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New Tax Law Contains Provisions of Interest to Builders
President Bush last week signed into law H.R. 4297, the “Tax Increase Prevention and Reconciliation Act of 2005,” a $70 billion tax cut package that will extend lower rates for investors, limit the reach of the alternative minimum tax and increase the ability of small businesses to expense certain capital assets.
The legislation, which cleared the Senate on May 11 by a 54-44 vote, includes several provisions of interest to NAHB members. The new law:
- Includes a two-year extension of reduced rates on capital gains and dividends. Under current law, capital gains and dividend income are taxed at a maximum rate of 15% through 2008. For taxpayers in the 10% and 15% tax brackets, the tax rate is 5% through 2007 and zero in 2008. H.R. 4297 extends the effective rates through 2010.
- Increases alternative minimum tax (AMT) exemption levels. The new exemption levels will rise from $58,000 in 2005 to $62,550 for joint filers and from $40,250 to $42,500 for single filers. This one-year “patch” is expected to prevent 15 million families from being hit by the AMT. The tax was introduced in 1968 to ensure that the wealthy pay their fair share of taxes, but it has increasingly ensnared middle-class taxpayers because it was never indexed for inflation.
- Provides AMT relief for non-refundable personal tax credits, such as those for dependent care, the elderly and disabled, interest on certain home mortgages, certain college expenses and lifetime learning, among others. Claiming these credits can push an individual into the AMT. This provision extends current law, which allows most non-refundable personal tax credits to be claimed against the AMT so that families continue to receive the full benefit of them.
- Incorporates a two-year extension of enhanced Section 179 expensing for small businesses. Under current law, small businesses may expense (i.e. deduct in the first year) up to $100,000 of investments and depreciable assets. The deduction phases out dollar-for-dollar to the extent the business’s annual investments exceed $400,000. Without action, after 2007 the expensing limit would have declined to $25,000 and the phase-out threshold would have fallen to $200,000.
- Enhances access to affordable mortgages for veterans. Prior to passage of H.R. 4297, veterans were eligible to access financing from certain mortgage revenue bonds only if they served prior to 1977 and applied for these mortgages within a 30-year eligibility period after leaving active service. The new law expands eligibility for the program in a number of states by repealing the requirement that veterans must have served before 1977 and reducing the eligibility period to 25 years.
- Amends information reporting requirements to include interest on tax-exempt bonds, in the same manner as interest paid on taxable obligations.
- On the domestic manufacturing deduction, the bill modifies the W-2 wage limitation, which for a taxable year is 50% of the wages paid by the taxpayer during the calendar year that ends in the taxable year. The new law clarifies that only those wages allocable to domestic production gross receipts are included for purposes of this limitation. It also repeals the special rule limiting the amount of W-2 wages that may be allocated by pass-through entities.
To read the legislation, click here and enter H.R. 4297 in the box at the center of the page.
For more information, e-mail Rob Dietz at NAHB, or call him at 800-368-5242 x8285.
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