ALP: How will recent changes in federal tax law affect me?

September 2006

President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 into law in May, triggering a variety of tax law changes that may affect you or your business.

TIPRA increases the scope of the “kiddie tax” on investment income.  This provision requires your children to pay tax on investment income at your marginal rate.  Whereas this provision formerly applied to investment income earned up to age 14, the new law causes the tax to apply to investment income that your children earn up to age 18.

Under TIPRA, you will probably continue to pay a 15% tax on capital gains and dividend income.  This reduced rate was set to expire in 2008, but it has been extended until the end of 2010.  Beginning in 2011, capital gains will be taxed at their previous 20% rate for most taxpayers.

TIPRA also extends and increases relief from the alternative minimum tax (AMT) for one year.  For 2006, the exemption from AMT increases from $58,000 to $62,550 for joint filers and from $40,250 to $42,500 for single filers.  Additionally, you will still be allowed to claim most non-refundable personal credits against AMT.

TIPRA extends the deduction for investments in equipment and depreciable assets through 2009.  Under this provision, your small business can deduct the costs of acquiring up to $100,000 in equipment and other depreciable assets.  The deduction phases out, however, to the extent that your business’s total annual investments exceed $400,000. 

Finally, TIPRA increases opportunities for taxpayers to convert traditional IRAs into Roth IRAs .  Beginning in 2010, you can convert traditional IRAs into Roth IRAs without incurring early withdrawal penalties, regardless of your modified adjusted gross income.  If you convert funds in 2010, you can defer half of the corresponding tax liability until 2012.