Tax Increase Prevention and Reconciliation Act of 2005

On May 17, 2006 President Bush signed the "Tax Increase and Prevention Reconciliation Act of 2005 (TIPRA)". The Act holds many changes, but only a few changes affect most taxpayers. This discussion will focus only on those changes that affect the majority of individuals or businesses in America.

Extension of Capital Gain Tax Rates

The provisions relating to lower capital gain and dividend tax rates have been extended for 2 years. The Act extends the 0%, 5%, and 15% capital gain rates through December 31, 2010.

Election to Include Qualified Dividends as Investment Income

The provision to elect to treat qualified dividends as investment income for purposes of determining the amount of deductible investment interest has been extended for 2 years until 2010. These dividends are not eligible to be taxed at the maximum 5% or 15% maximum capital gain rates.

Capital Gain Treatment for Self-Created Musical Works

A taxpayer may elect to treat the sale or exchange of musical compositions or copyrights in musical works created by the taxpayer's personal efforts as the sale or exchange of a capital asset until December 31, 2010.

Kiddie Tax Age Limit Increased

Beginning in tax year 2006, the age at which a child can be subject to the kiddie tax has increased to under age 18 at the end of the tax year.  Under previous law, the kiddie tax applied to children under the age of 14 at the end of the tax year. The unearned income of minor children that exceeds $1,700 in 2006 is taxed at the parents' highest marginal tax rate if taxing the income at that rate results in a higher tax.

An exception to the kiddie tax applies if the child is married and files a joint return with a spouse. The new law also provides an exception to the kiddie tax for distributions from certain qualified disability trusts.

Extension of the Increased Section 179 Expensing Limits

The provisions related to the the increased Section 179 expensing limits have been extended for 2 years. The expense deduction under Section 179 was scheduled to fall back to $25,000 in tax year 2008. The new law extends the $100,000 limit which is indexed annually for inflation through 2010. For tax year 2006, the Section 179 limit is $108,000.

A taxpayer’s right to revoke or change the Section 179 expense election without IRS consent is also extended for 2 years to tax years beginning before January 1, 2010.

Section 179 property includes off-the-shelf computer software as eligible property for the expensing election. This provision is also extended for 2 years to tax years beginning before January 1, 2010.

Amortization of Expenses for Creating or Acquiring Musical Compositions

The new law provides an elective 5-year amortization period for musical works and copyrights. The 5-year amortization election applies to expenses paid or incurred by songwriters and composers who create any applicable musical property, as well as to expenses paid or incurred by music publishers, performers, producers, and recording companies who acquire any applicable musical property. An applicable musical property is any musical composition or any copyright that is property that is depreciable under the income forecast method. The new law applies for property placed in service in tax years 2006 through 2010.

Income Limitation for Roth IRA Conversions Eliminated

Beginning in tax year 2010, the income limit on conversions from a traditional IRA to a Roth IRA has been eliminated. In the past, in order to convert a traditional IRA to a Roth IRA, you could not have more than $100,000 of adjusted gross income in the year in which the conversion was to take place. This provision was applicable to both individual filers and married couples filing jointly. Under the new law, the income limitation has been repealed.

If you decide to convert your traditional IRA to a Roth IRA, the converted value of the IRA will be included in your gross income, subject to tax. However, for conversions occurring in tax year 2010, unless you elect otherwise, the amount includible in gross income as a result of the conversion will be included ratably in tax years 2011 and 2012. Note that if the converted amounts are distributed before 2012, the amount of the inclusion will be accelerated.

Foreign Earned Income Exclusion

Beginning with tax year 2006, the foreign earned income exclusion will be indexed for inflation annually.

Domestic Production Deduction Clarification

The new law clarifies applicable wages allocable to domestic production gross receipts. For purposes of the domestic production deduction, W-2 wages only include amounts that are properly allocable to domestic production gross receipts. The effect will be to require employers to have recordkeeping systems showing employees' time and thus pay that is devoted to qualifying activities.

The special limitation on wages treated as allocated to partners or shareholders of pass-through entities for purposes of the W-2 wage limit is repealed. Instead, each partner or shareholder is treated as having the W-2 wages for the tax year equal to his allocable share of the partnership's or S corporation's W-2 wages for the tax year.

These provisions are effective for tax years beginning after May 17, 2006.

Changes to Offers in Compromise

Effective for Offers in Compromise submitted on or after July 16, 2006, taxpayers must make partial payments to the IRS while their offer-incompromise is being considered. For lump-sum offers (which include single payments, as well as payments made in 5 or fewer installments), taxpayers must make a down payment of 20% of the amount of the offer with any application.

Any periodic payment offer must be accompanied by the payment of the amount of the first proposed installment. Failure to make an installment (other than the first installment) due under a periodic payment offer in compromise while the offer is being evaluated will be treated as a withdrawal of the offer.

User fees are eliminated for offers submitted with the appropriate partial payment.

An offer in compromise 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.

Technical Explanation and Other Provisions of the Act

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