TIPRA highlights: new law generally favors taxpayers.

• Author: Josephs, Stuart R.
• Position: Federaltax

The following are highlights of domestic provisions in the 2005 Tax Increase Prevention and Reconciliation Act (TIPRA), signed into law May 17, 2006, affecting individuals, businesses and corporations.

Changes Affecting Individuals

Lower Tax Rates on Long-Term Capital Gains and Qualified Dividends

Under existing law, an individual's and other noncorporate taxpayer's "adjusted net capital gain" is taxed at a 15 percent top rate or, to the extent it would have been taxed at a 10 percent or 15 percent rate if it had been ordinary income, at a 5 percent top rate (or a 0 percent top rate for tax years beginning after 2007).

Adjusted net capital gain is the net capital gain for the tax year (the excess of net long-term capital gains over net short-term capital losses) less:

* Long-term capital gains taxed at a 28 percent top rate (gain on the sale of most collectibles and gain on the included portion of IRC Sec. 1202 small business stock); and

* Long-term capital gains taxed at a 25 percent top rate (unrecaptured Sec. 1250 gain attributable to real estate depreciation).

Adjusted net capital gain also includes qualified dividend income (discussed below).

Under existing law, these 15 percent, 5 percent and 0 percent rates on adjusted net capital gains would be in effect through 2008. Thereafter, rates ranging from 20 percent down to 8 percent would become effective.

The new law extends for two years, through tax years beginning before 2011, these lower rates on adjusted net capital gains.

Qualified Dividends: This type of income generally consists of dividends received during the tax year from domestic corporations and qualified foreign corporations--subject to holding period requirements and certain exceptions. It is treated as adjusted net capital gains and subject to the same favorable tax rates applicable to those gains.

Under existing law, this treatment would expire at the end of 2008. Thereafter, qualified dividends would be taxed at regular ordinary income tax rates.

The new law extends for two years, through tax years beginning before 2011, this favorable treatment of qualified dividends.

AMT Relief

Under existing law, the AMT exemption for individuals would be:

* $45,000 for joint returns, less 25 percent of AMTI exceeding $150,000 (no exemption if AMTI is $330,000 or more);

* $33,750 for unmarried individuals, less 25 percent of AMTI exceeding $112,500 (no exemption if AMTI is $247,500 or more); or

* $22,500 for married individuals filing separately, less 25 percent of AMTI exceeding $75,000 (no exemption if AMTI is $165,000 or more). However, AMTI for these taxpayers is increased by the lesser of $22,500 or 25 percent of the excess of AMTI (before this increase) over $165,000.

For tax years beginning in 2006, the new law provides the following exemptions:

* $62,550 for joint returns, less 25 percent of AMTI exceeding $150,000 (no exemption if AMTI is $400,200 or more);

* $42,500 for unmarried individuals, less 25 percent of AMTI exceeding $112,500 (no exemption if AMTI is $282,500 or more); or

* $31,275 for married individuals filing separately, less 25 percent of AMTI exceeding...