By Robert Bianchi
Another wave of tax changes, affecting both individuals and
businesses, is upon us! Congress passed the Tax Increase Prevention
and Reconciliation Act, which was signed into law on May 17. TIPRA
was enacted in order to correct some perceived inconsistencies in
prior tax legislation and to serve as a replacement for some
popular yet expiring provisions. This article will explain briefly
some of the changes found in TIPRA, not all of which are
necessarily good news for taxpayers.
Another wave of tax changes, affecting both individuals and businesses, is upon us! Congress passed the Tax Increase Prevention and Reconciliation Act, which was signed into law on May 17. TIPRA was enacted in order to correct some perceived inconsistencies in prior tax legislation and to serve as a replacement for some popular yet expiring provisions. This article will explain briefly some of the changes found in TIPRA, not all of which are necessarily good news for taxpayers.
AMT Relief
Originally enacted to make sure wealthy Americans did not escape paying taxes, this tax has started to ensnare more middle-income taxpayers. The AMT tax, which is a parallel tax system, does not allow several of the deductions permissible under the regular tax system, such as state, local and property taxes. Additionally, the AMT exemption is not indexed for inflation. To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary fix to the problem. Under the new law, for tax years beginning in 2006, the AMT exemption amounts are increased to:
n $62,550 for married individuals filing a joint return and surviving spouses
n $42,500 for unmarried individuals other than surviving spouses
n $31,275 for married individuals filing a separate return
Another provision in the new law provides AMT relief for personal tax credits. Certain nonrefundable personal credits (including dependent care, elderly and disabled, Hope Scholarship and Lifetime Learning) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax. This has the effect of disallowing these credits against AMT. The new law temporarily (through 2006) allows these credits to offset the entire regular and AMT liability.
Investor Tax
Breaks Extended
In 2003, Congress passed a measure to lower the tax rate on most dividends to 15 percent from a high of 38.6 percent and to lower rates on most capital gains from 20 percent to 15 percent. That measure was set to expire at the end of 2008, but the new law extends the favorable rates through 2010.
Income Limitations On Roth IRA Conversions Eliminated, starting 2010
Contributions to a regular individual retirement account (IRA) generally result in a tax deduction for amounts contributed and earnings grow tax deferred. However, withdrawals are subject to significant restrictions and are taxed at ordinary income tax rates. In contrast, no tax deduction is allowed for a contribution to a Roth IRA, but contributions grow tax-free and there’s no tax, and few restrictions, on withdrawals.
Under current law, only taxpayers with $100,000 or less in modified adjusted gross income can convert a regular IRA into a Roth IRA. A taxpayer making the conversion generally must pay tax on money taken out of the regular IRA, but once it’s in the taxpayer’s Roth IRA, earnings are tax-free. Under the new law, beginning in 2010, taxpayers with more than $100,000 of modified adjusted gross income also will be able to convert a regular IRA into a Roth IRA. To make such conversions more attractive in 2010, the new law permits taxpayers who convert in 2010 to spread the income and resulting tax payments on the converted funds over two years – 2011 and 2012.
Kiddie Tax Age Limit Raised From Under
14 To Under 18
At one time, wealthy parents could significantly lower their family’s tax bill by transferring investment assets to minor children. This tax technique, called income shifting, worked by taking income out of the parents’ higher tax bracket and placing it in the lower tax brackets of their children. To curtail the use of this tax strategy, Congress enacted the ” kiddie tax ” rules, which said that children under 14 who had more than a small amount of unearned (investment) income had to pay tax at their parents’ marginal tax rate (the highest rate of tax of the parents).
Under the new law, the age limit below which a child’s income from investments is taxed at the parents’ rates is raised from 14 to 18. The new provisions apply to tax years beginning after Dec. 31, 2005.
Changes To the Foreign Earned Income
Exclusion And Housing Allowance For Citizens Working Abroad
The new law makes three changes to the foreign earned income exclusion and housing allowance. First, the income exclusion is indexed for inflation starting in 2006 (rather than 2008 under current law). Second, the base housing amount used in calculating the foreign housing cost exclusion in a taxable year is 16 percent of the amount of the foreign earned income exclusion limitation. Reasonable foreign housing expenses in excess of the base housing amount remain excluded from gross income, but the amount of the exclusion is limited to 30 percent of the taxpayer’s foreign earned income exclusion. Third, income excluded as either foreign earned income or as a housing allowance is included for purposes of determining the marginal tax rates applicable to non-excluded income.
Extension Of Increased Expensing For Small Businesses
Since its enactment several years ago, Code Sec. 179 has provided affected taxpayers a choice to deduct in full the cost of new or used tangible personal property up to a specified limit rather than depreciate these purchases. The maximum dollar amount that may be deducted annually is $108,000 for 2006, as adjusted for inflation. Under pre-Act law, this amount was to drop to $25,000 for property placed in service in tax years beginning after 2007.
Additionally, under Code Sec. 179, the taxpayer’s maximum expensing amount is reduced dollar-for-dollar by the amount of qualified expensing-eligible property that is placed in service during the tax year in excess of a phase-out amount. This amount is $430,000 for 2006, as adjusted for inflation. Under pre-Act law, this amount was scheduled to revert to $200,000 for property placed in service in tax years beginning after 2007. Off-the-shelf computer software qualifies as “section 179 property” eligible for the Code Sec. 179 expense election, but under pre-Act law, could not qualify in tax years beginning in 2008 and later. A Code Sec. 179 election or a revocation may be made, without IRS’s consent, on an amended federal tax return for the tax year to which the election or revocation applies, but under pre-Act law, could not be so made in tax years beginning after 2007.
The new law extends the $108,000 expense election limit and the $430,000 phase-out amount as inflation adjusted. Additionally off-the-shelf computer software is eligible “section 179 property,” and the right to amend or revoke an expense election without IRS’s consent is allowed for tax years beginning before 2010.
50 Percent W-2 Wage Limit On The Code Sec. 199 Domestic Production Deduction Modified
Under present law, the domestic production deduction is limited to 50 percent of the W-2 wages paid by the taxpayer. Under the Act, the W-2 wages taken into account for purposes of this limitation must be properly allocable to domestic production gross receipts – that is, the gross receipts from the activities that give rise to the deduction. In addition, the Act repeals the special limitation on the amount of W-2 wages that may be taken into account by partners and S corporation shareholders. The changes are effective for tax years beginning after the enactment date.
Other Corporate
Estimated Tax
Payment Changes
For corporate estimated tax payments due on Sept. 15, 2010, 20.5 percent won’t be due until Oct. 1, 2010, and for Sept. 15, 2011, 27.5 percent won’t be due until Oct. 1, 2011.
Tax-Exempt
Bond Reporting
Information reporting will be required for tax-exempt interest paid on tax-exempt bonds after Dec. 31, 2005. That is, financial institution will now issue 1099s for tax-exempt interest paid as they have previously for taxable interest paid.
Offers In Compromise
Taxpayers will be required to make partial payments to the IRS with any offer in compromise. For lump-sum offers (which include single payments, as well as payments made in five or fewer installments), taxpayers will have to make a down payment of 20 percent of the amount of the offer with any application. Any periodic payment offer in compromise will have to be accompanied by the payment of the amount of the first proposed installment. User fees will be applied against tax, interest or penalties due under the offer in compromise.
