Springfield Business Journal Articles


Another New Tax Law -- More Of The Same

The Tax Increase Prevention and Reconciliation Act of 2005 was passed May 17, 2006. The Act provides another temporary fix for several tax problems that are very much in need of permanent solutions. Many of the Act's provisions extend tax breaks contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (the "2001 Act"). Because the 2001 Act could not generate 60 votes in the Senate, all of its provisions were set to expire anywhere from 2004 to 2010. Congress has been extending the provisions piece meal ever since.

Alternative Minimum Tax. The alternative minimum tax ("AMT") was introduced to correct a perceived unfairness when people with large incomes paid little or no income tax because of exemptions, deductions, etc. The AMT exemptions, however, have not kept pace with inflation, and each year more and more people are subject to the AMT. Everyone agrees the AMT needs to be fixed, but because fixing it will reduce government revenue, it never gets done. The 2001 Act increased the exemption amounts for 2001 - 2004. The Working Families Tax Relief Act of 2004 (the "2004 Act") increased the exemption amounts for 2005. Now the Act provides for higher AMT exemption amounts in 2006. The AMT exemption amount for married couples filing jointly is $62,550 and for single taxpayers is $42,500. It is estimated that this provision of the Act will save 15 million people from being subject to the AMT. These people will now be subject to AMT in 2007 and every year thereafter until Congress provides a permanent fix to the AMT problem.

Capital Gains Rates. The Act extends the current low rates on long term capital gains and dividends from the end of 2008 to the end of 2010. The current maximum rate is generally 15%.

Kiddie Tax. The age for the "kiddie tax" has been increased to 18 years of age from 14 years of age. This means that a child's investment income over $1,700 will be taxed to the parents until the child turns 18.

Section 179 Deduction. Section 179 allows businesses to deduct the full cost of certain property in the year the property is purchased, rather than depreciating the property over many years. The 2004 Act had increased the maximum Section 179 deduction to $100,000. The maximum would have decreased to $25,000 in 2007, however, the Act extends the increased deduction through 2009. The amount is indexed for inflation, making the amount for 2006 $108,000.

Roth IRAs. Beginning in 2010, the $100,000 adjusted gross income limitation for Roth IRA conversions is repealed. This means that any taxpayer can convert a traditional IRA to a Roth IRA. A conversion results in income tax in the year of conversion on the entire value of the IRA, but all income in the Roth IRA going forward is tax free.

Tax Relief for Artists. The sale of works created by an artist's own labor such as songs or paintings have been taxed as ordinary income, with a maximum rate this year of 35%. Sales occurring from the date of the Act until the end of 2010 can now be treated as capital gains.

Estate Taxes. Once again, no agreement could be reached on estate taxes. Current proposals range from an exemption of $3.5 million per person to total repeal. Proposed rates range from 15% to 45%. This matter is still very much in play, however, and Senate Majority Leader Bill Frist has promised a vote on the matter by July 4.

Offers-In-Compromise. If you are unable to pay an outstanding tax bill, you may submit an offer-in-compromise of a reduced amount. The Act increases the amount that you must pay when submitting the offer-in-compromise. You must now submit 20% of the amount you offer to pay. This payment is non-refundable, so even if the IRS rejects your offer, it will apply your payment to the outstanding debt. If you propose installment payments, you must make your proposed scheduled payments while the IRS considers your offer. If the IRS does not act on your offer within two years, the offer will be deemed accepted. These additional payment requirements will be a significant burden to taxpayers who are attempting to work out matters with the IRS.

Tax Exempt Bond Reporting. Currently, tax exempt interest is not reported to the IRS the way that taxable interest is (the Forms 1099 you receive each January). The Act now requires that this information be reported as well. Failed Proposals. Several proposals that have received a lot of publicity did not make it into the Act. These proposals included charitable deductions for people who do not itemize and tax free charitable deductions directly from IRAs. As with the estate tax, we will likely hear more about these proposals in the future.
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