While the extension of the reduced rates on capital gains and dividends, alternative minimum tax relief, and the continuation of enhanced Section 179 expensing have received the most publicity, there are a host of other changes in the Tax Increase Prevention and Reconciliation Act of 2005.
There is a two-year extension of the reduced rates on capital gains and dividends. Prior to the legislation, c apital gains and dividend income were to be taxed at a maximum rate of 15 percent only through 2008. For taxpayers in the 10 and 15 percent tax brackets, the tax rate is 5 percent through 2007, and zero in 2008. The act extends the reduced rates effective in 2008 through 2010 and the reduced rates terminate for taxable years beginning after Dec. 31, 2010.
The act extends the AMT exemption levels though taxable years beginning in 2006 at an even higher level than in 2005. The new exemption levels for 2006 are $62,550 for married individuals filing a joint return and for surviving spouses; $42,500 for unmarried individuals other than surviving spouses; and $31,275 for married individuals filing separate returns. The act extends, through taxable years beginning on or before Dec. 31, 2006, the provision that allows most non-refundable personal tax credits to be claimed against the AMT.
The act extends the ability of small businesses to expense up to $100,000 (as adjusted for inflation) of investments in qualified depreciable assets, as well as a deduction phase-out dollar-for-dollar to the extent the business's annual investments exceed $400,000 (as adjusted for inflation). The extensions are effective for taxable years beginning after 2007 and before 2010.
A number of modifications have also been made to the timing of corporate estimate tax payments for corporations with assets of not less than $1 billion.
The legislation originally considered by the Senate and House was more massive than what was enacted. Here are the other tax provisions that made it, many of which will become applicable for transactions after Dec. 31:
- The act makes two changes to Subpart F, which imposes immediate taxation on foreign subsidiaries of U.S. companies, even if their income hasn't been brought back into the United States. One provision extends an existing exception for active financing income for two years. A second provision provides a "CFC look-through" rule exception from Subpart F for cross-border payments of dividends, interest, rents, and royalties funded with active income that hasn't been repatriated.
- Elective capital gains treatment is available for certain self-created musical works with respect to musical compositions or copyrights in musical works sold or exchanged. Also, t he costs of creating or acquiring a musical composition can be amortized over five years.
- The application of the Section 355(b)(3) active trade or business test to certain corporate distributions is simplified and applied on an affiliated-group basis.
- The tax treatment of loans with below-market interest rates to continuing care facilities is reformed. This includes the elimination of a dollar cap.
- Tax treatment of certain environmental cleanup funds for settling claims under the Comprehensive Environmental Response, Comprehensive, and Liability Act of 1980 is modified so the funds will be treated as governmentally owned if certain requirements are met.
- The application of the increased $20 million capital expenditure limitation from qualified small issue bonds is accelerated.
- With regard to the tonnage tax, the alternative tax regime for U.S.-flagged vessels that participate in commercial foreign trade, it may be elected for vessels weighing more than 6,000 deadweight tons (reduced from 10,000) .
Additional revenues will be generated from a wider range of changes, encapsulating everything from t he age of minors who are subjected to the "Kiddie Tax" (increased to age 18), to new loan and redemption requirements on pooled financing bonds.
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