Tax Increase Prevention and Reconciliation Act of 2005
On May 11, 2006 Congress pass the Tax Increase Prevention and Reconciliation
Act of 2005. This has a long list of tax provisions, many of which are getting
considerable press in the media. Here is a list of items in the bill, with
comments on some of them.
AMT relief - for 2006
Congress continues to find no (politically acceptable) solution for the AMT.
Therefore, as in similar years, there is a short-term adjustment of the AMT
exemptions that will reduce the AMT tax, and allow ~15 million taxpayers
to escape the tax. This adjustment applies only to 2006.
The bill also allows certain non-refundable credits to apply to the AMT tax.
This is good news, as otherwise certain taxpayers would lose the benefit of
these credits (including the dependent care and educational credits).
The AMT was enacted in 1969 in an attempt to prevent the wealthiest taxpayers
from avoiding the payment of taxes. Unfortunatly, the exemption amount was
not indexed for inflation. Today a lot more than the wealthiest 100 taxpayers
make more than $50,000 or so each year.
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Dividend and Capital Gains tax relief extension
In 2003 Congress created a special lower tax bracket for qualified dividends
and long-term capital gains. This provision was scheduled to expire at the end
of 2008, but this bill extends this through 2010.
Democrats and the media often assult this provision as a special benefit for
the rich. It is true that the wealthy benefit more than the poor, but many
taxpayers in the middle income ranges benefit too.
A better view of this is not creating a tax break for any certain group, but
creating attractive investments. Wealty people (as all investors should) exert
the effort to find the best after-tax return for their money, and that is where
they choose to invest. This provision makes investing in our economy more
attractive, thus causing a heavier investment in areas that fuel our economy
and create jobs.
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Small business expensing of capital items via section 179
In 2003 Congress enhanced the provision that allows small business to expense
certain capital purchases rather than to spread the expense over multiple
years through depreciation. This is called a Section 179 expense. This bill
extends that provision through 2009.
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Roth IRA conversions (waiving limits in 2010)
This act removes the $100,000 income cut-off for rolling over money from a
Traditional IRA to a Roth IRA. The distribution will still be taxable, but will
not be subject to the 10% penalty. (I do not know about the 2.5% California
penalty.) This provision becomes available after 2009. For conversions executed
in 2010 the taxpayer can elect to average the extra income over three years.
The motivation for this is to increase revenue over the short term, at the cost
of potential long-term revenue. The long-term revenue loss is because a Roth
IRA earns income tax-free, so future income will not be taxable.
There are some tax planning ideas associated with this for those who have
income levels too high to contribute to a Roth IRA....
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Offers-in-Compromise require partial payments when submitted
Offers-in-Compromise (OIC) will now require a 25% payment if the offer is constructed
around a one-time payment. This has the value of accelerating tax payments to the
government.
An OIC is what is generally meant when companies advertise that they can help
you with IRS problems, "maybe" settling your tax account for pennies on the dollar.
The real story is these "pennies-on-the-dollar" cases are very rare. In most cases
the IRS will settle for an amout less than but substantially close to the total
tax owed. It is exceptionally rare for an offer to be accepted that is much
less than the taxpayer net worth.
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Kiddy tax cut-off raised
The "Kiddy Tax" is a provision that prevents wealty people from sheltering
too much income under the social security number of their child. At certain
unearned (investment) income levels, the child is taxed at the marginal
tax rate of the parent, thus eliminating any advantage. Previously this
applied only to children under age 14; it now applies to children under age
18.
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