Tax Increase Prevention and Reconciliation Act of 2005
New law brings tax relief to individuals and businesses alike
 Fremont, CA - May
22nd, 2006
-
Dear Taxpayer:
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. GROCO 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 (510) 797-8661
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,
Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP
FOR IMMEDIATE RELEASE
Media Contact:
Dennis Wolfe
P: 510.797.8661
F: 510.797.1791
dwolfe@groco.com
|