Edition: March 2007 - Vol 15 Number 03
Author: John Sammut and RBC Dain Rauscher
In May of 2006, President Bush signed into law the Tax Increase Prevention and Reconciliation Act (TIPRA). Like most legislation, there are many facets to the new law, and there are significant developments that investors will want to consider.
Capital gains and dividends
One aspect of the new tax law that’s attracting attention is the extension of the federal income tax rate structure for capital gains and dividends. A previous tax cut reduced the tax rate on long-term capital gains and qualified dividends to a maximum of 15 percent. That rate was set to expire in 2008, but the new law extends the current rates through 2010.
Alternative minimum tax (AMT)
Another piece of the legislation aims at reducing the number of individuals subject to alternative minimum tax (AMT). Established in 1969, AMT is a parallel tax system intended to prevent taxpayers with substantial incomes from using certain exclusions, deductions and credits to pay little (or no) federal income tax. TIPRA extends and increases AMT exemptions beyond 2005 levels, but for 2006 only. New AMT exemption amounts for 2006 are:
• Married Filing Jointly — $62,550 (Up from $58,000 last year)
• Single Filers — $42,500 (up from $40,250 last year)
IRC Section 1(g) effectively provides that the investment income of a young child may, under certain circumstances, be taxed at child’s parents’ top marginal income tax rate. For purposes of the “kiddie” tax, effective Jan. 1, 2006, TIPRA increases the qualifying age from under age 14 to under age 18. This means that children under 18 with unearned income (usually from investments) can now be taxed at their parent’s federal income tax rates. However, the tax does not apply unless the unearned income is greater than $1,700.
Section 179 expensing
Business owners will also want to take note, as TIPRA extends section 179 expense deductions through 2009, allowing owners to deduct up to $108,000 in business equipment and software. Without the new law, the expense limit would have been reduced to $25,000 after 2007.
Roth IRA conversions
Finally, TIPRA eliminates the restriction that prevents people with modified adjusted gross incomes greater than $100,000 from converting a traditional IRA to a Roth IRA. This change is not effective, however, until 2010.
While this provides a general overview of some of the notable parts of TIPRA, remember that it is important to meet with your tax advisor and financial consultant to review the details of the legislation and how it could potentially affect your tax situation.
This article is provided by John Sammut, a financial consultant at RBC Dain Rauscher in Syracuse, N.Y., and was prepared by or in cooperation with RBC Dain Rauscher. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Dain Rauscher does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Dain Rauscher is not a tax advisor. All decisions regarding the tax implications of your investments should be made in connection with your independent tax advisor. John Sammut provides wealth management solutions to individual investors, families and corporations. You can reach Sammut by telephone at (800) 343-3036, or e-mail him at firstname.lastname@example.org.