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Newsletter
- Summer 2006
The
Summer 2006 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.
Washington
is focused on the budget. Funding for the war, homeland security,
Social Security and Medicare, with the September 30 year-end looming
for the government, it is doubtful that the budget for next year
will be forthcoming by September 30, leaving the government to
run in what is called a "continuing resolution".
With
2006 an election year, many in Washington are concentrating on
their election or the election of their colleagues. With interest
focused on compaigning, it is almost certain that additional tax
acts will be initiated after the November election.
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.
2006 Tax
Legislation
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.
Highlights
of the Legislation
Stock
investors are the broadest group of beneficiaries of the Act.
The 15% favorable 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 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 than 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 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 Details
AMT
Relief: A One-Year Fix
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 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 nonrefundable
personal credits to offset AMT liability. The credits include:
Dependent
Care Credit
Credit
for Elderly Disabled
Hope
Credit
Lifetime
Learning Credit
Capital Gains
and Dividends: Two-Year Extension
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/Musical
Compositions/Musical Composition Copyrights
Musicians
benefit from a special provision in the Act. TIPRA allows taxpayers
to elect to treat the sale or exchange 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.
Small Business
Expensing
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 extension in
the TIPRA, the amounts would have dropped to $25,000 on a $200,000
cap after 2007.
Revenue "Offsets"
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 rate. This change in the law is effective
for 2006. Estimated tax payments for 2006 may need to be adjusted
for this provision.
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 .
Offers-in-Compromise:
Required Payment with Officer
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 noteed, if the IRS fails to process the
OIC within two years, the offer will be deemed to be accepted
by the IRS.
Average Tax
Savings per Taxpayer
| Income |
|
Average |
| (2005
dollars) |
|
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
|
Other Tax
Items of Note:
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 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
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
likfetime 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 Trasury 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 losing 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 lose only 2/3 of
the deductions and exemptions they lost in 2005. In 2007, they
will only lose 1/3 and in 2008 they will lose nothing. The phase
out will no longer exist 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.
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