| May 2006 |
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TaxAdvisor
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Congress Approves Tax Reconciliation Bill
After months of back and forth negotiations the House and Senate have
approved H.R. 4297, The Tax Increase Prevention and Reconciliation Act of 2005
(TIPRA) and the President has signed the bill into law.
The TIPRA law impacts a broad cross-section of taxpayers. The new law extends
the controversial dividend and capital gains tax rate cuts for two more years
beyond 2008, gives taxpayers some immediate relief from the alternative minimum
tax (AMT), extends small business expensing thresholds, and allows high-income
taxpayers a Roth conversion opportunity. Moreover, it makes over 20 other
significant changes.
AMT Relief
TIPRA extends and increases - for 2006 only - the AMT exemption for
individuals. It also lessens the sting of the AMT for 2006 by allowing the use
of certain non-refundable personal credits. The 2006 exemption amounts are
$42,500 ($62,550 MFJ) which is higher than the 2005 amounts. Had the 'patch' not
been enacted the exemption would have dropped back down to only $33,750 ($45,000
MFJ). This one item alone is estimated to keep 15 million taxpayers out of AMT.
The Act extends through 2006 the provision allowing the use of personal credits
to offset AMT liability. The personal credits allowed are the child care credit,
Hope credit, Lifetime Learning credit, mortgage interest credit and the credit
for the elderly and disabled.
Dividend and Capital Gains Rate Cuts
The dividend and capital gain rate cuts enacted in 2003 were scheduled to
expire at the end of 2008. TIPRA extends these rate breaks through the end of
2010. Basically most dividends and all long term capital gains are taxed at a
maximum rate of 15% under the Act. Those in the 15% tax bracket or lower already
will pay only 5% on qualified dividend and capital gain income.
Small Business Expensing
Congress has enhanced small business expensing under §179 several times to
encourage business investment. TIPRA extends the enhancements in the 2004
American Jobs Creation Act through 2009. These benefits were set to expire at
the end of 2007. The maximum amount a taxpayer may expense for 2006 is $108,000,
reduced by the amount by which the cost of qualifying property exceeds $430,000.
Both amounts will continue to be indexed for inflation in the future. Without
the extension, the expensing limit would drop to $25,000 on a $200,000 cap after
2007.
Important Changes to Roth IRAs
TIPRA eliminates the current $100,000 adjusted gross income (AGI) ceiling for
converting traditional IRAs to Roth IRAs, for tax years after 2009. A conversion
is treated as a taxable distribution, but is not subject to the 10% early
withdrawal penalty. Taxpayers who convert in 2010 can elect to recognize the
conversion income in 2010 or average it over the next two years. 2010 is also
the last year for the current low income tax rates before they sunset in 2011.
Most experts figure that conversions will pay very favorably, with future tax
rates not expected to go down significantly. The make-or-break factor for many
taxpayers, however, will be whether the conversion tax can be funded from
outside the account. If account proceeds must be used to pay the tax the 10%
early withdrawal penalty will apply.
Kiddie Tax
The kiddie tax rules require a child's unearned income, such as dividends and
interest, to be taxed at the parents' higher tax rate. Under current law, the
kiddie tax applies if the child is under age 14 and the child has net unearned
income over $1,700. TIPRA raises the age limit to under 18. This provision is
effective immediately for all of 2006 and has the effect of eliminating some
income shifting techniques used in the past.
We recognize the above synopsis is no substitute for a meaningful discussion,
deliberation, and careful analysis. If you have any questions or would like
additional information regarding this Tax Advisor, please contact your
engagement Partner/Manager or contact Michael Hydell at 330-255-2456 or email
him at
michael@bobermarkey.com.
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