“Nothing Endures but Change”

– Heraclitus

This is always true when talking about the U.S. tax code. Life would be so much simpler (and our newsletters would be more entertaining!!) if Congress just implemented a flat or sales tax. Instead, they tinker with the tax code to gain political advantage. And now we must write another “boring” newsletter on how the changes may affect you, our client. It may not be the most exciting newsletter, but awareness of this information is important. So here’s the scoop.

After months of haggling, a House-Senate conference committee released H.R. 4297, the Tax Increase Prevention and Reconciliation Act of 2005 (“Act”). The House approved the bill on May 10, 2006, by a vote of 244 to 185 and the Senate followed the next day by a vote of 54 to 44. President Bush signed the bill into law on May 17.

We believe the Act is significant and does impact a broad cross-section of taxpayers. Among other things, the new law extends the dividend and capital gains tax rate cuts, gives taxpayers some immediate relief from the alternative minimum tax (“AMT”) and allows high-income taxpayers a Roth conversion opportunity. It also makes over twenty other changes.

While the final bill has undergone many changes since it started as last year’s 2005 reconciliation bill, it still contains $70 billion in net new tax cuts. It also contains $20 billion in revenue raisers that should get the attention of a wide variety of taxpayers.

AMT RELIEF

The Act extends and increases – for 2006 only – the AMT exemption amount for individuals. It also lessens the sting of the AMT for 2006 by allowing the use of certain nonrefundable personal credits.

Through December 31, 2006, taxpayers will be able to take advantage of higher AMT exemption amounts. The AMT exemption amount will be $62,550 for married couples filing jointly and $42,500 for single taxpayers. The exemption amount for married couples filing jointly in 2005 was $58,000 and for single taxpayers, the amount was $40,250.

The Act also extends, through 2006, the provision allowing taxpayers to use nonrefundable personal credits to offset AMT liability. Nonrefundable personal credits include the dependent care credit, the credit for the elderly and disabled, the credit for interest on certain home mortgages, the Hope credit for certain college expenses and the Lifetime Learning credit.

DIVIDEND AND CAPITAL GAINS RATE CUTS

As most of you already know, in 2003, Congress lowered the maximum dividend and capital gains tax rates to 15 percent for “qualifying taxpayers”. Nonqualifying taxpayers –those taxpayers in the 10 percent and 15 percent tax brackets – are eligible for an even lower rate of five percent. In 2008, the rate for taxpayers in the 10 percent and 15 percent tax brackets will fall to zero. As originally enacted, these tax rates were scheduled to expire at the end of 2008. Importantly, the Act extends these rates for two more years through December 31, 2010. This will obviously make capital gains and dividends much more attractive than ordinary income.

ROTH IRAS

Unlike traditional individual retirement accounts (“IRA”), contributions to a Roth IRA are not deductible, but withdrawals are tax-free. Moreover, distributions from Roth IRAs do not have to begin once a person reaches the age of 70 ½.. Hence, there are some key advantages to establishing and maintaining a Roth IRA.

Since many of you cannot contribute to a Roth IRA due to the fact that your annual income exceeds the allowable limitations, one way for a taxpayer to establish a Roth IRA is to “convert” a traditional IRA to a Roth IRA. Formerly, a taxpayer could not convert a traditional IRA to a Roth IRA unless your adjusted gross income was less than $100,000. The Act eliminates the $100,000 adjusted gross income ceiling for conversion for tax years after 2009. Conversions are treated as taxable distributions, but taxpayers who convert in 2010 can elect to recognize the conversion income in 2010 or average it over the next two years. As we approach 2010 (we like to plan ahead), we will be reviewing the advantages and disadvantages of such a conversion with all of our clients.

UPDATE OF FEDERAL ESTATE TAX

On another tax topic, legislation that would exempt the first $5 million of an individual’s estate and the first $10 million of a married couple’s estate from federal estate tax passed the House by a 269-156 vote on June 22nd. Further, estates valued at between $10 million and $25 million would be taxed at the capital-gains tax rate, while estates in excess of $25 million would be taxed at the top rates of 30 to 40 percent. If the measure becomes law, it would exempt all but about 2,800 estates from federal estate tax. There is no guarantee of its passage, however, as the legislation is expected to face a stern test in the Senate.

MARIEMONT JUNIOR HIGH TEAM WINS!!!

On a more personal note, for 7 years now, THOR (Jim & Allisha) has worked with the Mariemont School system in running investment clubs at the junior high and senior high schools. The senior high school club is a true investment club investing the members own money. They currently have over $11,000 invested.

The junior high school club introduces the youngsters to investing by participating in the Ohio Stock Market Game. This is a 10 week contest where the children invest an imaginary $100,000 in the stock market. This year there were nine teams competing from Mariemont and a total of 285 teams from all of Southwest Ohio. The Mariemont team, “the CEOs”, made up of six 8th grade boys, won the tournament with an ending value of $130,596!! This is an incredible feat, but you may not want to hire these young stock wizards yet. The stock that won then the tournament was Empire Resources, which appreciated from $20 a share to almost $41 a share at the end of the game. The stock is now worth only $12.88 a share. As CEOs member Jason Lonneman stated, “That’s how you play it, baby!!”.