May seems to be the traditional month in Washington for tax cuts and May 2006 is no different from past years. Congress has just passed a $70 billion tax cut package, the Tax Increase Prevention and Reconciliation Act, which impacts you.
Although one tax incentive - extending the dividend and capital gains tax rate cuts for two more years - has received the most press coverage, the new law includes many other important tax breaks that could help reduce your tax liability this year and in future years. Every time Congress changes the Tax Code there are exciting new opportunities for strategic tax planning. This letter highlights some of the important incentives in the new tax law. We encourage you to contact our office so we can take a detailed look at how the new tax law can save you money.
Dividends and capital gains. Three years ago, Congress lowered the tax rate on certain dividends and capital gains. The rate reductions were temporary and were scheduled to expire after 2008. The new law extends the lower rates for two more years.
The maximum tax rate on qualifying dividends and capital gains through December 31, 2010 is 15 percent. Not all dividends and capital gains qualify for the 15 percent rate. For example, the maximum capital gains rate on collectibles is 28 percent. Taxpayers in the 15 and 10 percent rate brackets can take advantage of even more generous tax treatment. Our office can help you create a tax strategy that maximizes the benefits of the lower tax rates on qualifying dividends and capital gains.
Roth IRAs. Until Congress passed this new tax law, higher-income individuals could not convert traditional IRAs to Roth IRAs. Only individuals earning less than $100,000 could convert traditional IRAs to Roth IRAs. The new law removes this limitation starting in 2010. Even though 2010 seems a long way off, it's important to start planning now to maximize this opportunity.
AMT relief. Taxpayers who are liable for the alternative minimum tax (AMT) know that its bite can be painful. Congress has talked for years about reforming the AMT so it doesn't impact as many middle-income taxpayers but so far hasn't made any substantial changes to the AMT rules. Instead, the new law extends some temporary measures designed to reduce the burden of the AMT. Through 2006, AMT taxpayers can take advantage of higher exemption amounts and use the nonrefundable personal tax credits to offset regular and AMT liability.
Kiddie tax. The"kiddie" tax rules require that a child's unearned income, such as dividends and interest, be taxed at the tax rate of the parents. In most cases, the child's parents will be in a higher tax bracket. Currently, the "kiddie" tax applies if the child is under age 14 and some other criteria are met. The new law raises the age limit from 14 to 18 and this change is effective immediately. Taxpayers who had envisioned the lower age limit being effective for 2006 now have to revisit their tax plans.
Small business expensing. Over the past several years, small businesses have been able to expense rather than capitalize more purchases because of higher expensing thresholds. The new law extends the more generous expensing thresholds for two more years.
More tax cuts. In addition to all of these tax breaks, the new law also:
· Changes the offer-in-compromise rules;
· Modifies the foreign earned income and employer-provided housing exclusion rules for U.S. citizens living abroad;
· Extends and creates a new exception to Subpart F, which taxes foreign subsidiaries of U.S. companies;
· Gives tax breaks to some environmental clean-up funds;
· Simplifies the active trade or business test for certain corporate distributions;
· Allows musical artists and publishers to elect special tax treatment;
· Tightens earnings stripping rules to prevent abuses;
· Requires withholding on payments made by some government agencies;
· Repeals the FSC/ETI grandfather provisions;
· Accelerates increased limits for industrial development bonds;
· Cracks down on exempt organizations engaging in tax shelters;
· Expands information reporting requirements for some tax-exempt bonds;
· Lengthens the amortization period for certain expenditures by oil and gas companies;
· Tightens the rules under the Foreign Investment in Real Property Tax Act ;
· Restricts the tax-free treatment for certain corporate cash-rich spin-off transactions;
· Imposes loan and redemption requirements on pooled financing bonds;
· Changes the timing of some estimated tax payments by large corporations;
· Clarifies the domestic production deduction; and
· Revises the tax treatment of loans to continuing care facilities.
The new tax law impacts taxpayers across-the-board. Many of the new incentives build on tax breaks enacted in past years. Careful and efficient tax planning requires attention to the details and nuances in the new and extended incentives
Be sure to check with your accountant to see if you can benefit from any of the changes listed and as always keep your Business N Synergy.
Brian N. Stovall