Tax Increase Prevention and Reconciliation Act of 2005

The President signed into law the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222). The bill contains a list of extended provisions, several new tax breaks, and a list of revenue raisers.

Some of the provisions include:

1. Extension of Favorable Capital Gain and Dividend Rates for Two More Years
The current law's favorable tax rates for capital gains and qualified dividend income remain in place through 2010 (instead of sunsetting after 2008).

2. Increased Expensing for Small Businesses Extended for Two More Years
The Act extends, through the end of 2009, the expanded version of the $100,000 small business expense deduction (i.e., immediate deduction in year of purchase of the asset rather than depreciation over many years) provided by the American Jobs Creation Act of 2004.

3. AMT Exemption and Credits in 2006
For 2006, the AMT exemption amount for married taxpayers increases to $62,550 and for unmarried individuals to $42,500 (instead of dropping to $45,000 and $33,750; respectively). Additionally, nonrefundable personal tax credits may be claimed to the full extent of an individual's regular tax and alternative minimum tax (instead of being limited to the excess of regular tax liability over tentative minimum tax). This provision is effective for tax years beginning after December 31, 2005.

4. Sale or Exchange of Musical Works
Music writers may elect to treat the sale or exchange of their musical compositions or copyrights in musical works created through personal efforts as the sale or exchange of a capital asset (applies for sales or exchanges before January 1, 2011, in tax years beginning after the date of enactment). Additionally, a qualified financial sponsor of a songwriter may amortize, over a five year period, certain expenses incurred on a music composition placed into service prior to January 1, 2011 and after December 31, 2005.

5. Kiddie Tax Age Increased to 18
For tax years beginning after 2005, the age at which the "kiddie tax" applies is changed from under 14 to under 18 years of age. An exception to the tax would apply for a child who is married and files a joint return for the tax year and for distributions from certain qualified disability trusts. The "kiddie tax" applies to a child under the applicable age who collects dividends and other "unearned" income; the first $850 is tax free and the next $850 typically is taxed at the child's rate. Any income over $1,700 typically is taxed at the parents' top rate. The provision is effective for 2006.

6. Modification of Exclusion for Citizens Living Abroad in 2006
Effective for tax years beginning after December 31, 2005, there will be certain amendments to the foreign earned income exclusion and housing allowance for U.S. employees working abroad. The Act accelerates the inflation adjustment for the income exclusion from 2008 to 2006, and now provides that the base housing amount used for calculating the foreign housing cost exclusion is 16% of the amount of the foreign earned income exclusion limitation. The amount of any income excluded by this provision will, however, be included for purposes of determining marginal tax rates.

7. Other Impacts
There are other provisions that impact corporations and other entities. You may read about these in any of the documents below.

Tax Increase Prevention and Reconciliation Act of 2005 (PL 109-222)
[ Text ] [ Summary ] [ Joint Explanatory Statement ]