The
Tax Increase Prevention and Reconciliation Act
of 2005
The
much debated $70 billion tax reconciliation bill
that extends investment tax cuts and Alternative
Minimum Tax relief finally cleared Congress in
May, 2006, and was signed by the President.
"We're
finally here. We have a deal," exulted Charles
Grassley, chairman of the Senate Finance Committee,
after the chamber approved the tax package in
a 54-44 vote, split largely along party lines.
The bill had already been approved by House lawmakers,
following an earlier agreement by Congressional
negotiators. However, the legislation has been
many months in the making, as Republicans struggled
to unite behind the proposals, fearing a growing
federal deficit.
The
tax bill will extend the life of the 15 percent
rate of tax on most capital gains and qualifying
dividends for two years until the end of 2010,
preventing a tax increase at the start of 2009.
The rate will be reduced to zero in 2008 for taxpayers
in the 10- and 15-percent tax brackets. These
proposals are expected to cost $20.551 billion
over 5 years and $50.783 billion over 10 years.
Alternative
Minimum Tax provisions extend the exemption levels
though the end of 2006 but at a higher level -
$62,550 (married) and $42,500 (other). The proposal
is expected to cost $31.047 billion over 5 years.
Other
key provisions include: increased expensing for
small business allowing small firms to expense
$100,000 (from $25,000) through 2009, expected
to cost $7.274 billion over 5 years; and exception
under subpart F for active financing and insurance
income extended for two years, until the end of
2008 costing an expected $4.796 billion over 5
years.
In
addition, Senate Majority Leader Bill Frist secured
two provisions in the legislation increasing the
tax code’s fairness for songwriters. The first
allows songwriters to claim the capital gains
tax rate on music sales and will reduce songwriters’
taxes by up to 35 percent. Individual songwriters
can pay up to 50 percent in income and self-employment
taxes on their music under current law, while
their corporate partners just pay 15 percent in
capital gains taxes.
The
second songwriter provision simplifies the accounting
process for advances paid to songwriters. Songwriting
advances can now be calculated according to a
straight-line, three-year depreciation schedule.
"I
applaud the Senate for passing important tax relief
that will help keep our economy strong and growing,"
commented President Bush, who for many weeks has
been pressuring lawmakers to arrive at a deal
which included the investment tax cuts, despite
their cost in terms of revenues.
"This
legislation prevents an enormous tax hike that
the American people do not want and would not
welcome. The bill will extend policies that have
helped our economy flourish," he added.
Bush
added that his tax policies have led to 18 straight
quarters of growth, including 4.8 percent growth
in the last quarter.
However,
critics of the legislation contend that the tax
cuts benefit only a relatively small number of
wealthy people and provide very little in meaningful
tax relief for low and middle income workers.
What's more, some provisions that would have helped
business investment, such as an extended R&D tax
credit, had to be left out.
“Despite
$70 billion spent on tax cuts in this bill, millions
of teachers, families with kids in college, and
businesses that want to conduct important research
or hire the hard-to-employ will not see one dollar
of the benefits handed out today," commented Sen.
Max Baucus, ranking Democrat on the Finance Committee.
“This
bill made the wrong choices – putting 2009 tax
cuts before 2006 tax cuts, and putting ideological
‘wants’ before Americans’ real needs," he argued.
The Tax Reconciliation Act extends through 2006
the provision allowing taxpayers to use non-refundable
personal credits to offset AMT liability. Non-refundable
personal credits include the dependent care credit,
the credit for the elderly and disabled, the credit
for interest on certain home mortgages, the Hope
credit for certain college expenses and the Lifetime
Learning credit.
Among
proposals which did not make the final Act were
some tax shelter provisions, including increased
penalties on tax shelter promoters and interest
deductions for transactions lacking economic substance.
Increased taxes for offshore arrangements, corporate
inversions, and expatriates were also dropped
from the Act.
The Act aligns the dividend and capital gains
tax rate cuts with the tax cuts enacted in the
Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA), including the lower individual
marginal income tax rates, marriage penalty relief
and temporary repeal of the federal estate tax.
All of the cuts in both Acts will expire at the
end of 2010.
The Act extends the enhanced small business expensing
thresholds in the American Jobs Creation Act of
2004 through December 31, 2009. The maximum amount
a taxpayer may expense is $100,000 of the cost
of qualifying property, reduced by the amount
by which the cost of qualifying property exceeds
$400,000. Both amounts are indexed for inflation
for tax years beginning after 2003 and before
2010, and the limits are increased for Gulf Opportunity
Zone property. For 2006, the amounts are $108,000
and $430,000, respectively.
Other
provisions of the Act include:
-
Settlement funds resolving claims under the
Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA), commonly known as
Superfund, will be exempt from federal taxation.
- A
reduction in the 10,000 tonne limit for tonnage
tax treatment to 6,000 tonnes.
- An
extension of a grandfathering exception from
the arbitrage bond rules for
Texas permanent university funds through August
31, 2009.
- Elimination
of the $100,000 adjusted gross income ceiling
for converting a traditional individual
retirement account (IRA) to a Roth IRA, for
tax years after 2009. 401(k) plans are not included,
however.
- An
increase in the amounts payable by taxpayers
making 'offers-in-compromise' to the IRS. 20%
of the sum offered will have to be paid along
with the offer.
- From
2011, federal, state and local government agencies
will withhold three percent from payments for
services or property provided by a taxpayer.
- Modification
of the rules for QPAI (Qualified Production
Activities Income) by limiting deductions to
50 percent of the wages that are deducted in
arriving at QPAI.
- Some
anti-avoidance tightening of the rules under
the Foreign Investment in Real Property Tax
Act (FIRPTA).
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