A Brief Look at the Latest Tax Bill

May 10, 2006

Today’s Wall Street Journal had an article titled What the Tax Bill Means for Your Return. Here’s some of the highlights of the new tax bill that should be signed into law later this week:

1. The Alternative Minimum Tax is blocked from increasing for 2006. But, this provision only lasts for 2006. Those who were sucked into the AMT in 2005 won’t get any sort of relief. This isn’t good enough. We need to get rid of the AMT once and for all!

2. Extends the 15% tax rate on dividends and capital gains until 2010.

3. Increases the age limit on the kiddie tax from 14 to 18. Currently under the kiddie tax, the first $800 of a child’s unearned income (investment income) is tax free. The next $800 is taxed at the child’s rate. Anything over $1,600 is typically taxed at the parents’s top rate.

4. Allows wealthy individuals to convert their retirement savings from traditional IRAs to Roth IRAs. It isn’t really clear what this means exactly. In the past there were income limits (modified adjusted gross income of $100,000 or less) that had to be considered before converting a traditional IRA to a Roth IRA. It looks like that number may be done away with. UPDATE: For more on the Roth Conversion, read this article in the San Francisco Chronicle.

For those of you who are interested, you can read Kay’s thoughts on the new tax bill over at Don’t Mess with Taxes.

4 responses to A Brief Look at the Latest Tax Bill

  1. Social security payments were tax free at first. This conversion window is a red herring allowing Congress to collect taxes on the conversion and then years later, means test ROTH Ira income and begin to tax Roth IRA income above a certain limit. If you convert, you will pay taxes now and probably pay taxes later. Never convert all of your IRA. Keep both a classic IRA and a Roth IRA to maintain the flexibility you will need to fight the changes in taxes Congress will throw at you in the future!!

  2. wow, ciwood, you raise a good point that congress can change the tax free nature of roth accounts in the future at their (well at the majority’s whim).
    we need an ammendment to protect our tax free accounts!!
    have a wonderful day,
    makingourway

  3. I hate to be a pessimist, but

    Why do you think the gov’t requires brokerages, mutual funds, etc. to report the value of your retirement account to the IRS?

    There’s no way they’re going to keep their hands off of your retirement savings when they’ll be so many people who “need” help and you’ve been lucky in the lottery of life…

    I’ve decided against opening a Roth for these very reasons and utilize a traditional and 401k. Time will tell if I’ve made the right decision.

  4. Ouch! The real meaning of what they are considering with IRA conversions to Roths is scary. The federal government is running a deficit right now. One way to get tax dollars today without anyone complaining too much is to allow people to voluntarily pay the taxes on their retirement savings now by converting traditional IRAs to Roths.

    That means that the tax revenue for that income is available to them now. It won’t be available when we retire. I don’t believe for a second that our government is going to suddenly develop a deep sense of fiscal responsibility and bring spending down to the level of income. Instead, they will spend the extra money now, continue to run deficits and find other ways to tax us when we’re old and gray.

    The worst part of this is that our current crop of legislators have no intension of letting us pay the income tax on that money now only to take it away from us in sales taxes, property taxes, fees, wealth taxes, etc. later. They aren’t planning to raise our taxes in any way when the bill comes due. They are planning to retire before it becomes their problem.

    Yes, I think we should consider converting traditional IRAs to Roths. I love the idea. I’ve done it with one myself. However, I want to see a balanced federal budget, real social security and welfare reform, and a serious cutback on pork.