After months of negotiating, Congress finally passed a bill that provides $70 billion in tax relief for American taxpayers. President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 on May 17, 2006 . Here's a brief overview of what the law contains.
Tax rates
In a 2003 tax law, the maximum tax rates for dividend income and long-term capital gains were cut to 15% through 2008. The rate for taxpayers in the two lowest brackets for ordinary income was cut to 5% through 2007 and to 0% in 2008. The new law extends the lower rates through December 31, 2010 .
Alternative minimum tax
The alternative minimum tax ( AMT ), a separate tax calculation intended to keep wealthy taxpayers from using tax breaks to eliminate their tax liability, has caught millions of middle-income taxpayers in recent years. To keep an additional 15 million taxpayers from having to pay the AMT this year, the new law provides higher exemption amounts. The AMT exemption for married couples filing jointly in 2006 is $62,550, and the exemption for singles is $42,500. The new law also extends through 2006 the benefit of certain personal tax credits in calculating the alternative minimum tax.
Expensing
The expensing election that allows small businesses to write off equipment costs in the year of purchase was scheduled to drop from the current $108,000 to $25,000 after 2007. The new law extends the higher expensing allowance through December 31, 2009 .
Roth IRAs
Effective beginning in 2010, the new law ends the income limit for converting a traditional IRA to a Roth IRA. Higher-income taxpayers will be permitted to convert to Roths.
“Kiddie tax”
Under previous law, the unearned income of children under age 14 was taxed at the parents' highest rate if it exceeded a certain amount. The new law raises this “kiddie tax” threshold to age 18.
The law contains many other tax provisions that will affect individuals and businesses. Among them are changes in the tax treatment of self-created musical works, the foreign earned income exclusion, and the domestic manufacturing deduction. Contact our office if you would like details on this latest piece of tax legislation.