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\u2714$70 billion in net tax cuts
\u2714 14 revenue offset provisions
\u2714Extension of capital gains
conference committee released H.R. 4297, the Tax Increase Prevention and Reconciliation Act of 2005 (Tax Reconciliation Act). The House promptly approved the bill on May 10, 2006, by a vote of 244 to 185 and the Senate fol- lowed the next day by a vote of 54 to 44. President Bush signed the bill into law at a While House ceremony on May 17.
The Tax Reconciliation Act im- pacts a broad cross-section of taxpay- ers. The new law extends the contro- versial dividend and capital gains tax rate cuts for two more years beyond 2008, gives taxpayers some immediate relief from the alternative minimum tax (AMT), extends small business expens- ing thresholds, and allows high-income taxpayers a Roth conversion opportu- nity. Moreover, it makes over 20 other signi\ufb01cant changes.
Conferees worked for many weeks before pressure from Congres- sional leaders and the White House encouraged an agreement. While the final bill has undergone many changes since it started as last year\u2019s 2005 reconciliation bill, it still contains $70 billion in net tax cuts. It also contains $20 billion in revenue raisers that should get the attention of a wide variety of taxpayers.
a legislative victory before sum- mer. Congress has been bogged down with immigration and lobby reform as well as trying to respond to high energy prices. The official name of this new law carries a \u201c2005\u201d designation because it is in fact a carryover from last year\u2019s budget. Expectations are that, given mid-term elections, there will be no further tax measures this year under the auspices of the \u201cbudget process.\u201d
To reach an agreement, and keep within budget constraints, conferees removed some important provisions which will likely appear in stand-alone legisla- tion, a \u201ctrailer\u201d bill, or could be tacked onto the pending pension reform bill. These additional provisions include: extending the state and local sales tax deduction, the teachers\u2019 classroom expense deduction, R&D provisions, some employment tax credits, and other popular but temporary incentives.
The Tax Reconciliation Act extends and increases-for 2006 only-the AMT exemption amount for individuals. It also lessens the sting of the AMT for 2006 by allowing the use of certain nonrefundable personal credits.
gains rate cuts........................ 2 Small business expensing....... 3 Subpart F.................................. 3 Corporate estimated
tax payments........................... 3 CERCLA settlement funds....... 4 Revenue Raisers...................... 4 Roth IRAs.................................. 4 No Shows................................. 7
affect a broad spec-
trum of taxpayers,
job creators and mid-
Ways & Means Com-
ment, May 10, 2006.
Despite dire predictions about the AMT soon becoming the \u201cregular\u201d tax for millions of middle-income Americans, Congress hasn\u2019t found the wherewithal to repeal the AMT or reform it. The Tax Reconciliation Act, like many tax bills before it, merely provides limited AMT relief.
Through December 31, 2006, taxpayers will be able to take advantage of higher AMT exemption amounts. The AMT exemption amount for married couples
Without this 2006-only retroactive relief, an additional 15 million taxpayers, many of them middle-class, would be subject to the AMT. Congress will have to face similar \u201cdire consequences\u201d again for 2007.
higher AMT exemption amounts through December 31, 2005, but at lower levels ($58,000 for married couples\ufb01 ling jointly and $40,250 for single taxpayers).
The Tax Reconciliation Act extends through 2006 the provision allowing taxpayers to use nonrefundable per- sonal credits to offset AMT liability. Nonrefundable personal credits in- clude the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for certain college expenses and the Lifetime Learning credit.
No recent tax cut has been as controversial as the dividend and capital gains tax rate cut enacted in 2003. While the White House
and Republicans credit this tax cut with spurring economic growth, Democrats decry it as a give-away to the wealthy.
The dividend and capital gains tax rate cut is so controversial that Republicans knew they could only get it through Congress as part of a tax reconciliation bill, which requires only a simple majority in the House and Senate to pass. Oth- erwise, a stand-alone bill would require at least 60 votes in the Senate to pass and no Democrat would sign on.
In 2003 Congress lowered the maxi- mum dividend and capital gains tax rates \u2013 for most, but not all, dividends and capital gains \u2013 to 15 percent for qualify- ing taxpayers. Taxpayers in the 10- and 15-percent tax brackets are eligible for an even lower rate of\ufb01 ve percent. In 2008, the rate for taxpayers in the 10- and 15-percent tax brackets falls to zero. As originally enacted, these tax rate cuts were temporary. They were scheduled to expire at the end of 2008.
The Tax Reconciliation Act extends these cuts for two more years through December 31, 2010.
Extending this tax break represents a signi\ufb01 cant tax cut for many of those affected. Once the extension ends in 2011, capi- tal gains will effectively be taxed at a 33.33 percent higher rate (20 percent instead of 15 percent); while those in the highest tax bracket (set to revert to 39.6 per- cent) will pay over 160 percent more tax on dividends.
The extension through December 31, 2010, now aligns the dividend and capital gains tax rate cuts with the tax cuts enacted in the Economic Growth and Tax Relief Reconcilia- tion Act of 2001 (EGTRRA), including the lower individual marginal income tax rates, mar- riage penalty relief and tempo- rary repeal of the federal estate tax. All the tax cuts in EGTRRA will sunset after December 31, 2010, and at this time, it\u2019s anyone\u2019s guess whether Con- gress will extend them. The current White House and many Republicans in Congress want to, but many lawmakers, and not only Democrats, believe the country cannot afford them with the federal budget deficit at an all-time high. Therefore, the possibility of higher tax rates should be considered in any long-term tax strategy.
Reconciliation Act 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 special treat- ment is effective for sales or ex-
2008 Tax Savings (in percentage of total tax liability)
For Taxpayers With Quali\ufb01 ed Dividend And Long
Term Capital Gains Income
changes in tax years beginning after the President signs the new law and before January 1, 2011.
Despite some initial proposals to lower the capital gains tax rate on collectibles, the
related music-industry development, the Act permits a taxpayer that puts any musical composition or musical copyright into service to elect to use the five-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.
This will allow music publishers to amortize advances they make to song writers over
Since 2003, Congress has enhanced small business expensing under Code Sec. 179 several times to encourage business investment. The Tax Rec- onciliation Act continues this special treatment. The enhanced small
The maximum amount a taxpayer may expense is $100,000 of the cost of qualifying property, reduced by the amount by which the cost of qualifying property ex- ceeds $400,000. Both amounts are indexed for in\ufb02 ation for tax years beginning after 2003 and before 2010. These amounts are increased for Gulf Opportunity Zone prop- erty. For 2006, the amounts are
$108,000 and $430,000, respectively. Without the extension, the expensing limit would have dropped to $25,000 on a $200,000 cap after 2007.
tion from Subpart F taxation for active financing and insurance income. This special treatment was set to expire at the end of 2006. The Tax Reconcilia- tion Act extends the temporary excep- tion through December 31, 2008.
tion Act also creates another temporary exception from Subpart F by providing a look-through exception for dividends, interest, rents, and royalties received by one controlled foreign corporation (CFC) from a related CFC to the extent attribut- able to non-Subpart F income of the payor. The new temporary exception is effective for tax years beginning after December 31, 2005, and before January 1, 2009.
tions with assets of at least $1 billion that are due in 2006, 2012 and 2013. Payments due in July, August and September 2006 are increased to 105 percent; payments due in July, August and September 2012 to 106.25 percent; and payments due in July, August and September 2013 to 100.75 percent.
of the corporate estimated tax payment due on September 15, 2010, will not be due until October 1, 2010. 27.5 percent of the corporate estimated tax payment due on September 15, 2011, will not be due until October 1, 2011.
ACTIVE BUSINESS TEST
The Tax Reconciliation Act also simpli\ufb01 es the active business test for tax-free corporate spin-offs. Taxpay- ers can look ata l l corporations in the distributing corporate group and the spun-off subsidiary\u2019s respective af\ufb01 li- ated group to determine if the active business test is satis\ufb01 ed.
By applying the test at the group level, the necessity for corporate restructuring to satisfy the active business test may be avoided.
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