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Summary of the
Tax Increase Prevention
and Reconciliation Act of 2005
The Tax Increase Prevention and Reconciliation Act of 2005 was signed by President Bush on May 17, 2006. The following changes were included in this Act [1]:
Capital Gains and Dividends Rates
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the capital gains and dividend income tax rate to 15 percent. For taxpayers in the 10 and 15 percent tax brackets, the rate is 5 percent and will be reduced to zero in 2008. These rates were set to expire after 2008. The 2005 Act extends these rates through December 31, 2010.
Alternative Minimum Tax Relief
The Act increases the AMT exemption amount to $62,550 (married filing jointly), $40,500 (single), and $31,275 (married filing separately) for 2006 only. Also, the rules that allow personal non-refundable tax credits (i.e. the Hope credit, Lifetime Learning credit, Dependent Care credit, and the credit for the elderly and disabled) may be used to offset 2006 AMT liability.
Conversions to Roth IRAs
Currently, taxpayers with modified adjusted gross income above $100,000 are not allowed to convert traditional IRAs to Roth IRAs. The Act removes the modified adjusted gross income limitations on conversions from IRAs to Roth IRAs. Taxpayers can elect to convert their IRAs to Roth IRAs in 2010 and receive a two year time period (2011 and 2012) in which they must pay the resulting tax. For other subsequent years, the taxpayer must pay 100 percent of the resulting tax in the same year of conversion.
Increase Age for Kiddie Tax
A certain amount of investment income of children under the age of 14 is subject to the parent’s tax rate and is referred to as the kiddie tax. Under the Act, the kiddie tax now applies to children under the age of 18 rather than children under the age of 14. This provision is retroactive to January 1, 2006. The exceptions include minor children who are married and file a joint tax return and distributions from specific qualified disability trusts.
Increased Expensing for Small Business
The 2003 Jobs and Growth Tax Relief Reconciliation Act and the American Jobs Creation Act of 2004 increased the Section 179 small business expense deduction from $25,000 to $100,000. This $100,000 deduction can be used in the first year that the depreciable asset is purchased but is phased-out when the property exceeds $400,000. Both the deduction and phase-out amounts are indexed for inflation under the 2003 Act but were set to expire at the end of 2007, when the deduction would have returned to $25,000 and the phase-out limit to $200,000. The 2005 Act now extends the Section 179 expense deduction and phase-out until 2010.
More Information
Other provisions:
- change the foreign earned income exclusion and housing allowance
- require reporting of interest on tax-exempt bonds in a similar manner to interest paid on taxable obligations in determining tax liability
- allow for capital gain treatment for self-created musical works when sold by the artist
- require a down payment with the application to the IRS for an offer-in-compromise
[1] This summary is solely for general informational purposes and does not represent legal advice from Alexander Financial Planning, Inc., concerning United States tax law. If legal advice or other expert assistance is required the user should consult a professional. The information contained in this summary is offered in good faith and was obtained from federal sources deemed to be reliable; however, the information is offered without warranties, express or implied, as to its merchantability, fitness for a particular purpose, or any other matter.
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