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May 30, 2006 > Tax Increase Prevention and Reconciliation Act of 2005

Tax Increase Prevention and Reconciliation Act of 2005

by Alan L. Olsen, CPA Greenstein Rogoff Olsen & Co., LLP

New law brings tax relief to individuals and businesses alike 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.

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 phase-out threshold is $430,000.

Had this provision not been adopted, the expensing limit would have dropped back to $25,000, and the phase-out 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.

This summary of the act's key provisions was provided courtesy of Greenstein Rogoff Olsen & Co. LLP to help you understand how TIPRA might help reduce your tax liability. Questions or comments may be e-mailed to us at or by calling 510-797-8661.

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