New Tax Legislation Moving Forward

I'm back from vacation and while I was out Congress passed a new tax bill that the President is expected to sign on Wednesday of this week. Highlights of the new bill include...

1. An extension of the reduced capital gains and dividend tax rates. The rates were set to increase after 2008. The new bill extends the reduced rates through 2010.



2. There's a small provision allowing musical artists to treat the sale of compositions or copyrights as sales of capital assets (subject to reduced tax rates).



3. The AMT exemption is increased to 62,550 for married couples for 2006 (42,500 for others).



4. An extension of the increased section 179 deduction amount through the end of 2009.

In addition to the above cuts the bill also adds several 'revenue raisers' to keep the bill's cost below $70 billion. These include requiring taxpayers to make up-front payments when submitting offers in compromise to IRS and allowing taxpayers with higher incomes to convert their traditional IRA's to Roth's.

The most controversial aspect of the bill (besides the extension of the reduced capital gains and dividend rates) is the requirement for withholding on federal contracts. Beginning in 2011 contractors will have 3% of their contract proceeds withheld. Several lawmakers have vowed to repeal this provision before it has a chance to take effect, but it is an interesting approach to closing the $345 billion tax gap that results from non-compliance. Some estimate that two thirds of the tax gap results from under reporting income associated with 1099 earnings. Withholding at the source of payment of this type of income is seen as a logical enforcement step. It will be interesting to see how it plays out over the next several years.