Tax Increase Prevention and Reconciliation Act of 2005
The Tax Increase Prevention and Reconciliation Act of 2005 was passed by the House of Representatives on May 10, 2006, and the Senate on May 11, 2006. President Bush signed the legislation into law on May 17.
Committee on Ways and Means (May 10, 2006)
WASHINGTON – Today, the House of Representatives approved the Conference Report for H.R. 4297, the Tax Increase Prevention and Reconciliation Act of 2005 by a vote of 244 – 185.
"This bill is designed to keep the tax rate on investment low and to prevent 15 million Americans from falling into the alternative minimum tax in 2006," said Ways and Means Chairman Bill Thomas (R-CA). "This legislation is crucial to maintaining the strong American economy that has created more than five million new jobs in the past three years."
This agreement prevents several current-law tax provisions from expiring in the near future. These provisions affect a broad spectrum of taxpayers, including investors, job creators and middle-income families. The two largest pieces of the bill are the extension of the lower tax rates on capital gains and dividends and the extension of the alternative minimum tax (AMT) protection.
Excerpts from Detailed Summary of Conference Report
Two-Year Extension of Reduced Rates on Capital Gains and Dividends
Under current law, capital gains and dividend income are taxed at a maximum rate of 15 percent through 2008. For taxpayers in the 10 and 15 percent tax brackets, the tax rate is 5 percent through 2007 and zero in 2008. The Conference Report extends the rates effective in 2008 through 2010. Without action, these rates would have increased after 2008.
Alternative Minimum Tax Relief
- Increase in AMT Exemption Levels
The provision extends the Alternative Minimum Tax (AMT) exemption levels through the end of 2006 at a higher level than in 2005. The new exemption levels for 2006 are $62,550 for joint filers, $42,500 for single filers and $31,275 for separate filers.
- AMT Relief for Non-Refundable Personal Tax Credits
The tax code includes many non-refundable personal tax credits, such as the dependent care credit and the credit for the elderly and disabled, among others. Claiming these credits may push an individual in the AMT. The provision extends current law which allows most non-refundable personal tax credits to be claimed against the AMT so that families continue to receive the full benefit of these tax credits.
Extension and Modification of Certain Provisions
- Two-Year Extension of Enhanced Section 179 Expensing for Small Business
Under current law, small businesses may expense up to $100,000 of investments in depreciable assets. The deduction phases out dollar-for dollar to the extent the business's annual investments exceed $400,000. Without action, the expensing limit would have declined to $25,000 and the phase-out threshold would decline to $200,000 after 2007.
- Subpart F
Subpart F of the tax code imposes immediate taxation on foreign subsidiaries of U.S. companies, even if their income has not been brought back to the United States. One provision extends an existing exception from Subpart F for active financing income for two years. A second provision provides a "CFC look-through" rule exception from Subpart F for cross-border payments of dividends, interest, rents, and royalties that are funded with active income that has not been repatriated. This "CFC look-through" rule will be effective for taxable years beginning after December 31, 2005 and before January 1, 2009.
- Simplification of Active Trade or Business Test
The provision simplifies the application of the active trade or business test to certain corporate distributions. By applying this test on an affiliated group basis, the provision applies the same standard regardless of whether a business is owned by a holding company or owned directly. As a result, the provision allows corporations to avoid costly and inefficient internal restructurings prior to engaging in certain corporate distributions to their shareholders.
- Tax Treatment of Self-Created Musical Works
The provision provides capital gains treatment for self-created musical works when these works are sold by the artist. Under current law, such sales are taxed as ordinary income.
- Amortization for Songwriters
The provision allows taxpayers to elect to amortize the costs of creating or acquiring a musical composition over five years. This election would be made in lieu of the income forecast method for these advances.
- Loans to Qualified Continuing Care Facilities
The provision reforms the tax treatment of loans to continuing care facilities.
Corporate Estimated Tax Provisions
The timing of certain corporate estimated tax installment payments has been changed.
Revenue Offset Provisions
- Application of Earnings Stripping Rules to C Corporations Which are Partners
The provision codifies proposed Treasury regulations attributing partnership interest income, interest expense and liabilities to corporate partners for purposes of applying the earning stripping rules.
- Amend Information Reporting Requirements to Include Interest on Tax-Exempt Bonds
The provision provides that interest paid on tax-exempt bonds is subject to information reporting in the same manner as interest paid on taxable obligations.
- Amortization of Geological and Geophysical Expenditures for Major Integrated Oil & Gas Companies
The provision replaces two-year amortization treatment for certain expenditures made by major integrated oil companies with five-year amortization treatment.
- Limitation on Certain Corporate "Cash Rich" Spin-Off Transactions
The provision denies tax-free treatment to certain spin-offs where either the distributing corporation or the controlled corporation is a "disqualified investment corporation", defined as having investment assets that are two-thirds or more (75 percent or more under a first-year transition rule) or the value of the corporation's total assets.
- Offers-In-Compromise Partial Payments
The provision requires that a taxpayer make a good faith down payment of 20 percent of any lump sum offer-in-compromise with any application for an offer. For periodic payment offers, the taxpayer is required to comply with their own payment schedule while the offer is being considered. The provision also provides that an offer is deemed accepted if the IRS does not make a decision with respect to the offer within two years from the date that the offer was submitted.
- Taxation of Passive Income of Minors
Under current law, minors under age 14 are taxed on their unearned income (i.e. passive income such as interest) at their parent's marginal tax rate. The provision increases the age of minors subject to this tax to those minors under age 18. The provision also provides an exception for distributions from certain qualified disability trusts.
- Conversions to Roth IRAs
The provision allows more taxpayers to convert to Roth IRAs by removing the modified adjusted gross income limitations on rollovers from an IRA to a Roth IRA. Under the provision, taxpayers can elect to pay tax on amounts converted in 2010 in equal installments in 2011 and 2012.
- Domestic Manufacturing Deduction Wage Limitation
The domestic manufacturing deduction for a taxable year is limited to 50 percent of the wages by the taxpayer during the calendar year that ends in such taxable year. The provision clarifies that only wages allocable to domestic production gross receipts are included for purposes of this limitation.