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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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"Tax software is no substitute for tax knowledge."

Any views expressed herein are based on our best information. The content of this web site was written as general information without specific individual information and thus may not apply in all situations. This material was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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Janelle Ogg, EA
Richard Ogg, EA