4
Tax Increase Prevention and Reconciliation
Act of 2005
June 2006
To Our Clients and Friends:
New law
brings tax relief to individuals and businesses alike
On May 17, President Bush signed the Tax Increase Prevention and Reconciliation
Act of 2005 (TIPRA). This bill, which reconciles the Budget Resolution of 2005
(hence its date), provides a variety of tax breaks that may apply to you.
Specifically, it extends expensing rules for small businesses and tax rate
reductions on dividends and capital gains. It also temporarily protects some
middle-income Americans from the alternative minimum tax (AMT), expands the
kiddie tax to age 18 and makes it easier to convert traditional IRAs to Roth
IRAs.
A summary of the act’s key provisions follows. NCNP offers this information to help you understand how TIPRA might help you reduce your tax liability. Please send a reply e-mail or call us at 203-944-2100 with any questions you may have about this new law or other tax matters.
Small
business expensing
Under present law, the limit on the amount that small businesses may expense is
$100,000. This means that up to $100,000 of investments in depreciable assets
can be deducted in the year they are placed in service. Currently, the
deduction phases out dollar-for-dollar for annual investments exceeding
$400,000.
This provision was due to sunset at the end of 2007. But under TIPRA, the effective date is extended to Dec. 30, 2009, thus allowing small businesses more time to plan their purchases. Because the limits involved are adjusted for inflation, the deduction cap is $108,000 for 2006, and the phaseout threshold is $430,000.
Had this provision not been adopted, the expensing limit would have dropped back to $25,000, and the phaseout threshold would have decreased to $200,000 after 2007.
Alternative
minimum tax
Although the consensus is that the AMT should be overhauled, Congress has been
reluctant to take such action because it could reduce federal revenues by $1
trillion. The White House wants repeal coupled with overall tax reform but
hasn’t indicated what direction such reform should take.
In the interim, Congress has provided a “temporary and limited fix” for taxpayers caught in the AMT trap. TIPRA increases the AMT exemption to $62,550 for married couples filing jointly and $42,500 for single filers — but only through 2006.
In addition, such nonrefundable personal tax credits as the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for college expenses and the Lifetime Learning credit can now be claimed against the AMT, thus offsetting both regular and AMT tax liability.
Capital
gains rate
Current law taxes most long-term capital gains at a 15% rate. This provision
was scheduled to sunset at the end of 2008. TIPRA extends this lower rate two
more years, so the provision now expires at the end of 2010.
Tax rate
on dividends
Qualified dividends are currently taxed at a maximum 15% rate under a provision
that was to expire at the end of 2008. Like the capital gains rate extension, this
provision has been extended through 2010.
Expansion
of kiddie tax
Previously, only children under the age of 14 were taxed on unearned income at
their parents' tax rate. The new law changes the age threshold to 18 (with some
exceptions), effective retroactively for all of 2006. The child is still
entitled to $850 of tax-free income in 2006, and the next $850 is taxed at the
child’s rate before the "kiddie tax" applies.
Roth IRA
conversions
TIPRA removes entirely the $100,000 adjusted gross income cap on individuals
qualified to convert a traditional IRA to a Roth account. Although this
provision won’t be effective until 2010, it will then allow an individual of
any income level to make a Roth conversion. By paying current income tax on the
conversion, the IRA owner can avoid income tax on all future income and
appreciation in the account.
Let us
know how we can help
Because our firm specializes in advising individuals and businesses on ways to
minimize their taxes and maximize their financial well-being, we’ll keep you
posted on any further tax law changes we think you should know about. Again,
feel free to let us know how we can help you take advantage of these and other
tax law provisions to keep more of your money where it belongs — in your pocket,
not the government’s.
Best regards,