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Bush Signs Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)

Thursday, May 18, 2006

Both Houses of Congress have passed TIPRA, and President Bush has signed it today. The measure will provide approximately 70 billion of tax relief to a variety of taxpayers. Here is a summary of the tax savings provisions of wider application, and we invite you to contact us with any questions you may have:

Tax Reduction for Individuals

  1. Extend through 2010 the preferential tax rates on capital gains and qualified dividend income, capping the tax on such income at 15%. This benefit was due to expire December 31, 2008. (This extension provides $50 billion of the $70 billion of tax savings.)
  2. Generally, increase the AMT exemption amounts for individuals to $62,550 for married individuals filing jointly; $42,500 for unmarried individuals; and $31,275 for married individuals filing separately. This provision is effective only for 2006 year. Although such increases are subject to an income phase-out, the increase is intended to prevent the AMT from snaring an ever growing number of taxpayers.
  3. For tax years beginning January 2010, generally eliminates the income limits on conversions of traditional IRAs to Roth IRAs, and generally permits income inclusion resulting from conversions in 2010 to be reported one-half in 2011 and the other half in 2012.

Tax Reduction for Businesses

  1. Extend through 2009 the election to expense (rather than depreciate) as much as $100,000 of property used in a trade or business, and make off-the-shelf computer software eligible for such immediate expensing.
  2. Start indexing for inflation in 2006, the $80,000 income exclusion for an individual's qualifying foreign earned income.
  3. United States shareholders of controlled foreign corporations (CFCs) will not be required to include in their taxable income dividends, interest, rents and royalties received by one of their CFCs from a related CFC to the extent attributable to operating income of the payor CFC. This relief applies only for tax years 2006, 2007, and 2008.

Unfortunately, TIPRA also adds tax-raising provisions to the Tax Code, and a sampling of them is as follows:

  1. The so-called 'Kiddie Tax', where a child pays tax at his or her parent's highest marginal rate on passive income, beginning with the 2006 year, will apply to a child who has not attained the age of 18 (up from 14) before the close of the tax year.
  2. In the case of a corporation with assets of at least $1 billion, estimated tax payments due in July, August, and September 2006, are increased to 105% of the payment otherwise due, and the next required payment is reduced accordingly.
  3. The following changes are made to the Domestic Production Deduction (see our summary of this deduction on our web site) for tax years beginning after the enactment of TIPRA: (a) only W-2 wages allocable to domestic production activity are eligible for the deduction; and (b) in the case of a partner or a S Corp. shareholder, the W-2 wages that they take into account are simply their allocable share of the partnership's or S Corporation's W-2 wages for the year.
  4. Repeal the 'binding contract' exception to the previous repeal of the foreign sales corporation and extraterritorial income exclusion regimes. The repeal is effective for tax years beginning after date of enactment of TIPRA. (See our article on export subsidies, including the still applicable IC-DISC, on our web site).