TIPRA covers some issues, neglects others.
Recent tax reductions--along with a changing economy and inflation--have expanded the AMT's effects to more Americans. Lately, this expansion has caused shifts in tax planning and calls for tax reform. TIPRA Section 301 includes some relief from the AMT for 2006, via a temporary increase in the AMT exemptions, which will be $62,550 for those married filing jointly and $42,500 for single taxpayers (compared to $58,000 and $40,250, respectively, as provided in the Working Families Tax Relief Act of 2004).
TIPRA Section 302 extended the use of certain nonrefundable credits to reduce AMT liability through 2006. Along with the adoption credit, the child tax credit and the low-income saver's credit, it allows offsetting of the AMT with the following nonrefundable credits--the dependent care credit, credit for the elderly and disabled, energy savings credit, education credits and mortgage credit. Prior to the TIPRA, the ability to use these other credits for this purpose expired after 2005. Unfortunately, this bill is merely a band-aid for 2006; these issues will need to be re-addressed for 2007 and subsequent years.
Since 2003, Americans have been enjoying even more favorable capital gain and dividend rates than in the past. The 15% rate (5% for those in the 10% and 15% brackets) was set to expire on Dec. 31, 2008 and revert back to 20% for capital gains and ordinary income tax rates for dividends. TIPRA Section 102 extends the 15% capital gain rate through Dec. 31, 2010 and adjusts the rate for low-income taxpayers. Taxpayers in the 10% or 15% tax brackets will have their capital gains and dividends taxed at zero from 2008-2010. The reduced rates have been very beneficial to the many Americans who have realized gains in their portfolios over recent years. It is believed the extension of such rates Hill continue to spur investment and trading activity, and thereby continue the economic recovery.
However, this provision is controversial, because many feel it only benefits the wealthy. The rate reduction is a significant decrease and should be part of long-range planning. One factor to consider is whether gains on the sale of property should be deferred under provisions such as a like-kind exchange under Sec. 1031.
Self-created musical works: Budding musicians Hill want to pay special attention to TIPRA Section 204, which allows an election to treat the sale or exchange of self-created musical compositions or copyrights as the sale or exchange of a capital asset. Absent this provision, the transaction would have been deemed a sale in the ordinary course of business, resulting in ordinary income. This provision is effective from May 17, 2006 to Dec. 31, 2010.
Sec. 179 Expensing
TIPRA Section 101 extends the Sec. 179 expensing provisions for small-business capital investment. The expensing threshold, which is $108,000 for 2006, is extended to Dec. 31, 2009. Again, Congress hopes this Hill continue to spur investment and lead to more economic growth.
TIPRA Section 510 significantly changes the "kiddie tax" rules. Under prior law, unearned income of children under age 14 was taxed at their parents' marginal tax rate once it exceeded $1,700 for 2006, if the parent could claim the child as a dependent. This prevented shifting income to a child's return to take advantage of lower tax brackets. Beginning Jan. 1, 2006, the kiddie tax applies to children under age 18. However, this does not apply to a married child who files a joint return. The provision would apply to a married child who files separately.
Because this provision is retroactive to the beginning of 2006, tax advisers should focus on its potential effect on their client base. They should consider the types of investments held by a child not previously subject to the kiddie tax, and whether a shift from income-producing investments to growth-oriented investments would now be prudent.
TIPRA Section 512 liberalizes the Roth IRA conversion rules. Prior to the law change, only taxpayers with adjusted gross incomes under $100,000 could convert a traditional IRA to a Roth IRA. The TIPRA removes the $100,000 income limit for tax years beginning after 2009. In addition, for conversions during 2010, the income attributable to the conversion is subject to tax over a two-year period beginning with the year after the conversion, unless the taxpayer elects to include such income in the conversion year. The 10% excise tax will continue to apply to an early withdrawal of converted amounts (as will income tax).
Foreign Earned Income Exclusion
TIPRA Section 515 set an inflation adjustment for the exclusion of foreign earned income for U.S. citizens working abroad, and changed how the excess income is taxed. In general, taxpayers with income in excess of the exclusion ($82,400 in 2006) will be taxed at the marginal rate as if there were no exclusion. In addition, the qualified housing exclusion has been changed. (For more details, see Sherr and Mattson, "International Provisions of TIPRA," TTA, July 2006, p. 400.)
The TIPRA provisions outlined above affect the majority of taxpayers. The following provisions do not have the same broad effect:
* A temporary exclusion from subpart F for dividends, rents and royalties meeting certain requirements (TIPRA Section 103(a));
* An increase in estimated tax payment requirements for corporations with assets of at least $1 billion in 2006 (TIPRA Section 401);
* Simplification of the active-business test for tax-free corporate spinoffs (applied at the group level) (TIPRA Section 202);
* Exemption from Federal tax of certain settlement funds established under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (TIPRA Section 201(a));
* Requirement to make a partial payment of tax liability, in addition to a user fee, for an offer-in-compromise (TIPRA Section 509);
* Withholding by government agencies of 3% on all payments for services or property beginning in 2011 (TIPRA Section 511(a));
* Repeal of the foreign sales corporation and extraterritorial income exclusion binding contract transition rules, due to the risk of World Trade Organization sanctions (TIPRA Section 513);
* Limit of the domestic production activities deduction to 50% of the wages used in arriving at qualified production activities income, rather than simply 50% of overall wages (TIPRA Section 514(a));
* An excise tax on tax-exempt entities that are part of tax-shelter transactions (TIPRA Section 516(a)); and
* Codification of earnings-stripping regulations (TIPRA Section 501).
The TIPRA contains a broad range of tax provisions and some much-anticipated rehef and extenders. However, although it addressed many expected issues, it did not answer all of taxpayers' concerns. For example, it does not mention the possibility of extending the 15-year life for tenant improvements. Many professionals are anxiously awaiting a trailer bill later in 2006 that will cover some of these other issues.
FROM ANTHONY CONSTANTINE, CPA, COHEN & COMPANY, LTD., CLEVELAND, OH
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|Title Annotation:||Tax Increase Prevention and Reconciliation Act of 2005|
|Publication:||The Tax Adviser|
|Date:||Aug 1, 2006|
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