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President Signs Tax Increase Prevention and Reconciliation Act

By: Suzanne T. Tuson, CPA, MST

On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005. This bill represents $70 billion in tax relief. Here are some of the major provisions.

Tax Relief Provisions

• Two year extension of the 15 percent top capital gains and dividend rates through December 31, 2010


• One year extension through 2006 of the Alternative Minimum Tax exemption amount for individuals with the ability to use certain nonrefundable personal credits against the liability. The 2006 exemption amounts are $62,550 for persons married filing jointly and $40,250 for single taxpayers


• Two year extension of the $100,000 limitation on Section 179 Small Business Expensing through December 31, 2009


• Creation of Subpart F look-through rules related to payments between related Controlled Foreign Corporations in determining foreign personal holding company income

Revenue Raiser Provisions

• Elimination of the $100,000 adjusted gross income limit for individuals converting traditional IRAs to Roth Taxpayers converting to Roth IRAs in 2010 can elect to recognize the income from conversion in 2010 or average it over the next two years. It’s important to note that 2010 is the last year for the current low income tax rates before they sunset in 2011


• Increase in the reach of the kiddie tax to encompass children under the age of 18 (previously only children under the age of 14 were subject to these rules) effective beginning 2006


• Limitation of the Section 199 Domestic Production Deduction to wages allocable to domestic gross receipts


• Adjustment to the maximum foreign housing expense limitation for U.S. persons working overseas


• Three percent tax withholding rate on certain payments for property or services that are made by the federal government, a state, a political subdivision of a state, or any instrumentality or agency of any of these entities, to persons providing property or services


• Elimination of the grandfather provisions for Foreign Sales Corporations and the Extraterritorial Income Exclusion binding contract rules


• New information reporting requirement for interest paid on tax-exempt bonds

Congress only addressed some of the expiring provisions with this act. There are many others that are supposed to be addressed in a “trailer bill,” which would include tuition deductions, research & experimentation tax credits, and the deduction for state and local sales taxes. With the attention currently on pension reform, the trailer bill becomes less likely of passing.

For more information, contact Suzanne Tuson at 248.208.8860.

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075

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