The tax bill passed by the House and Senate last week extends the maximum 15 percent tax on dividends and capital gains for two more years, to 2010, but provides only a one-year freeze on incomes that trigger the alternative minimum tax (AMT). The law also contains revenue enhancers including elimination of the income limitation for converting a traditional IRA to a Roth IRA. This change will not come into effect until 2010.
The tax package also extends the small business investment tax, allowing small businesses to expense up to $100,000 in depreciable assets through 2009.
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The AMT income limits for 2006 will be $62,550 for married couples and $42,500 for others, according to Buffalo First. This so-called âAMT Patchâ does not help most of the families who are currently paying the tax, many of whom have legitimate deductions and tax credits. But the law does protect the eligibility of families paying the AMT for tax credits, including the child care credit, the Associated Press reports.
The Congressional Budget Offices estimates that if the âAMT Patchâ were in place for five years, the revenue loss would be $33.9 billion.
Elimination of any income limitation after December 31, 2009, for conversions from a traditional IRA to a Roth IRA is being called as a revenue enhancement by Congress.
Money converted to the Roth IRA will be taxed at the time of conversion, providing the government with some revenue, but future income is tax-free. Taxpayers who convert in 2010 will be allowed to spread out their tax payments, says Mel Schwartz, legislative affairs partner for Grant Thornton LLP, according to USA Today. No tax would be due in 2010; half the tax could be paid in 2011 and the other half in 2012, he says.
The biggest beneficiaries of this change will be upper-income taxpayers who roll over a large 401(k) into an IRA, Richard O'Donnell, tax editor for RIA, told USAToday.
Other changes in the new bill include closing the âkiddie taxâ loophole. Children with unearned income must now pay tax at their parents' rate until they are 18. Previously, tax was paid at the child's rate, typically lower, after the child reached age 14. The new law eliminates a major advantage of the Uniform Gift to Minors (UGMA), says Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, according to USAToday. Since UGMAs affect a child's eligibility for financial aid, the tax benefit was the one remaining reason to use them, he said.
Voting on the tax bill in both the House and Senate followed party lines, with Republicans claiming that the tax cuts fostered economic growth and Democrats saying that they benefited the rich. GOP leaders named their bill the âTax Increase Prevention Act,â and are already accusing Democrats who voted against it of voting for a tax increase, the Boston Globe reports.
Senator Charles E. Grassley, Chairman of the Senate Finance Committee, said that provisions like the tuition tax credit and tax deductions for state and local taxes would be considered in a second bill, likely to come before Congress this summer. Democrats say there is no guarantee that will happen, the Globe says.
President Bush is expected to sign the tax bill.