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Reconciliation Bill Offers AMT, Capital Gains, Dividend Relief, CCH Notes
Special CCH Tax Briefing Provides Overview, Explanation of Changes
(RIVERWOODS, ILL., May 11, 2006) – 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 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® Office, CCH® Tax Research Network™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.
Wolters Kluwer is a leading multinational publisher and information services company. The Company’s core markets are health, corporate services, financial services, tax, accounting, legal, regulation, and education. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, see www.wolterskluwer.com.
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