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Tax Increase Prevention and Reconciliation Act of 2005 - changes

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					Tax Increase Prevention and Reconciliation Act (TIPRA)
On May 17, 2006, President Bush signed the "Tax Increase Prevention and
Reconciliation Act" (TIPRA), P.L.109-222. Most of TIPRA is focused on extending
individual income tax relief provisions that expired at the end of 2005 or were
scheduled to expire within the next two years. Provisions eliminating the adjusted
gross income limitation for Roth IRA conversions and the extension of lower rates for
dividends and capital gains could provide opportunities for your customers.

Income Ceiling for Traditional IRA-to-Roth IRA Conversions Eliminated:
Currently, a taxpayer can convert a traditional IRA to a Roth IRA only if 1) his or her
adjusted gross income (AGI) does not exceed $100,000 (excluding the converted
amount) and 2) the taxpayer is not married, filing separately. A conversion is taxed
as a complete distribution of the traditional IRA in the year of the conversion, but is
not subject to the 10% premature penalty tax. Beginning in 2010, the new law
allows taxpayers to convert traditional IRAs to Roth IRAs without regard to their
adjusted gross income or filing status. Additionally, for conversions occurring in
2010, taxpayers will have a limited ability to spread the income tax over the
following two years, including one-half of the conversion in 2011 and the other one-
half in 2012. The converted amounts will not be subject to the 10% penalty tax. To
discourage immediate withdrawal of the converted amounts, any converted amounts
withdrawn prior to 2012 must be included as taxable income in the year of the
withdrawal - in addition to the one-half converted amount - and will be subject to the
10% penalty tax.


   What this means to your business in the near term:
         High-income customers may now be interested in making deductible or
         non-deductible traditional IRA contributions between now and 2010 in
         anticipation of converting these accumulations to a Roth IRA in 2010.
         With the elimination of the income ceiling for conversions beginning in
         2010, there is an opportunity for your customers involving rollovers to
         IRAs from qualified plans immediately followed by conversions to a Roth.
         This would permit the customer to quickly move qualified plan money into
         a Roth IRA, without the 10% penalty tax.
         Because taxpayers can spread the taxation of a conversion in 2010 over
         the following two years, you can begin laying the foundation now with
         your customers for them to plan for conversion in 2010.

Extension of Lower Long-Term Capital Gains and Dividend Rates:
The lower rates for long-term capital gains and "qualified dividend income" enacted
in 2003 as part of JGTRRA are extended through 2010. Under JGTRRA, the
maximum long-term capital gains rate is 15%. For taxpayers in the 10% and 15%
tax brackets, the lowest long-term capital gain rate is currently 5%, decreasing to
0% in 2008. These same rates apply for "qualified dividend income", which is
generally defined as dividends paid by domestic corporations and certain qualified
foreign corporations. The lower rates for "qualified dividend income" also apply to
dividends paid by mutual funds if the income passing through the mutual fund to the
taxpayer is "qualified dividend income" in the hands of the mutual fund. The
JGTRRA capital gains rate provisions were set to expire at the end of 2008, but
TIPRA has extended them to December 31, 2010.




For Internal Broker-Dealer Use Only – May not be quoted, reproduced, shown to
members of the public or used in oral, written or electronic form as sales literature
for public use.
       What this means to your business in the near term:
         Now that the top long-term capital gains tax rate is scheduled to remain
         at 15% through 2010 and the rate for those in the 10% or 15% income
         tax bracket will drop from 5% today to 0% in 2008 – 2010, customers
         selling businesses or real estate today may wish to consult with their tax
         advisor to consider structuring the sale as an installment sale to defer
         their capital gain tax.
         The fact that income paid from mutual funds can be taxed at lower long-
         term capital gains rates while distributions from annuities are taxed at
         ordinary income tax rates is a competitive disadvantage. We should
         continue to emphasize that annuities provide tax deferral, can offer
         important guarantees that mutual funds do not, and can provide life-time
         income streams.


Other Individual Income Tax Provisions:
   AMT Relief Continued and Increased.
   Without TIPRA, the AMT exemption amount for 2006 would have been lower than
   that for 2005, resulting in an increased number of taxpayers subject to the AMT.
   To avoid this, TIPRA increased the 2006 AMT exemption amounts from those that
   applied for 2005 and increased taxpayers' ability to use personal tax credits to
   offset the AMT.

       What this means to your business in the near term:
       This new law provides AMT relief for 2006 only in the form of higher
       exemptions and continued ability to use certain personal credits to offset AMT
       liability. However, after 2006, if no further relief is enacted, the AMT is likely
       to affect more people than ever. The AMT exemption for joint filers is
       currently scheduled to drop from $62,550 in 2006 to $45,000 in 2007, and
       the ability to use nonrefundable personal credits (e.g. the dependent care
       credit and the Hope and Lifetime Learning credits) to offset AMT liability will
       not be available after 2006.
           As a result, customers may wish to consult with their tax advisor to
           consider accelerating certain AMT preference items into 2006 instead of
           2007.
                o For example, exercising incentive stock options can create AMT
                    income, so it may be prudent to exercise these options in 2006
                    rather than 2007.
                o Also, if your customers own municipal bond funds that invest in
                    private activity bonds, they should be directed to consult their tax
                    advisor to help determine whether these investments will still be
                    appropriate for them after 2006.

   Kiddie Tax.
   TIPRA increased the age to which the Kiddie Tax applies from under age 14 to
   under age 18. The "Kiddie Tax" requires a child to pay tax on unearned income
   over $1,700 at his or her parents' highest marginal rate. Alternatively, the
   parents can simply include the child's unearned income on their returns.

       What this means to your business in the near term:
       This provision is effective for all of 2006.


For Internal Broker-Dealer Use Only – May not be quoted, reproduced, shown to
members of the public or used in oral, written or electronic form as sales literature
for public use.
          Customers engaging in various gifting and income-shifting strategies
          should be directed to consult their tax advisor to review these strategies
          in light of this change.
          Investment income in custodial (UGMA/UTMA) accounts will now be taxed
          at the parent’s highest marginal tax rate until the child reaches age 18.
          Customers whose children were not likely to qualify for financial aid may
          have been using a strategy of gifting appreciated securities to their pre-
          college age children so the securities could be sold and taxed at the child’s
          rate. This will no longer be effective until after the child reaches age 18.




For Internal Broker-Dealer Use Only – May not be quoted, reproduced, shown to
members of the public or used in oral, written or electronic form as sales literature
for public use.

				
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