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ProSeries Frequently Asked Questions

Tax Increase Prevention and Reconciliation Act

Products Affected:

• ProSeries
• ProSeries Express Edition
• ProSeries Basic Edition

The Tax Increase Prevention and Reconciliation Act (TIPRA), H.R. 4297, was signed into law on May 17, 2006.

Excerpt from Committee on Ways and Means Press Release Issued May 10, 2006

Today, the House of Representatives approved the Conference Report for H.R. 4297, the Tax Increase Prevention and Reconciliation Act of 2005 by a vote of 244 - 185.

"This bill is designed to keep the tax rate on investment low and to prevent 15 million Americans from falling into the alternative minimum tax in 2006," said Ways and Means Chairman Bill Thomas (R-CA). "This legislation is crucial to maintaining the strong American economy that has created more than five million new jobs in the past three years."

This agreement prevents several current-law tax provisions from expiring in the near future. These provisions affect a broad spectrum of taxpayers, including investors, job creators and middle-income families. The two largest pieces of the bill are the extension of the lower tax rates on capital gains and dividends and the extension of the alternative minimum tax (AMT) protection.

Excerpts from Committee on Ways and Means Detailed Summary of Conference Report

Below is a brief summary of some of the changes made by TIPRA. Be sure to review the complete Detailed Summary of Conference Report on the Committee on Ways and Means Web site to see other provisions.

• Two-Year Extension of Reduced Rates on Capital Gains and Dividends - Under current law, capital gains and dividend income are taxed at a maximum rate of 15 percent 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 Conference Report extends the rates effective in 2008 through 2010. Without action, these rates would have increased after 2008.
• Increase in AMT Exemption Levels - The provision extends the Alternative Minimum Tax (AMT) exemption levels through the end of 2006 at a higher level than in 2005. The new exemption levels for 2006 are $62,550 for joint filers, $42,500 for single filers and $31,275 for separate filers.
• AMT Relief for Non-Refundable Personal Tax Credits - The tax code includes many non-refundable personal tax credits, such as the dependent care credit and the credit for the elderly and disabled, among others. Claiming these credits may push an individual in the AMT. The provision extends current law which allows most non-refundable personal tax credits to be claimed against the AMT so that families continue to receive the full benefit of these tax credits.
• Two-Year Extension of Enhanced Section 179 Expensing for Small Business - Under current law, small businesses may expense up to $100,000 of investments in depreciable assets. The deduction phases out dollar-for dollar to the extent the business's annual investments exceed $400,000. Without action, the expensing limit would have declined to $25,000 and the phase-out threshold would decline to $200,000 after 2007.
• Subpart F - Subpart F of the tax code imposes immediate taxation on foreign subsidiaries of U.S. companies, even if their income has not been brought back to the United States. One provision extends an existing exception from Subpart F 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 that are funded with active income that has not been repatriated. This "CFC look-through" rule will be effective for taxable years beginning after December 31, 2005 and before January 1, 2009.
• Simplification of Active Trade or Business Test - The provision simplifies the application of the active trade or business test to certain corporate distributions. By applying this test on an affiliated group basis, the provision applies the same standard regardless of whether a business is owned by a holding company or owned directly. As a result, the provision allows corporations to avoid costly and inefficient internal restructurings prior to engaging in certain corporate distributions to their shareholders.
• Tax Treatment of Self-Created Musical Works - The provision provides capital gains treatment for self-created musical works when these works are sold by the artist. Under current law, such sales are taxed as ordinary income.
• Amortization for Songwriters - The provision allows taxpayers to elect to amortize the costs of creating or acquiring a musical composition over five years. This election would be made in lieu of the income forecast method for these advances.
• Loans to Qualified Continuing Care Facilities - The provision reforms the tax treatment of loans to continuing care facilities.
• Corporate Estimated Tax Provisions - The timing of certain corporate estimated tax installment payments has been changed.
• Application of Earnings Stripping Rules to C Corporations Which are Partners - The provision codifies proposed Treasury regulations attributing partnership interest income, interest expense and liabilities to corporate partners for purposes of applying the earning stripping rules.
• Amend Information Reporting Requirements to Include Interest on Tax-Exempt Bonds - The provision provides that interest paid on tax-exempt bonds is subject to information reporting in the same manner as interest paid on taxable obligations.
• Amortization of Geological and Geophysical Expenditures for Major Integrated Oil & Gas Companies - The provision replaces two-year amortization treatment for certain expenditures made by major integrated oil companies with five-year amortization treatment.
• Limitation on Certain Corporate "Cash Rich" Spin-Off Transactions - The provision denies tax-free treatment to certain spin-offs where either the distributing corporation or the controlled corporation is a "disqualified investment corporation", defined as having investment assets that are two-thirds or more (75 percent or more under a first-year transition rule) or the value of the corporation's total assets.
• Offers-In-Compromise Partial Payments - The provision requires that a taxpayer make a good faith down payment of 20 percent of any lump sum offer-in-compromise with any application for an offer. For periodic payment offers, the taxpayer is required to comply with their own payment schedule while the offer is being considered. The provision also provides that an offer is deemed accepted if the IRS does not make a decision with respect to the offer within two years from the date that the offer was submitted.
• Taxation of Passive Income of Minors - Under current law, minors under age 14 are taxed on their unearned income (i.e. passive income such as interest) at their parent's marginal tax rate. The provision increases the age of minors subject to this tax to those minors under age 18. The provision also provides an exception for distributions from certain qualified disability trusts.
• Conversions to Roth IRAs - The provision allows more taxpayers to convert to Roth IRAs by removing the modified adjusted gross income limitations on rollovers from an IRA to a Roth IRA. Under the provision, taxpayers can elect to pay tax on amounts converted in 2010 in equal installments in 2011 and 2012.
• Domestic Manufacturing Deduction Wage Limitation - The domestic manufacturing deduction for a taxable year is limited to 50 percent of the wages by the taxpayer during the calendar year that ends in such taxable year. The provision clarifies that only wages allocable to domestic production gross receipts are included for purposes of this limitation.
• Foreign Earned Income and Employer-Provided Housing Exclusion Rules for U.S. Citizens Living Abroad - U.S. citizens living and working abroad may be eligible to exclude from their income for U.S. tax purposes certain foreign earned income and foreign employer-provided housing costs. The provision reforms the rules applicable to these citizens by (i) accelerating indexing of the $80,000 foreign earned income exclusion cap, (ii) tying the employer-provided housing exclusion to the foreign earned exclusion cap and applying an objective standard in determining the amount of reasonable housing expenses, and (iii) applying a "stacking rule" to ensuring that these citizens are subject to the same U.S. tax rates as individuals living and working in the U.S.

Additional Information

• Press Release: May 17, 2006
• Senate Finance Committee Summary
• Statement of Managers
• Legislative Text
• Estimated Revenue Effects

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