The Tax Increase Protection and Reconciliation Act of 2005: What's It Mean for You?

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The Tax Increase Protection and Reconciliation Act of 2005: What's It Mean for You?

The Tax Increase Protection and Reconciliation Act of 2005 (HR 4297) is designed to give investors a break on long term capital gains income and qualified dividend income. The bill replaces a previous one, which offered essentially the same tax breaks but was set to expire in 2008. The new bill is in effect until 2010, when it will come up for renewal and have to be passed by the Senate and the House of Representatives again.

The bill changes tax law in a few ways. First, long term capital gains income and qualified dividend income will be taxed at 15% for most households. This rate is the lowest capital gains taxes have ever been, and it applies to households whose regular incomes are taxed at 25%, 28%, 33%, and 35%. For households whose regular incomes are taxed at 5% or 10%, their capital gains and qualified dividend incomes are taxed at 5% under the bill, another all time low.

Another function of the bill is the rewriting of the Alternative Minimum Tax law, also known as AMT. People who were taxed under AMT were taxed at a flat rate of 28%, but they were unable to claim any deductions. AMT has been an extremely controversial plan; it was designed to keep taxes stable and manageable for some people, but they often ended up paying more in the end without the benefit of deductions. The new bill raises AMT exemptions to $62,225.

So what do these changes mean to you? That depends entirely on your circumstances. If you do not invest in the stock market, if you do not have income from any stock investments or money market accounts, or if you are not taxed under the AMT law, this bill does absolutely nothing for you. If any of these circumstances do apply to you, however, then this bill can save you real money. If you receive income from investments, that income will be taxed at a much lower rate than your regular income, which translates into more money in your pocket. Likewise, if you were taxed under AMT, then your new ability to claim deductions on your taxes can mean a reduced tax bill, or even an increased tax return check.

There is another way this bill may affect you that is seldom considered. An addendum to the bill that received very little media attention changed the way the IRS handles tax dispute cases. Previously, if you had a dispute with the IRS, you did not have to pay any money while the case was being decided. Under the new law, people who are disputing a charge with the IRS must by law make payments towards the disputed amount while the case is still pending. This also applies to so-called "offers-in-compromise" with the IRS. If you have gotten behind on your taxes and make a settlement offer to the IRS to get caught up, previously, you did not have to make payments while waiting to hear if your settlement was accepted. Now, you must make payments or risk legal proceedings.

The Tax Increase Prevention and Reconciliation Act of 2005 is deeply controversial. Some people claim the tax relief it provides puts more money in people's pockets, allowing them to spend more, which is vital to the success of the economy. Other people claim it is just a tax break for the wealthy that have to disposable income to make investments, while it offer no real benefits to the poor and working class. The debate is moot, however, until 2010.