Press Room

Tax Increase Prevention and Reconciliation Act: What you need to know

Money Management

Monthly financial advice
from the MACPA

For release: October 2006

Although not as comprehensive as other tax acts, the Tax Increase Prevention and Reconciliation Act of 2005 includes important tax changes. Some apply to 2006 and others take effect several years down the road.

Here, the Maryland Association of CPAs summarizes the most significant provisions affecting individual taxpayers.

AMT relief reinstated

The Alternative Minimum Tax (AMT) was originally enacted to ensure that higher-income taxpayers with large deductions and / or tax credits pay a minimum amount of income tax. It's another way of calculating your income tax liability.

When calculating the AMT, you are allowed to deduct an exemption amount from your AMT income, based on your filing status and your AMT income. However, because the tax brackets and exemptions have not been adjusted for inflation, in recent years, the AMT has affected many middle-income taxpayers. Under a prior tax law, the AMT exemptions for individuals were raised — making fewer taxpayers subject to the AMT — but those increases expired after 2005.

Under the new Act, for 2006 only, the AMT exemption is reinstated and at a higher level, enabling more taxpayers to escape triggering the AMT. For 2006, the maximum AMT exemption amount is $62,550 for married taxpayers filing a joint return (up $4,550 over the 2005 level), $42,500 for single and head of household (up $2,250 over 2005) and $31,275 for married couples filing separately (up $2,275 over 2005).

Additionally, the new law extends, through 2006, the AMT provision that allows those claiming certain tax credits (e.g., the dependent care credit, the credit for the elderly and disabled, and the HOPE Scholarship and Lifetime Learning Credits) to use them to offset the AMT as well as the regular tax liability.

Capital gains tax breaks extended

Under current law, the maximum long-term capital gains tax rate is 15 percent for most qualified taxpayers. Taxpayers in the 10 and 15 percent income tax brackets are eligible for a 5 percent capital gains tax rate. When originally enacted, these favorable tax rates were set to expire at the end of 2008, but the new law extends the 15 percent rate through 2010.

For those in the 10 and 15 percent brackets, the 5 percent rate will apply through 2007 and will fall to zero for 2008 through 2010.

Dividends break continues

Most dividends from qualified U.S. corporations are eligible for the same favorable 15 percent tax treatment as long-term capital gains. This rate was set to expire after 2008, but the new law extends this rate through 2010.

Kiddie tax to affect older children

At one time, parents could lower the family tax bill by transferring income-producing investment assets to their children who were typically in a lower tax bracket. To curtail this strategy, Congress passed the "kiddie tax" which required that children under age 14 who have more than a small amount of unearned income pay tax on that income at their parents' tax rate.

The new tax act raises the age limit to 18. As a result, more children who have investment income in 2006 exceeding $1,700 will be subject to taxes at their parents' highest marginal tax rate.

Income limitations eliminated for Roth IRA conversion

Under current law, only individuals with $100,000 or less in modified adjusted gross income are eligible to convert a traditional Individual Retirement Account (IRA) into a Roth IRA. As a result of the new law, beginning in 2010, taxpayers will be able to convert a traditional IRA into a Roth IRS regardless of how high their modified adjusted gross income is. What's more, the 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 (none of the income for a conversion made in 2010 will be taxable for that year).

In a related change effective in 2010, a married individual filing a separate return will be allowed to convert from a traditional IRA to a Roth IRA. Previously, a married individual filing a separate return was unable to covert (unless he or she lived apart from his or her spouse during the entire withdrawal year).

Consult with a CPA

If you have questions or concerns about how the new act might affect you, contact a CPA for advice.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.

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