Special CCH Tax Briefing Provides Overview, Explanation of Changes
SB Informer
Friday, May 12, 2006; 04:00 AM
RIVERWOODS, Ill. -
Congress has given taxpayers a little more certainty in planning their
finances by extending two tax breaks for an additional two years and
providing a one-year "fix" for the alternative minimum tax (AMT),
according to CCH, a Wolters Kluwer business and a leading provider of
tax information, software and services (CCHGroup.com). The Tax Increase Prevention and Reconciliation Act of 2005, passed
by the House on May 10 and the Senate on May 11, is expected to be
signed by the President. A special CCH Tax Briefing analyzing the bill is available at http://www.cch.com/tax2006.
Among dozens of provisions affecting everyone from music composers to
corporations are several that can have a significant impact on
middle-income and wealthy families. Substantial AMT Relief The bill provides substantial AMT relief by raising the amount of
the AMT exemption to $62,550 for joint filers and surviving spouses;
$42,500 for singles; and $31,275 for married persons filing separate
returns for 2006. The corresponding amounts in 2005 were $58,000,
$40,250 and $29,000, but without the new law the amounts would have
fallen back to their 2000 levels: $45,000 for joint filers and
surviving spouses; $33,750 for single taxpayers; and $22,500 for
married taxpayers filing separately. The bill will also allow taxpayers
to claim personal credits, such as the dependent care credit, against
the AMT in 2006. "The AMT has been the bugaboo of the income tax system for some time
now, and ever since taxes were cut beginning in 2001, it has threatened
to wipe out hoped-for tax reductions for many middle-class taxpayers,"
said CCH Principal Tax Analyst Mark Luscombe, JD, CPA. "This will
shield about 15 million returns from the effects of the AMT at a cost
of about $34 billion. But, then we go back to square one again for
2007." Capital Gains, Dividend Provisions Extended The bill also extends two investor-friendly tax provisions for two
years beyond their scheduled expiration at the end of 2008. As a
result, the long- term capital gains rate will remain at 15 percent
until December 31, 2010, for taxpayers in all except the 10-percent and
15-percent brackets. For those in the 10-percent and 15-percent
brackets, long-term capital gains will be taxed at 5 percent for the
2006 and 2007 tax years and at 0 percent for 2008-2010. In addition,
dividends will continue to receive the same tax treatment as capital
gains through the end of 2010. "The extension aligns these provisions with many others that are due
to expire at the end of 2010," Luscombe noted. A break for small
businesses, allowing them to expense up to $100,000 per year in
equipment, with the amount adjusted for inflation after 2003, is also
extended in the bill through 2009. The inflation-adjusted amount for
the expense deduction is $108,000 for 2006. Offsets Pay for Breaks To pay for some of its tax breaks, the bill contains more than a
dozen "revenue offsets," including one that removes restrictions on
rollovers to Roth IRAs and another that affects the so-called "kiddie
tax." Beginning in 2010, anyone can roll over an IRA to a Roth IRA. The
ability to make such a rollover is currently limited to taxpayers with
adjusted gross incomes of no more than $100,000. The amount being
rolled over must be included in gross income, so taxes will be due, but
they can be spread over a two-year period if the rollover is made in
2010. Qualified withdrawals from Roth IRAs are not taxable, and Roth
IRAs are not subject to the minimum distribution requirements of
conventional IRAs and 401(k)s. "The Treasury gets its money sooner rather than later -- at the time
of the rollover rather than at the time money is withdrawn," Luscombe
noted. "Under technical rules, this helps pay for the bill, even though
in the long run it's a wash, or even a loss in tax revenue." The bill also ends a practice that allowed high-income families to
lower their tax bills by transferring assets to minor children. Under
so-called "kiddie tax" provisions, the unearned income of children
under age 14 has been taxed at their parents' top rate, but on reaching
age 14 they could file their own returns, which almost invariably led
to their unearned income being taxed at lower rates. The new law
requires that unearned income be taxed at parents' rates until children
reach age 18. "This will change a fairly common practice of making gifts to minors to lower family tax bills," Luscombe noted. Further Extensions Expected Following the reconciliation bill, another tax bill is expected to
extend a number of other provisions that expired at the end of last
year. Of greatest impact on individuals is an extension of the option
to take state and local sales tax, rather than state income tax, as an
itemized deduction. Other extensions affect the "saver's credit" for low-income workers,
and the ability of teachers to take a deduction for learning materials
they purchase from their own pockets. A number of business-related
credits are also expected to be extended. "These are popular provisions, but when you add them all together,
they total about $90 billion dollars in one-year 'relief,' at a time of
significant budget deficits," Luscombe noted. About CCH, a Wolters Kluwer business CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider
of tax, audit and accounting information, software and services. It has
served tax, accounting and business professionals and their clients
since 1913. Among its market-leading products are The ProSystem fx(R)
Office, CCH(R) Tax Research Network(TM), Accounting Research Manager(R)
and the U.S. Master Tax Guide(R). CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading multinational publisher and information
services company. For more information, see http://www.wolterskluwer.com/.
Website: http://www.cchgroup.com/
Website: http://www.wolterskluwer.com/