Important Changes to the Tax Code

Feb. 23, 2006 — -- It's that time of year again. Yes, time to start thinking about filing your tax returns. But before you begin rummaging through your receipts, there are some important changes in the tax code you need to be aware of, and some of these changes may benefit you.

April 17 -- not April 15 -- is this year's filing deadline. Because April 15 falls on a Saturday this year, taxpayers have until midnight on Monday, April 17, 2006, to file their 2005 tax returns without penalty. Although nearly 50 percent -- or 66 million -- usually wait until the last 30 days to file their taxes, procrastination is not a smart strategy. If you are rushed, you are more likely to make mistakes and miss out on important tax benefits.

Certain charitable donations are fully deductible. Cash contributions made between Aug. 28 and Dec. 31 to hurricane-relief organizations, as well as many other charities, are 100 percent deductible as part of the government's Katrina relief efforts. The contribution does not have to be Katrina-related, although that was the intent. Normally, cash contributions are capped at 50 percent of your adjusted gross income.

To take a deduction for charitable contributions, you must itemize your tax return. Also, you will need a receipt from a charity for any donation more than $250. Lastly, it's essential to make sure the organization to which you make a donation is considered tax-exempt by the IRS. You can ask the organization directly, or you can log on to irs.gov and click on the charities and nonprofits link to make sure your charity of choice is tax-exempt.

You can pay your taxes by credit card on officialpayments.com or by calling 800-2PAY-TAX. According to the IRS, about 1.5 million taxpayers paid their federal taxes with plastic in 2005 -- an increase of 54 percent from the previous year. This year, credit card companies have new promotions to encourage taxpayers to charge their bill. Visa and American Express offer double hotel points and airline miles for their respective Starwood and United affinity cards.

In addition, for the first time this year, you can pay your taxes electronically using your American Express, Discover, MasterCard or Visa credit card either at officialpayments.com or by calling 800-2PAY-TAX. The IRS can confirm your payment by comparing the Employer Identification Number on the form you filled out to the electronic record provided by the Official Payments Corp., which is the electronic payment service provider.

Although there are some advantages to this type of payment, it is not a good idea to use your credit card to pay your taxes if it means that you are going to rack up more debt. Additionally, there is a fee for this service -- 2.49 percent of the amount of the payment. So, if your payment is $1,000, you will be charged an additional $24.90 for using your credit card.

It has become harder to claim adult children as dependents. With nearly 38 percent of all tax returns claiming dependents, some taxpayers may be affected by new rules about who is a "qualifying child." In the past, single parents who have adult children living with them could file as "head-of-household," which meant lower taxes than if they were to file as single taxpayers. This year, though, it will be much harder for adult children to qualify as dependents. For 2005, a child cannot be considered a "qualifying dependent" if he or she turned 19 years old by the end of the year (or 24 years old for a full-time student). An older child may still be considered a "qualifying dependent" if he or she meets certain requirements, but not if he or she earns more than $3,200 annually. This means that many single parents who claimed their adult children as dependents in the past may no longer be able to, and they may now face a higher tax bill.

There's a new formula for gas deductions if you use your car for business purposes. If you use your car for business, the government recognizes that you likely paid a lot more this year in gas due to record-high gas prices. Although the deduction rate was 40 cents per mile for January through August, it went up to 48 cents for September through December, so be sure to do the math when calculating your deduction.

If you file online, you'll get your refund faster. According to the IRS, 65.8 million tax returns were e-filed for the 2004 tax year. When filing your 2005 tax return, you should take advantage of this filing option, as it can result in quicker refunds and fewer errors. On average, e-filers get their refunds in half the time of regular filers, and if you e-file and use direct deposit, you can receive your refund in approximately two weeks. Also, e-filers have a less than 1 percent error rate because the computer software automatically checks the math

Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.