Congress Passes the Tax Increase Prevention and Reconciliation Act of 2005
The major news outlets have covered the details of the bill very well. Once the bill becomes public law, President Bush's tax cuts on long-term capital gains and qualified dividends will remain at their all-time low of 15% for taxpayers in the 25%, 28%, 33%, and 35% tax brackets, and 5% for taxpayers in the 5% and 10% tax brackets. The lower capital gains and dividends tax rates were previously set to expire at the end of 2008. Now investors have an extra two years to pocket earnings at the lower tax rates. Even better news for investors with modest incomes: "The capital gains rate for folks in the 10% and 15% brackets was scheduled to drop to zero -- that's right, nothing -- in 2008. That perk has now been extended through the end of 2010," according to a report by TheStreet.com. Capital gains covers everything from the profits on mutual funds and stocks, to the profits earned when people sell their houses.
Another major provision of the bill, Congress has lifted the curse of the Alternative Minimum Tax from some households. The bill raises the AMT exemption amount from $58,000 for joint tax filers to $62,550. This move alone will lower the tax burdern for approximately 15 million households, according to CCH Principal Tax Analyst Mark Luscombe, JD, CPA. Additionally, "The bill also offers these taxpayers protection from the AMT if they also claim several popular tax credits, such as the dependent care and education credits," according to tax journalist Kay Bell.
In order to pay for these tax breaks, Congress had to come up with clever tax hikes to pay for the cuts. In the bill, taxpayers who earn more than $100,000 will be able to convert their Traditional IRAs into Roth IRAs. "The bill also includes a provision allowing people with adjusted gross income of more than $100,000 to convert their traditional IRAs to Roth IRAs, something which now is allowed only for taxpayers under that income threshold. The change is expected to raise about $6.4 billion in revenue over the next decade because people who opt for the conversion must pay taxes on the value of their accounts," according to CNN. The bill also extends the "kiddie tax cutoff from age 14 to age 18. The kiddie tax is when a child's investment income, such as interest, dividends, and capital gains, are taxed at the parent's tax rates instead of the lower tax rates their children would qualify for. "This will change a fairly common practice of making gifts to minors to lower family tax bills," CCH's Luscombe observed.
Kay Bell highlights a little known provision in the legislation what was ignored by the mainstream press. "Other tax bill losers include individuals making an offer-in-compromise to the IRS to wipe out their tax debts.... These folks no longer can postpone the inevitable while they wait for an IRS ruling on their request. Instead, they'll now have to make a partial payment of their proposed settlement offer while the IRS is reviewing the case." (You can find more information about the IRS Offer in Compromise program here on About.com.)
Reaction to the tax bill has been varied. Bill Frist, R-Tennessee and Senate Majority Leader, said that ""We will keep taxes low so that we can keep this great country of ours strong and growing," as reported by CNN. Meanwhile, Harry Reid, D-Nevada and the Senate Minority Leader, said that the bill "caters to an elite group of wealthy Americans at the expense of the middle class," also reported by CNN. US Politics Guide Kathy Gill characterized the legislation as an election year gimmick, "This can only be understood as a form of election-year pandering on the part of a party which has thoroughly abandoned its roots of fiscal responsibility," Gill opined. On the other hand, Conservative Politics Guide Amy Hess thinks, "We should make these tax cuts permanent, and we should continue to force Congress to keep a reign on spending." Liberal Politics Guide Deborah White stated, "I believe this conference report reflects misplaced priorities. It exacerbates an already serious deficit. It certainly exacerbates the national debt. And most importantly, it is certainly not equitable."
In the blogosphere, the reaction was even more heated. Tax professor Daniel Shaviro characterizes the Roth IRA conversion provision and other tax breaks as a "sleazy budget games." Professor James Edward Maule echoes similar concerns, "The games played by Congress with the budget and tax revenues make the NFL's capologists look like amateurs. Whether it's 'robbing Peter to pay Paul' or a matter of smoke and mirrors doesn't matter. What matters is that the practice of hoodwinking people continues unabated. It's a sad reflection on the shortcomings of modern American politics and the culture that tolerates and enables these practices."
More news coverage:
- The Tax Increase Prevention and Reconciliation Act of 2005 (from the Library of Congress)
- Tax Benefits to the Rich and Patient (New York Times)
- Senate Approves 2-Year Extension of Bush Tax Cuts (New York Times)
- Tax-Cut Bill Wins Final Passage (CNN)
- Senate Passes $70 Billion in Tax Cuts (Washington Post)
- Congress Sends $70 Billion Tax Package to President (National Public Radio)
- Senate Approves $70 Billion Tax Cut Bill (USA Today)
- How the Tax Bill Affects Your Return (TheStreet.com)
- New Tax Law Could End Sales Tax Exemption (Associated Press via Seattle Post-Intelligencer)
- Who Gains from Tax-Cut Bill (Christian Science Monitor)
- Reconciliation Bill Offers AMT, Capital Gains, Dividend Relief, CCH Notes (CCH)
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