The Summer 2006 Tax Client
Newsletter brings you up-to-date on a number of important tax law changes for
2006. The United States Congress has
been busy, enacting four separate tax acts in the last nine months, including
the Tax Increase Prevention and Reconciliation Act of 2005, TIPRA, signed into
law on May 17, 2006.
Many important tax law
provisions went away (the process called sunset) on December 31, 2005.
The expiring provisions include the $250 adjustment to income known as
the Educator’s Deduction, the Tuition and Fees Deduction, the deductibility of
State Sales Tax, the Research and Development Credit and the Saver’s Credit. The
Pension Bill, thought by many to be a “trailer bill” to TIPRA, will generally
include most if not all of these expiring provisions.
It is anticipated that agreement on this bill will be reached and passage
of the Act complete by Labor Day.
With 2006 an election year,
many in
If you have any questions
concerning any of the information being reported on in this issue of the Tax
Client Newsletter, please contact my office to schedule an appointment.
The Increase Prevention and
Reconciliation Act of 2005 – TIPRA – (75 pages) includes $90 billion in targeted
benefits and $20 billion in revenue “offsets”.
The official name of the legislation carries a 2005 date because it
represents a carry-over from last year’s budget.
In this issue of the Tax Client Newsletter we will review some of the
most important changes for 2006.
Stock investors are the
broadest group of beneficiaries of the Act.
The 15% favorable tax rate on long-term capital gains and qualifying
dividends is extended through 2010.
The Joint Committee on Taxation estimates that the extension of the 15% tax rate
on long-term capital gains will cost $40.8 billion over ten years.
TIPRA raises the amount of
income exempted from the Alternative Minimum Tax (AMT).
Taxpayers who would appear to benefit from this provision are those with
incomes in the $100,000 to $500,000 range.
A hypothetical family of four with $185,000 in income and $33,000 in
itemized deductions would have faced an AMT of $3,700 in 2006, however, with
TIPRA the family will not be exposed to the AMT.
This is a one-year fix.
Congress must address the AMT each and every year.
With this fix, it is anticipated that no more taxpayers will be subject
to the AMT in 2006 then were subject to the AMT in 2005.
Without this fix, an additional 4.1 million taxpayers would be added to
the roles of those taxpayers subject to the AMT.
Interesting, controversial
and challenging the revenue “offset” in the bill concerns the provision for ROTH
IRAs. Beginning in 2010, taxpayers
with incomes in excess of $100,000 will also have the opportunity to convert
their regular IRAs to a ROTH IRA.
Supporters of this measure noted that it will raise revenue since taxpayers
converting to a ROTH IRA must pay taxes based on the value at the time of the
conversion. It is estimated that
ROTH IRA conversions will yield $6.4 billion in revenue between 2010 and 2015.
Americans living and working
abroad will pay an estimated $2.1 billion in taxes over the next decade.
Expatriates will face tighter rules on how employer-provided housing will
be treated and they could face higher taxes on investment income as a result of
an adjustment in tax rates; calculating the excluded foreign earned income as if
taxable for the effective tax rate on taxable income.
The amount of income
exempted from the AMT is increased to $62,500 for married couples filing jointly
up from $58,000 in 2005. Without the
tax measure, the exempted amount was scheduled to decrease to $45,000 in 2006.
The exemption for single filers will be
raised to $42,500 for 2006 up from $40,250 in 2005.
TIPRA extends through 2006
the provision allowing taxpayers to use non-refundable personal credits to
offset AMT liability. The credits
include:
Dependent Care
Credit
Credit for
Elderly and Disabled
Hope Credit
Lifetime
Learning Credit
The Act extends the current
15% tax rate on capital gains and qualifying dividends from the end of 2008
through 2010. By extending the
capital gains/dividends break through 2010, the provisions are now aligned with
the tax cuts enacted in the Economic Growth and Tax Relief Reconciliation Act of
2001.
Musicians benefit from a
special provision in the Act. TIPRA
allows taxpayers to elect to treat the sale or change of self-created musical
compositions or copyrights as the sale or exchange of a capital asset.
This change is effective for tax years beginning after the President
signed the bill on May 17, 2006 and through 2010.
The Act allows a taxpayer who puts any musical composition or musical
copyright into service to elect to use the 5-year amortization period for
certain expenses paid or incurred with respect to all musical compositions and
musical composition copyrights placed in service in that tax year.
TIPRA continues the special
small business expensing under Code Section 179.
The enhanced small business thresholds contained in the American Jobs
Creation Act of 2004 are extended through 2009.
The maximum amount that may be expensed is $100,000 of qualifying
property, reduced by the amount by which the cost of qualifying property exceeds
$400,000. The $100,000 and $400,000
amounts are indexed for inflation after 2003 and before 2010.
For 2006, the amounts are $108,000 and $430,000, respectively.
Without the extension in the TIPRA, the amounts would have dropped to
$25,000 on a $200,000 cap after 2007.
1.
Kiddie Tax:
Age Increase
The TIPRA provides for
increasing the age limit of the “kiddie-tax” to children under 18 years of age
which is up from the previous under age 14.
If a child under 18 has investment income, the first $850 is tax-free and
the next $850 is typically taxed at the child’s tax rate.
“Unearned” income above $1,700 is taxable at the parents’ top tax rate.
This change in the law is effective for 2006.
Estimated tax payments for 2006 may need to be adjusted for this
provision.
2.
ROTH IRAs:
Increase in Eligibility
TIPRA eliminates the
$100,000 adjusted gross income test for converting a traditional IRA to a ROTH
IRA. The change is effective for tax
years after 2009. Taxpayers who
convert in 2010 can elect to recognize the conversion income in 2010 or average
it over the next two years of 2011 and 2012.
While contributions to a ROTH IRA are not deductible – the earnings are
tax-free. ROTH IRAs do not require
minimum distributions at age 70 ½.
3.
Offers-in-Compromise: Required Payment with Offer
The TIPRA increases the
amounts that must be paid by taxpayers submitting an offer-in-compromise.
Under the new law, taxpayers are required to make partial payments of
their liability in addition to any user fees now imposed by the Internal Revenue
Service. The required payment amount
will be applied to the outstanding tax liability and not refunded if the offer
is not accepted. For a lump sum
offer, taxpayers will be required to pay 20% of the amount being offered.
For an installment payment offer, taxpayers will be required to make
their proposed scheduled payments while the offer is being considered.
It should be noted, if the IRS fails to process the OIC within two years,
the offer will be deemed to be accepted by the IRS.
Income (2005 dollars)
Average Tax Savings
Less than $10,000
$
0
10,000 – 20,000
$
3
20,000 -
30,000
$
10
30,000 -
40,000
$
17
40,000 -
50,000
$
47
50,000 – 75,000
$ 112
75,000 -100,000
$ 406
100,000- 200,000
$ 1,395
200,000- 500,000
$ 4,527
500,000- 1 million
$ 5,656
Over 1 million
$42,766
The maximum IRA contribution
for 2006 remains at $4,000 however the “catch up” amount for taxpayers age 50
and older has increased from $500 to $1,000, making the maximum contribution for
a taxpayer age 50 and older to be $5,000.
President Bush signed into
law the “Hero Act” on May 28, 2006 allowing non-taxable combat pay to be deemed
earned income to qualify for an IRA contribution.
This Act is deemed effective for years 2004, 2005 and future years
allowing those taxpayers who qualify to make IRA contributions for the years of
2004, 2005 and 2006 beyond the normal contribution due date.
The contribution due date has been extended for qualifying taxpayers
until May 28, 2009.
For 2006, taxpayers who are
participants in 401(k) plans may now have an opportunity to participate in a
ROTH 401(k), if the employers plan so allows.
401(k) limits are $15,000 with an additional $5,000 “catch up”
contribution for taxpayers age 50 and older.
Unlike the ROTH IRA there is no income limitation on the ROTH 401(k).
Energy credits are available
for homeowners for 2006 and 2007. A
$500 lifetime credit is available for certain energy-saving expenditures for
your personal residence.
Although not in a tax act,
you have undoubtedly heard of the decision by the Department of the Treasury to
rebate Federal Excise Taxes charged on long-distance telephone service.
Not only will taxpayers receive a credit for the Federal Excise Tax paid
for three years they will also receive interest on their money.
IRS is working with the Treasury Department to offer taxpayers a
“standard credit” rather than put taxpayers through the rigorous exercise of
compiling the taxes paid.
And finally, for taxpayers
making too much in income and loosing the deductibility of their itemized
deductions and personal exemptions, known as the phase out, 2006 will see the
beginning of the phase out of the phase out.
Taxpayers in 2006 will loose only 2/3 of the deductions and exemptions
they lost in 2005. In 2007 they will
only loose 1/3 and in 2008 they will loose nothing.
The phase out will no longer exists after 2007.
In the Summer 2006 Tax
Client Newsletter we have reviewed many of the most significant tax law changes
affecting your taxes.
Our combined focus should be
on how the tax law changes affect you, how the tax law changes can benefit you
and what tax planning techniques should be implemented in order to maximize
their tax benefit to you.
Thank you for reviewing the
Summer 2006 Tax Client Newsletter and for the opportunity and privilege of
allowing me to serve as your tax professional.
Do not use this article as a substitute for professional advice.
The information in this article is intended to be only a general overview of the topic and may omit details that could be critical to your specific situation. Accordingly, this article should not be construed as rendering legal, tax, or other professional services. Please contact our office for more information on this topic and how it could affect your specific tax or financial situation.