Blitz, Lee & Company | News | June- September 2006 Newsletter


	Quote: “The taxpayer-that’s someone who works for the federal government but doesn’t have to take the civil service examination.”
	-Ronald Reagan

	Highlights of the Tax Increase Prevention and Reconciliation Act
	Financial Planning for College
	Existing Student Loans
	Correction
	Family Employment

Highlights of the Tax Increase Prevention and Reconciliation Act
The Tax Increase Prevention and Reconciliation Act was signed by the President on May 17, 2006. The Act includes the following provisions:

... For 2006, the AMT exemption amount for married taxpayers increases to $62,550 and for unmarried individuals to $42,500, instead of dropping to $45,000 and $33,750 respectively.

Brief overview of the AMT. The AMT is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as state, local, and property taxes. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system and under the AMT system. If their liability is found to be greater under the AMT system, that's what they owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to apply to more middle-income taxpayers, due in part to the fact that the AMT parameters are not indexed for inflation.

In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”—allowances that reduce the amount of alternative minimum taxable income (AMTI), reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose AMTI exceeds specified amounts.) For 2005, the AMT exemption amounts were $58,000 for married couples filing jointly and surviving spouses; $40,250 for single taxpayers; and $29,000 for married couples filing separately. However, for 2006, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form.

New law provides one-year stopgap fix. To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary “patch” to the problem, this time a one-year extension of the 2005 AMT exemption amounts, increased slightly. Under the new law, for tax years beginning in 2006, the AMT exemption amounts are increased to: (1) $62,550 in the case of married individuals filing a joint return and surviving spouses; (2) $42,500 in the case of unmarried individuals other than surviving spouses; and (3) $31,275 in the case of married individuals filing a separate return.

Personal credits may be used to offset AMT through 2006. Another provision in the new law provides AMT relief for personal tax credits. The tax liability limitation rules generally provide that certain non-refundable personal credits (including dependent care, elderly and disabled, and Hope Scholarship and Lifetime Learning) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2005. The new law extends this temporary provision to tax years beginning in 2006.

... Current law's favorable Code Sec. 179 expensing provisions remain in place through the end of 2009 (instead of through the end of 2007).

Code Sec. 179 allows a business to deduct, as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the trade or business. The maximum dollar amount that may be deducted annually is $100,000 ($108,000 for 2006, as adjusted for inflation). Under pre-Act law, this amount was to drop to $25,000 for property placed in service in tax years beginning after 2007.

The taxpayer's maximum annual Code Sec. 179 expensing amount is reduced dollar-for-dollar by the amount of qualified expensing-eligible property that he places in service during the tax year in excess of a phaseout amount. This amount is $400,000 ($430,000 for 2006, as adjusted for inflation). Under pre-Act law, this amount was to drop to $200,000 for property placed in service in tax years beginning after 2007.

Off-the-shelf computer software qualifies as “section 179 property” eligible for the Code Sec. 179 expense election, but under pre-Act law, could not qualify in tax years beginning in 2008 and later.

... Current law's favorable tax rates for capital gains and qualified dividend income remain in place through 2010 (instead of ending after 2008).

Investor tax breaks extended. In 2003, Congress passed a measure to lower the tax rate on most dividends to 15 percent from as high as 38.6 percent, and to lower the rate on most capital gains from 20 percent to 15 percent. That measure was due to expire at the end of 2008, but the new law extends the favorable tax rates through 2010.

... The $100,000 modified AGI limit on conversions of traditional IRAs to Roth IRAs is eliminated for tax years beginning after Dec. 31, 2009.

Taxpayers with six-figure incomes who like to plan far ahead should be aware of a potentially lucrative provision contained in the recently enacted Tax Increase Prevention and Reconciliation Act. The new law provides that, beginning in 2010, the rules that currently prevent a taxpayer with more than $100,000 in modified adjusted gross income from converting a regular individual retirement account (IRA) into a Roth IRA will be eliminated.

A taxpayer who makes deductible contributions to a regular individual retirement account (IRA) gets a tax break now for the dollars he puts in, and his earnings grow tax free, but he pays ordinary income tax on every dollar he takes out, and withdrawals are subject to significant restrictions. In a Roth IRA, the taxpayer gets no tax deduction for contributions, but his money grows tax free, and there's no tax, and few restrictions, on qualifying withdrawals.

Under pre-Tax Increase Prevention and Reconciliation Act law, only taxpayers with $100,000 or less in modified adjusted gross income can convert a regular IRA into a Roth IRA. A taxpayer making the conversion generally must pay tax on money he takes out of his regular IRA, but once it's in his Roth IRA, he won't pay tax on that money or the money it earns. Generally speaking, Roth conversions appeal to taxpayers who either think their tax rate will go up in retirement, or believe that the value of their account will rise significantly, and thus are willing to make an up front tax payment when they convert in order to reap large tax savings in later years.

Under the new law, beginning in 2010, taxpayers with more than $100,000 of modified adjusted gross income also will be able to convert a regular IRA into a Roth IRA. To make such conversions more attractive in 2010, the new law permits taxpayers who convert in 2010 to spread the income and resulting tax payments on the converted funds over two years—2011 and 2012.

... For tax years beginning after 2005, the age at which the kiddie tax applies is changed from under 14 to under 18 years of age.

For parents thinking about trying to save taxes by transferring assets into their children's names, Congress has just thrown up another roadblock. In the recently enacted Tax Increase Prevention and Reconciliation Act, Congress raised the age at which the unearned income of minor children is taxed at the parents' tax rate from under age 14 to under age 18. Here are the details.

At one time, wealthy parents could significantly lower their family's tax bill by transferring investment assets to minor children. This tax technique, called income shifting, worked by taking income out of the parents' higher tax bracket and placing it in the lower tax brackets of their children. To curtail the use of this tax technique, Congress enacted the “kiddie tax” rules, which said that children under 14, who had more than a small amount of unearned (investment) income had to pay tax at their parents' marginal tax rate (the rate of tax on the last dollar earned). The threshold amount at which the kiddie tax kicks in is two times the amount allowed as a standard deduction for a dependent who has only investment income. For 2006, that amount is $850, so the kiddie tax begins to apply when the child has more than $1,700 in unearned income.

Under the new law, the age limit below which a child's income from investments is taxed at the parents' rate is raised from 14 to 18. The new law specifies, however, that the kiddie tax does not apply to a child who is married and files a joint return for the tax year. It also adds an exception to the kiddie tax for distributions from certain qualified disability trusts. The new provisions apply to tax years beginning after Dec. 31, 2005.

...Offers in Compromise, pre-payments will be required. Taxpayers will be required to make partial payments to the IRS with any offer in compromise. For lump-sum offers (which include single payments, as well as payments made in 5 or fewer installments), taxpayers will have to make a down payment of 20% of the amount of the offer, with any application. Any periodic payment offer in compromise will have to be accompanied by the payment of the amount of the first proposed installment. User fees will be applied against tax, interest, or penalties due under the offer in compromise.