Tax Law Change Signed Into Law On May 17th Impacts Middle and High Income Taxpayers

On May 17th, President Bush signed Tax Increase Prevention and Reconciliation Act into law. This tax cut package is projected to save taxpayers $70 billion through the remainder of the decade.

Woburn, MA (PRWEB) June 1, 2006 -- "On May 17, President Bush signed the Tax Increase Prevention and Reconciliation Act into law," explains Andrew Schwartz CPA, founder of CPANiche.com, a site where taxpayers can find a CPA who specializes in their particular profession. "While this $70 billion tax cut package extends certain expiring tax breaks, it also includes a few provisions that could increase your tax burden."

Here are some ways this Tax Act might save many middle and high income taxpayers some money:

Reduced Tax Rate on Capital Gains and Dividends Extended Through 2010: Currently, the maximum tax rate on corporate dividends and long-term capital gains (assets held for more than one year before being sold) is 15%. For people in the lowest two tax brackets, the rate is 5% through 2007, and then will be 0% in 2008. Originally scheduled to rise in 2009, the 15% and 0% tax rates on long-term capital gains and corporate dividends will now remain in place through 2010.

A Little AMT Relief Through 2006: Due to a variety of factors, more and more middle income taxpayers are being hit with the Alternative Minimum Tax (AMT) each year. And for 2006, the AMT exemption, which helps minimize the impact of this tax on the middle class, was going to fall from $58,000 to $45,000 for married couples, and from $40,250 to $33,750 for single individuals. This Tax Act restored the AMT exemption to $62,550 ($42,500 for single taxpayers) for 2006 only.

Increased Section 179 Deduction Available Through 2009: Every year, small business owners can elect to write off the business equipment they purchase instead of depreciating the cost of an asset over its useful life of 5 or 7 years. Effective 2008, the maximum Section 179 deduction was slated to decrease to just $25,000 from its current limit of $108,000 (in 2006). This Tax Act extended the increased Section 179 limits through 2009.

Like all other tax law changes, This Tax Act contains a few revenue raising items as well. Below are some ways this tax package might increase a person's tax burden:

"Kiddie Tax" Age Increased to 17: The Kiddie Tax, introduced as part of the massive Tax Reform Act of 1986, celebrates its twentieth birthday in 2006 by becoming broader. Basically, any unearned income above a certain threshold earned by a child under the age of 14 is taxed at the parent's tax rate. Thanks to the recent Tax Act, the Kiddie Tax now applies to children who are 17 or younger and earn more than $1,700 (in 2006) in interest, dividends, capital gains, and other non-wage income. This change to the rules might make 529 Plans look even more attractive.

Income Limitation for Roth Conversions Disappears in 2010: Under the current rules, you can only convert your IRAs to a Roth IRA if your income is less than $100,000. The same threshold of $100,000 applies to single individuals and to married couples alike. Starting in 2010, the income limitation disappears, and anyone can convert their IRAs to a Roth IRA. For 2010 Roth conversions, you'll also have the option to pay the taxes due in 2010, or to spread the tax liability over two years starting in 2011.

Good Tax Planning Gone Bad:

"Tax planning continues to become more challenging," warns Schwartz. "Even though you need to plan based on the current set of rules in place, future tax law changes might cause even the most prudent planning to backfire."

Here is an example of good tax planning gone bad. What if someone chose not to go with a 529 Plan to save for their child's college education, and instead purchased investments in the child's name with the expectation of selling those investments in 2008. Based on the pre-May 17th rules, no capital gains taxes would have been due provided the child is at least 14 years of age that year.

Seems like great tax planning, right? Well, since the Kiddie Tax now applies to children through the age of 17, those gains will now be taxed at the parent's rate of 15% unless the child is at least 18 years old.

So what's the solution? When planning, make sure to include a variable in your calculations to reflect the risk of the tax rules changing down the road. The longer term the tax planning, the more likely that either the rates or the rules will change, greatly impacting the taxes that ultimately will be due.

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