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Congress has given taxpayers a little more certainty in planning their finances by extending two tax breaks for an additional two years and providing a one-year "fix" for the alternative minimum tax (AMT). The Tax Increase Prevention and Reconciliation Act of 2005, passed by the House on May 10, 2006, and the Senate on May 11, is expected to be signed by the President.
Among dozens of provisions affecting everyone from music composers to corporations are several that can have a significant impact on middle-income and wealthy families.
Small Business Expensing
A break for small businesses, allowing them to expense up to $100,000 per year in equipment, with the amount adjusted for inflation after 2003, is also extended in the bill through 2009. The inflation-adjusted amount for the expense deduction is $108,000 for 2006.
Substantial AMT Relief
The bill provides substantial AMT relief by raising the amount of the AMT exemption to $62,550 for joint filers and surviving spouses; $42,500 for singles; and $31,275 for married persons filing separate returns for 2006. The corresponding amounts in 2005 were $58,000, $40,250 and $29,000, but without the new law the amounts would have fallen back to their 2000 levels: $45,000 for joint filers and surviving spouses; $33,750 for single taxpayers; and $22,500 for married taxpayers filing separately. The bill will also allow taxpayers to claim personal credits, such as the dependent care credit, against the AMT in 2006.
"The AMT has been the bugaboo of the income tax system for some time now, and ever since taxes were cut beginning in 2001, it has threatened to wipe out hoped-for tax reductions for many middle-class taxpayers," said CCH Principal Tax Analyst Mark Luscombe, JD, CPA. "This will shield about 15 million returns from the effects of the AMT at a cost of about $34 billion. But, then we go back to square one again for 2007."
Capital Gains, Dividend Provisions Extended
The bill also extends two investor-friendly tax provisions for two years beyond their scheduled expiration at the end of 2008. As a result, the long-term capital gains rate will remain at 15 percent until December 31, 2010, for taxpayers in all except the 10-percent and 15-percent brackets. For those in the 10-percent and 15-percent brackets, long-term capital gains will be taxed at 5 percent for the 2006 and 2007 tax years and at 0 percent for 2008-2010. In addition, dividends will continue to receive the same tax treatment as capital gains through the end of 2010.
"The extension aligns these provisions with many others that are due to expire at the end of 2010," Luscombe noted.
Offsets Pay for Breaks
To pay for some of its tax breaks, the bill contains more than a dozen "revenue offsets," including one that removes restrictions on rollovers to Roth IRAs and another that affects the so-called "kiddie tax."
Beginning in 2010, anyone can roll over an IRA to a Roth IRA. The ability to make such a rollover is currently limited to taxpayers with adjusted gross incomes of no more than $100,000. The amount being rolled over must be included in gross income, so taxes will be due, but they can be spread over a two-year period if the rollover is made in 2010. Qualified withdrawals from Roth IRAs are not taxable, and Roth IRAs are not subject to the minimum distribution requirements of conventional IRAs and 401(k)s.
"The Treasury gets its money sooner rather than later--at the time of the rollover rather than at the time money is withdrawn," Luscombe noted. "Under technical rules, this helps pay for the bill, even though in the long run it’s a wash, or even a loss in tax revenue."
The bill also ends a practice that allowed high-income families to lower their tax bills by transferring assets to minor children. Under so-called "kiddie tax" provisions, the unearned income of children under age 14 has been taxed at their parents’ top rate, but on reaching age 14 they could file their own returns, which almost invariably led to their unearned income being taxed at lower rates. The new law requires that unearned income be taxed at parents’ rates until children reach age 18.
"This will change a fairly common practice of making gifts to minors to lower family tax bills," Luscombe noted.
Further Extensions Expected
Following the reconciliation bill, another tax bill is expected to extend a number of other provisions that expired at the end of last year. Of greatest impact on individuals is an extension of the option to take state and local sales tax, rather than state income tax, as an itemized deduction. Other extensions affect the "saver’s credit" for low-income workers, and the ability of teachers to take a deduction for learning materials they purchase from their own pockets. A number of business-related credits are also expected to be extended.
- Related items:
- Congress Again Fails to Pass Tax Package for New Fiscal Year
- Congress Returns to Unfinished Work
- New Tax Year Means Many Tax Changes to Consider
- Permanent AMT Fix Poses Difficult Choices
- Congress Ends 2005 Session; Tax Reconciliation Conference Ahead in 2006
- Congress Finalizes Katrina Tax Relief, Turns to Reconstruction Funding
- Congress Wraps Up More Economic Gifts: New Tax Relief
- AMT Negates Tax Relief for High Earners
Added to the news on May 15, 2006.
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