Tax Increase Prevention and Reconciliation Act of 2005

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The Tax Increase Prevention and Reconciliation Act of 2005 (H.R. 4279) enacted as law on May 17, 2006.

  • It extends the dividend and capital gain rate cuts until 2010.
  • Rules that allow capital purchases to be taken immediately as an expense are extended until 2009
  • Favorable treatment of foreign "active financing" income for two years.
  • A provision extending favorable treatment for unearned income for controlled foreign corporations was extended by three years.
  • It extends relief from certain alternative minimum tax provisions (with increased exemptions and permission to use certain personal tax credits otherwise disallowed for AMT purposes) through 2006.
  • Sales of copyrights in music are now treated as capital gains rather than ordinary income, and costs of producing music can now be amortized over five years, rather than based on income from the music.
  • Half of dozen minor, targetted tax breaks are created.

Part of the cost of the tax cuts are paid for with "revenue offsets". These include:

  • Changes the Kiddie Tax which currently taxes unearned income of children 14 and under at their parent's rates so that it taxes children 18 and under at their parent's rates, and creates an exception for disability trusts.
  • Timing changes for corporate estimated tax payments.
  • Requires that farm subsidy checks be subject to income tax withholding.
  • Oil exploration expenses must be amortized over five years instead of two.
  • Tightens loopholes in tax laws for foreigners who invest in U.S. real estate.
  • Narrows eligiblity for tax free treatment in corporate spin offs where significant amounts of cash are involved.
  • Requires downpayments by taxpayers accompanying offers in compromise.
  • Allows traditional IRAs to be converted to Roth IRAs (this "revenue raiser" in fact in the long term is a significant tax cut).
  • Ends grandfathering of favorable treatment of certain foreign sales corporations (a repealed corporate tax break).
  • Trims the benefits applied to foreign earned income.
  • Imposes increased penalties on parties that participate in tax shelters without personally benefiting from them (e.g. non-profits whose tax exempt status is used to make a tax shelter work).

In all the tax cuts cost about $70 billion, mostly in the years 2006 to 2010. About 80 percent of the tax savings would flow to the top 10 percent of taxpayers and that almost a fifth of the benefits will go to the top one-tenth of 1 percent [1].

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