Eaton Peabody

Federal Tax Update - June 9, 2006

 

President Bush recently signed the Tax Increase Prevention and Reconciliation Act.

The following are selected provisions from which you might benefit:

Alternative Minimum Tax (“AMT”) Relief

For 2006, the AMT exemption amount for married taxpayers increases to $62,550 and for unmarried individuals to $42,500. Nonrefundable personal tax credits, such as the dependent care credit, the credit for interest on certain home mortgages, the Hope Credit, and the Lifetime Learning Credit, may be claimed to the full extent of an individual’s regular and alternative minimum tax, instead of being limited to the excess of regular tax liability over tentative minimum tax.

Dividend and Capital Gains Rate Tax Cuts

The favorable tax rates for capital gains and qualified dividend income remain in place through 2010, instead of sunsetting after 2008.

Small Business Expensing – Section 179

The favorable Code Section 179 expensing provisions remain in place through the end of 2009, instead of through the end of 2007. For 2006, the maximum amount a taxpayer may expense is $108,000 of the cost of qualifying property, reduced by the amount by which qualifying property exceeds $430,000.

Changes to Roth IRA’s for Higher Income Taxpayers

The Act eliminates the $100,000 adjusted gross income ceiling for converting a traditional IRA to a Roth IRA, for tax years after 2009. A conversion is treated as a taxable distribution, but it is not subject to the 10% early withdrawal penalty. Taxpayers who convert in 2010 can elect to recognize the conversion income in 2010 or average it over the next two years.

Offers in Compromise

The Act increases the amounts that must be paid by taxpayers submitting offers in compromise. The new law requires taxpayers to make partial payments of their liability in addition to user fees. The user fee will be applied against the tax liability. Lump sum offers require a 20% payment along with the offer. Installment offers will necessitate that the taxpayer make installment payment while the offer is being reviewed. If the IRS fails to process the offer within two years, the offer will be deemed to be accepted.

Kiddie Tax

For tax years beginning after 2005, the age at which the kiddie tax applies is changed from under 14 years of age to under 18 years of age. There are exceptions in the event the child is married and files a joint return and for distributions from certain qualified disability trusts.

 

Please contact Christine Worthen, cworthen@eatonpeabody.com, for further information.

This paper is provided as general information, and is not a substitute for legal or other professional advice.