Tracking the Tax Increase Prevention and Reconciliation Act changes Tax Matters by David A. Katzman The Tax Increase Prevention and Reconciliation Act was effective May 17, 2006, so taxpayers have generally adjusted to its many changes. However, this tax act was far-reaching and some changes were phased in, so annual tracking of those benefits with phased-in effective dates or near-future expiration dates is required. For example, the act offered relief for some taxpayers because it altered the Alternative Minimum Tax (AMT) requirements. The AMT is an alternative tax, which forces some taxpayers to calculate their taxes in two ways, at an ordinary income tax rate and at the AMT rate, which restricts certain exemptions. Taxpayers who must do both calculations owe taxes at the higher of the two rates. The AMT relief provided in the tax act was not permanently established, so taxpayers who may owe the AMT need to continue monitoring the situation. The act provided relief in the form of higher exemptions, which effectively eliminated AMT payments for more taxpayers. Currently, higher AMT exemptions remain in effect, but have been annually adjusted. In 2008 they are $33,750 for single filers and $45,000 for married couples filing jointly. For 2009, AMT exemptions were increased to $46,700 for single filers and $70,950 for joint filers. The tax act also created beneficial Roth IRA conversion changes, which taxpayers should consider. Beginning in 2010, the new tax law allows taxpayers who convert a tax-deferred retirement account to a Roth IRA to spread owed income taxes over two years, rather than paying the amount in a single year. Roth IRA conversions create income-tax obligations because they are funded with after-tax money, but withdrawals are tax-free. Other tax-deferred retirement accounts are funded with pre-tax money, but qualified withdrawals are then subject to taxes. Additionally the new law removed the restriction that a Roth conversion could not be done if your adjusted gross income exceeded $100,000 The tax act also changes tax rates on some capital gains. Taxpayers with the right mix of qualifying income and deductions should take the time to understand the new tax act’s zero-tax rate provisions. Under the act, the tax rate for certain capital-gains income drops to zero beginning in 2008. This zero-tax rate is effective each year through 2010, assuming it is not modified by congress. Generally speaking, the zero-tax rate is limited to taxpayers in the 10 percent to 15 percent tax brackets who have qualifying capital gains. However, many higher income taxpayers may benefit, if their income includes a significant percentage from capital gains. There are several ways to figure this tax rate, based on the taxpayer’s individual circumstances, so anyone with capital gains-based income may want to carefully examine this tax-law change. The tax act also made ongoing changes to the “kiddie tax.” The kiddie tax discourages parents from transferring assets to their children to take advantage of the lower tax bracket those children enjoy. In 2006 and 2007, the kiddie tax applied to children under age 18, which was up from the old age limit of 14. However, beginning in 2008, the kiddie tax age limit could extend to age 24 for some children who are considered full-time students. Under the revised law, all unearned income, over $1,800 in 2008, received by children under the new higher age limit is subject to taxes at the parents’ highest marginal rate. For taxpayers with income from copyrighted sales of musical works, another new tax-act provision is worth monitoring. Profits from transactions completed after May 17, 2006 through December 31, 2010 are taxed at the capital gains rate. After 2010, barring any further modifications to tax law, this benefit is set to revert to the previous standard, which required paying taxes on these profits at the taxpayer’s ordinary income rate. David A. Katzman is a certified public accountant licensed to practice in the State of Florida and the Commonwealth of Massachusetts. He is also a certified financial planner and certified senior advisor. Please consult your tax advisor for details and assistance in applying this general information to your specific situation.