Keeping Up | TIPRA 2005On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005, calling the $70 billion tax cut package “vital legislation” that will “keep our taxes low and the economy growing.”
The Act impacts a broad cross-section of taxpayers:
• Extends and increases, for 2006 only, the AMT exemption amount: from $58,000 to $62,500 for married couples filing jointly, and from $40,250 to $42,500 for single taxpayers. Without this retroactive relief, an additional 15 million taxpayers, many of them middle-class, would be subject to the AMT. Also extended through 2006 was the provision allowing taxpayers to use nonrefundable personal credits such as the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for certain college expenses and the Lifetime Learning credit, to offset AMT liability.
• Extends the dividend and capital gains rate cuts enacted in 2003 for two more years through December 31, 2010 (they were originally scheduled to expire at the end of 2008). Whereas the maximum dividend and capital gains tax rates for were lowered to 15% for qualifying taxpayers, when the extension ends, capital gains will effectively be taxed at 20%, and dividends at the ordinary income rate.
• Extends higher Code Sec. 179 small business expensing thresholds through 2009. For 2006, the maximum amount a taxpayer may expense is $108,000 of the cost of qualifying property, reduced by the amount by which this cost exceeds $430,000.
• Simplifies the active business test for tax-free corporate spin-offs.
• Eliminates the $100,000 adjusted gross income ceiling for converting a traditional IRA to a Roth IRA for tax years after 2009. 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.
• Raises the age limit on the kiddie tax, which requires that a child’s unearned income to be taxed at the parents’ tax rate, to under 18.
• In order to reach agreement and keep within budget constraints, some important provisions were removed, including extending the state and local sales tax deduction, the teachers’ classroom expense deduction, R & D provisions, some employment tax credits, and other popular but temporary incentives.
To discuss how these or other changes related to the new law may impact you or your business, please give us a call.
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