By MARY DEIBEL
Scripps Howard News Service
May 11, 2006
But the temporary patch in the Alternative Minimum Tax leaves open what happens to less-than-rich taxpayers it could trip up next year and as many as 1 in 3 taxpayers by 2010.
Absent 2006 changes, the U.S. Treasury estimates 22 million households would owe the Alternative Minimum Tax. As for 4 million taxpayers Treasury says paid it for 2005, they're likely to be caught again this year despite the temporary fix.
The bill's other centerpiece extends through 2010 today's lower tax rates for capital gains and dividends from sales of stocks, bonds and other assets.
Those rates, which had been scheduled to expire starting in 2009, are currently 15 percent for taxpayers in top brackets and 5 percent for people in the 10- and 15-percent brackets, or couples with taxable income of $59,400 and single filers $29,700 in 2005. Better-off taxpayers will be able to claim the 15 percent capital gains and dividend rate through 2010, while those in the 10- and 15-percent bracket will see these taxes drop to zero from 2008 through 2010.
Taxpayers who own stocks through retirement accounts don't claim capital gains and dividend tax breaks because their accounts are largely sheltered against taxation until the money is withdrawn in retirement, when it's taxed like pay as ordinary income up to a 35 percent marginal rate.
That's largely why the non-partisan Tax Policy Institute estimates that middle-income households would get average tax cut of $20 from this tax-cut package while 0.02 percent of households with incomes over $1 million get average tax cuts of $42,000.
However, middle-income taxpayers preparing to sell their principal residence stand to benefit, too, if their profit on sale of their home exceeds the $500,000-a-couple, $250,000-a-single-taxpayer exemption. Those limits can easily be breached for longtime homeowners and people in hot housing markets, says senior analyst Bob Scharin with professional tax publisher RIA.
The 4 million taxpayers who stand to get hit by the Alternative Minimum Tax again in 2006 should do advance planning with their investments, Scharin says, because capital gains and dividends can push them above the income thresholds for this parallel tax system.
Under the tax cut bill, the Alternative-Minimum-Tax exemption that's subtracted from taxable income to determine what you owe will increase to $62,550 for joint filers, up from $58,000 last year, and to $42,500 for singles, up from $40,500.
Exceed those income limits, however, and the Alternative Minimum Tax can cost you an average $2,770 additional income tax, the Treasury estimates, because it denies key tax breaks: You lose all personal exemptions, state and local tax write-offs and miscellaneous deductions including medical expenses, unreimbursed business expenses and investment fees.
Iowa Republican Charles Grassley, chairman of the tax-writing Senate Finance Committee, expects to move a "trailer" tax-cut bill "very soon" that contains an Alternative Minimum Tax patch for 2007.
The Alternative Minimum Tax, enacted in 1969, was aimed at making sure 155 super-wealthy individuals who hadn't paid any federal income tax owed at least a little. But the tax has never been adjusted for inflation so it now catches taxpayers making as little as $50,000 a year although the Tax Policy Center reports it mostly hits households with $100,000 to $500,000 income.
Congress and Bush continue to duck a permanent extension that would cost $700 billion the first 10 years - revenue they build into their budgets to make the federal deficit look smaller.
The tax-cut bill also is paid for in part by what Robert Greenstein of the liberal Center for Budget and Policy Priorities calls a "blatant tax gimmick": It suspends the $100,000 income cap on taxpayers who are allowed to convert traditional before-tax Individual Retirement Accounts to Roth IRAs, in which taxpayers pay tax upfront for the promise of future tax-free withdrawals.
This pay-me-now approach will let well-off IRA owners convert their IRAs in 2010 if they pay income tax on the money in 2011 and 2012. Congress' Joint Committee on Taxation estimates this will raise $4.8 billion initially to keep the overall tax bills cost under $70 billion, but it will lose $9.4 billion by 2015 and billions more thereafter as wealthy retirees start to tap tax-free IRA money or leave it tax-free to heirs.
Such efforts to keep the tax package price tag under the $70-billion cost that Congress set in its 2006 budget resolution allow Senate passage by a simple majority instead of the 60 votes needed to defeat a filibuster.
The second "trailer" tax cut is expected to include popular items considered filibuster-proof. Besides an Alternative Minimum Tax fix for 2007, the measure likely will propose renewing the $250 tax deduction for teachers who buy classroom supplies and a tax deduction for state and local sales taxes that is worth more than $2 billion a year to taxpayers from states with no general state income tax including Alaska, Florida, Nevada South Dakota, Tennessee, Texas and Wyoming.
Scripps Howard News Service, http://www.shns.com
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