross Income

Support Test Taxpayer must provide more than 50% of the dependent’s support An exception to support test requirement: –Multiple support agreement

Relationship Test Dependent must be one of the specified relatives of the taxpayer (either taxpayer, if joint return) or be a member of the taxpayer’s household for the entire year Once a relationship is established by marriage, it continues even if there is a change in marital status The relationship cannot be in violation of local law (still an issue in Michigan).

Gross Income Test Dependent’s gross income must be less than the amount allowed for an exemption ($3,200 for 2005)

Related Change to Head of Household Filing Status Under the new rules for 2005 the qualifying person must be your dependent. Previously, your unmarried child did not have to be your dependent.

Rules For Contributions of Motor Vehicles, Boats, and Airplanes (New for 2005) If the claimed value exceeds $500 and the item is sold by the charity, the deduction is limited to the gross proceeds from the sale. If the charity will significantly use or materially improve the item, the deduction will be the fair market value. If the charity sells at a price significantly below fair market value to a needy individual in direct furtherance of the organization’s charitable purpose, the deduction will be the market value. Form 1098-C is used for notification and is to be attached to the tax return.

New State of Michigan Contribution Credit Vehicle Donation (new for 2005) –Limitation: smaller of 50% of the donation or $100/$200(MFJ)

City of Detroit Changes Personal exemptions are reduced from $750 to $600. A non-resident taxpayer will be required to submit documentation from their employer to support an allocation of income earned outside the city. New mailing addresses.

Thank you for your participation in this presentation! Marshall J. Hunt, CPA Director, Tax Assistance Program Accounting Aid Society Mack Avenue Detroit, MI Website: