Tax Breaks Extended!

President Bush signed into law on May 17 a tax relief bill that extends two tax breaks, provides a one-year "fix" for the alternative minimum tax (AMT) and modifies a few others.

AMT Relief: The new law 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 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 also allows 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 law 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% until December 31, 2010, for taxpayers in all except the 10% and 15% brackets. For those in the 10% and 15% brackets, long-term capital gains will be taxed at 5% for the 2006 and 2007 tax years and at 0% 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.

Capital Asset Purchase Incentives Extended: 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, has been extended through 2009. The inflation-adjusted amount for the expense deduction is $108,000 for 2006.

IRA to Roth IRA Rollovers: 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 they're not subject to the minimum distribution requirements of conventional IRAs and 401(k)s.

"Kiddie Tax" Age Raised to 18: Under the 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.

Source: CCH