That’s not a typo in the subject of this post. The tax bill that was signed last week by President Bush is titled “The Tax Increase Prevention and Reconciliation Act of 2005.” Apparently Congress didn’t look at a calendar….
Here are the good points of the bill, such as they are:
1. AMT Relief, but just for one year. The bill increases the AMT exemption to $62,500 for Married Filing Jointly and $42,500 for single filers for 2006. However, yet another tax bill will need to be passed in 2007 to further extend AMT relief or millions of taxpayers will find themselves in AMT hell.
That’s the long list, in my view, of the good points. Now, here are the probable good points of the bill…but these could change, as they’re all in the future:
2. Dividend and Capital Gains Cuts Extended. This bill extends the dividend and capital gains tax cuts (these were scheduled to expire in 2008) until 2010. Note that nothing prevents Congress from extinguishing this extension next year.
3. Roth IRA Conversions. In 2010 anyone will be able to convert a regular IRA into a Roth IRA. Regular IRAs give taxpayers a tax deduction today but distributions (upon retirement) are taxable. Roth IRAs do not give a tax deduction today but the proceeds (in retirement) are tax-free. The tax owed for these conversion must be paid in 2011 and 2012. It’s quite possible that this new tax break could itself be broken by Congress between now and 2009.
Now let’s examine the negative points of the bill.
4. Offers in Compromise. Do you want to make an Offer in Compromise (OIC) with the IRS? You had better do it very soon—you have until July 15th to make an OIC without making a 20% OIC deposit. If your OIC is rejected by the IRS you will lose that deposit. I doubt we’ll see many OICs after July 15th.
5. Kiddee Tax Increase. If you’re wealthy, one tax strategy is to shift income to your children. The kiddee tax used to end at age 14…but the new bill extends it until age 18.
6. Expatriate Tax Increase. While the new bill does increase the Foreign Earned Income Exclusion (to $82,400), it greatly reduces the housing allowance for Americans living abroad. Additionally, the tax rate for investment income of expatriates is increased dramatically. The International Herald Tribune has an excellent story on this.
7. Changes to Section 199. If you’re a manufacturer (or a business that qualifies for this deduction), the Section 199 Deduction is now limited to 50% of W-2 earnings.
What’s not in the bill? Plenty. Tuition deduction, educators deduction, estate tax…the list is endless. A second bill is likely to emerge from Congress this Fall.
