On May 17, 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (“TIPRA”). The Act extends provisions relating to capital gains and dividends, the alternative minimum tax, and small business expensing. The Act also contains several other provisions, including changes that impact the “kiddie tax” rules and Roth IRA conversions.
Key provisions of the Act are summarized below.
Capital gains and dividends
The Jobs and Growth Tax Relief Reconciliation Act of 2003 established a maximum tax rate of 15 percent for long-term capital gains and dividend income (for taxpayers in the lowest two tax brackets, the maximum tax rate is 5 percent and will drop to zero in 2008). These rates were scheduled to expire after 2008.
The Act extends the rates that apply in 2008 for two years (through 2010).
Alternative minimum tax (AMT)
AMT exemption amounts, expanded under the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the Working Families Tax Relief Act of 2004, expired at the end of 2005. This Act increases AMT exemption amounts beyond their 2005 levels for the 2006 year only. New AMT exemption amounts for 2006 are:
- $62,550 for married individuals filing jointly
- $42,500 for single filers
- $31,275 for married individuals filing separately
The Act also resurrects, for 2006, the rules that allow non-refundable personal tax credits (e.g., the dependent care credit, the credit for the elderly and disabled, the Hope credit for certain college expenses and the Lifetime Learning credit) to offset the AMT.
Section 179 expensing for small business
As a result of the Jobs and Growth Tax Relief Reconciliation Act of 2003 and the American Jobs Creation Act of 2004, small businesses can currently elect to deduct up to $100,000 of investments in depreciable assets in the year they are purchased. The deduction begins to phase out when a business’s annual investment in Section 179 property exceeds $400,000. Both the $100,000 and $400,000 amounts are adjusted for inflation. Beginning in 2008, the Section 179 limit would have returned to its 2002 level of $25,000, and the phase-out limit would have dropped to $200,000.
The Act extends the increased Section 179 limits through 2009.
Roth IRA conversions
The Act eliminates the restriction that prevents individuals with modified adjusted gross income exceeding $100,000 from converting a traditional IRA to a Roth IRA. This change is not effective, however, until 2010.
In addition, the Act provides that individuals who convert a traditional IRA to a Roth IRA in 2010 will spread the resulting reportable income over the following two years (including the income ratably in 2011 and 2012). Individuals can elect to report 100 percent of the resulting income in 2010 if they wish.
IRC Section 1(g) effectively provides that the investment income of a young child may, under some circumstances, be taxed at the child’s parents’ top marginal income tax rate. This is commonly referred to as the “kiddie tax.”
For purposes of the kiddie tax, the Act increases the relevant age from 14 to 18. That is, effective January 1, 2006, children under the age of 18 are subject to the kiddie tax rules. Exceptions apply for minor children who are married and file a joint tax return, and distributions from certain qualified disability trusts.
Other provisions worth noting:
- The Act expands eligibility for qualified veterans’ mortgage bond programs that allow states to finance affordable mortgages for veterans.
- The Act provides for capital gain treatment (rather than ordinary income treatment) for self-created musical works when these works are sold by the artist.
- The Act makes changes that impact the tax treatment of loans made to qualified continuing care facilities.
- The Act requires that individuals seeking an offer-in-compromise make a good faith down payment with their application.
- The Act makes specific changes to the foreign earned income exclusion and housing allowance.
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