It seems that every year Congress presents us with a change in the tax law in an attempt to accomplish certain goals, such as stimulate the economy, redistribute income, raise revenue or try to make the system appear fair. The 2006 tax year is no different and only time will tell if our government is successful in meeting any of their goals.

Known as the Tax Increase Prevention and Reconciliation Act of 2005 (even though it was signed into law on May 17, 2006), it contains many provisions that may be of interest to you. We try to look at changes in the tax law as an opportunity to communicate with you and to be creative in applying the tax law to maximize benefits and minimize your tax liability.

The following is a summary of the some of the key provisions of the 2006 tax act. Please contact us with your questions.

• The "Kiddie Tax" age limit is raised to affect children under age 18, rather than under age 14. This change is effective retroactively for all of the 2006 tax year. Unearned income, such as interest, dividends, capital gains, rents and royalties, will be taxed at the parent's top marginal income tax rate when overall income exceeds $1,700. It is important to look back at any transactions since January 1, 2006 that you were expecting to be taxed at the child's rate that may now be taxed at the parent's rate. Steps may be taken to mitigate this situation such as harvest capital losses, switch investments to tax free or tax deferred growth, and, if there is earned income, make an IRA contribution.

• Maximum tax rate of 15% on long term capital gains and certain dividends is extended two more years through 2010. This popular provision was originally scheduled to expire in 2008. The bigger the spread between ordinary and capital gain rates, the more important it is to take advantage of opportunities under the law to have income treated as long-term capital gain. The simplest method is to hold property beyond the required 12-month holding period, whenever possible, before selling the property.

• Higher limit on the election to expense equipment purchases by small businesses is extended for two more years to 2009. The present maximum is $108,000 for 2006 and was scheduled to revert back to the old limit of $25,000 after the 2007 tax year.

• Nominal relief from the Alternative Minimum Tax is extended for the 2006 tax year only. This provision increased the AMT exemption to $62,550 for married couples filing jointly and to $42,500 for single filers. In addition, the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for college expenses and the Lifetime Learning credit can now be claimed against the AMT, thus offsetting both regular and AMT tax. Although there is consensus that the AMT should be eliminated, some estimates put the reduction in federal tax revenues at $1 trillion.

• Income limitation on conversion to Roth IRA is removed. This provision will be effective for the 2010 tax year. The present $100,000 adjusted gross income cap is eliminated. Individuals of all income levels will be able to convert their traditional IRA to a Roth IRA, pay current income tax on the conversion and enjoy tax-free growth in the Roth IRA. The decision to make the conversion involves careful advance planning, so please contact us if you are considering taking advantage of this provision.

• Modifications made to the foreign earned income and employer provided housing exclusions for United States citizens living in a foreign country. Effective with the 2006 tax year, the foreign earned income exclusion is now indexed to the cost of living. In this first year, the income exclusion increases from $80,000 to $82,400. In addition, the tax rate that is to apply to the income in excess of the exclusion is specified, the formula for the housing cost benefit is changed and a specified ceiling on the housing cost benefit is provided. These are very complicated changes to an already complex set of rules for taxpayers working abroad.

• Modification to the domestic production activities deduction regulations by narrowing the wage limitation definition. Qualifying wages are limited to amounts that are properly allocable to domestic production gross receipts. Thus, the amount of the deduction is limited to 50% of only those wages that are deducted in arriving at qualified production activities income. In addition, the limit on wages allocable to partners or shareholders in pass-through entities is repealed. The partner or shareholder will include in its wage limitation only the wages that are deducted in calculating qualified production activities income. These provisions are effective for tax years beginning after May 17, 2006.

• Special favorable tax treatment to musical artists and publishers. At the election of the taxpayer, the sale of musical compositions or copyrights in musical works created by the taxpayer is treated as the sale of a capital asset, thus eligible for the lower long-term capital gains tax rates discussed above. This provision is effective for sales on or after May 17, 2006 and before January 1, 2011.

• Offer in compromise rules become more restrictive. When the offer is submitted, the taxpayer must provide 20% of the amount offered in a lump-sum offer or the first proposed installment in a payment plan offer. Failure to make a periodic payment while the offer is being evaluated is considered a withdrawal of the offer. Finally, if the IRS fails to reject an offer within 24 months of submission, it is deemed accepted. This provision is effective for offers made on or after July 16, 2006.

It is safe to say that the goal of simplification was not achieved with the passage of the Tax Increase Prevention and Reconciliation Act of 2005. It is important that you contact us if you believe you are affected by any of these changes or if you want to do any planning to mitigate the tax impact.