[Analytical Perspectives]
[Federal Receipts and Collections]
[17. Federal Receipts]
[From the U.S. Government Printing Office, www.gpo.gov]
[[Page 239]]
17. FEDERAL RECEIPTS
Receipts (budget and off-budget) are taxes and other collections from
the public that result from the exercise of the Federal Government's
sovereign or governmental powers. The difference between receipts and
outlays is the surplus or deficit.
The Federal Government also collects income from the public from
market-oriented activities. Collections from these activities, which are
subtracted from gross outlays, rather than added to taxes and other
governmental receipts, are discussed in the next Chapter.
Total receipts in 2008 are estimated to be $2,662.5 billion, an
increase of $122.4 billion or 4.8 percent relative to 2007. Receipts are
projected to grow at an average annual rate of 5.6 percent between 2008
and 2012, rising to $3,307.3 billion. This growth in receipts is largely
due to assumed increases in incomes resulting from both real economic
growth and inflation.
As a share of Gross Domestic Product (GDP), receipts are projected to
decline from 18.5 percent in 2007 to 18.3 percent in 2008, and to rise
to 18.6 percent in 2012.
Table 17-1. RECEIPTS BY SOURCE--SUMMARY
(In billions of dollars)
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Estimate
2006 Actual -----------------------------------------------------------------------------------------
2007 2008 2009 2010 2011 2012
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Individual income taxes........................ 1,043.9 1,168.8 1,246.6 1,331.1 1,428.3 1,517.3 1,636.6
Corporation income taxes....................... 353.9 342.1 314.9 319.8 325.5 340.6 366.6
Social insurance and retirement receipts....... 837.8 873.4 927.2 974.2 1,029.3 1,085.7 1,138.8
(On-budget).................................. (229.4) (239.2) (253.1) (262.8) (276.0) (289.9) (303.4)
(Off-budget)................................. (608.4) (634.1) (674.1) (711.4) (753.3) (795.8) (835.3)
Excise taxes................................... 74.0 57.1 68.1 63.1 63.6 68.6 71.3
Estate and gift taxes.......................... 27.9 25.3 25.7 27.4 21.7 1.7 0.5
Customs duties................................. 24.8 26.8 29.2 30.7 32.7 34.3 35.7
Miscellaneous receipts......................... 45.0 46.7 50.7 52.0 53.6 55.5 57.8
--------------------------------------------------------------------------------------------------------
Total receipts............................... 2,407.3 2,540.1 2,662.5 2,798.3 2,954.7 3,103.6 3,307.3
(On-budget)................................ (1,798.9) (1,906.0) (1,988.4) (2,086.9) (2,201.4) (2,307.8) (2,472.0)
(Off-budget)............................... (608.4) (634.1) (674.1) (711.4) (753.3) (795.8) (835.3)
Total receipts as a percentage of GDP........ 18.4 18.5 18.3 18.3 18.3 18.3 18.6
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Table 17-2. EFFECT ON RECEIPTS OF CHANGES IN THE SOCIAL SECURITY TAXABLE EARNINGS BASE
(In billions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
------------------------------------------------------
2008 2009 2010 2011 2012
----------------------------------------------------------------------------------------------------------------
Social security (OASDI) taxable earnings base increases:
$97,500 to $102,600 on Jan. 1, 2008.................... 2.7 7.0 7.9 8.8 9.7
$102,600 to $107,700 on Jan. 1, 2009................... ......... 2.7 7.0 7.9 8.8
$107,700 to $113,100 on Jan. 1, 2010................... ......... ......... 2.8 7.4 8.3
$113,100 to $118,500 on Jan. 1, 2011................... ......... ......... ......... 2.8 7.5
$118,500 to $123,600 on Jan. 1, 2012................... ......... ......... ......... ......... 2.7
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[[Page 240]]
Chart 17-1. Major Provisions of the Tax Code Under the 2001, 2003, 2004, and 2006 Enacted Tax Relief
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Provision 2003 2004 2005 2006 2007 2008 2009 2010 2011
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Individual Income Tax Rates reduced to ................ ................ ................... ................ ............... ............... ............... Rates revert to
Rates 35, 33, 28, and 25 39.6, 36, 31,
percent and 28 percent
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10 Percent Bracket Top of bracket ................ ................ ................... ................ ............... ............... ............... Bracket
increased to eliminated,
$7,000/$14,000 for lowest bracket
single/joint reverts to 15
filers and percent
inflation-indexed
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
15 Percent Bracket for Top of bracket for ................ ................ ................... ................ ............... ............... ............... Top of bracket
Joint Filers joint filers for joint
increased to 200 filers reverts
percent of top of to 167 percent
bracket for single of top of
filers bracket for
single filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Standard Deduction for Standard deduction ................ ................ ................... ................ ............... ............... ............... Standard
Joint Filers for joint filers deduction for
increased to 200 joint filers
percent of reverts to 167
standard deduction percent of
for single filers standard
deduction for
single filers
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Child Credit Tax credit for each ................ ................ ................... ................ ............... ............... ............... Tax credit for
qualifying child each
under age 17 qualifying
increased to child under
$1,000 and age 17 reverts
refundability to $500 and
extended to refundability
families with 1 or restricted to
2 children taxpayers with
3 or more
children
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Estate Taxes Top rate reduced to Top rate reduced Top Rate reduced Top rate reduced to Top rate reduced ............... Exempt amount Estate tax Top rate
49 percent to 48 percent to 47 percent 46 percent to 45 percent increased to repealed reverts to 60
Exempt amount Exempt amount $3.5 million percent
increased to increased to $2 Exempt amount
$1.5 million million reverts to $1
million
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Small Business Expensing Deduction increased ................ ................ ................... ................ ............... ............... Deduction ...............
to $100,000, reverts to
reduced by amount $25,000,
qualifying reduced by
property exceeds amount
$400,000, and both qualifying
amounts inflation- property
indexed exceeds
Includes software $200,000 and
amounts not
inflation-
indexed
Does not apply
to software
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[[Page 241]]
Capital Gains Tax rate on capital ................ ................ ................... ................ Tax on capital ............... ............... Tax rate on
gains reduced to 5/ gains capital gains
15 percent eliminated for reverts to 10/
taxpayers in 20 percent (8/
10/15 percent 18 percent on
tax brackets assets held
over 5 years)
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Dividends Tax rate on ................ ................ ................... ................ Tax on ............... ............... Dividends taxed
dividends reduced dividends at standard
to 5/15 percent eliminated for income tax
taxpayers in rates
10/15 percent
tax brackets
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Bonus Depreciation Bonus depreciation ................ Bonus ................... ................ ............... ............... ............... ...............
increased to 50 depreciation
percent of expires
qualified property
aquired after 5/5/
03
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Alternative Minimum Tax AMT exemption ................ ................ AMT exemption AMT exemption ............... ............... ............... ...............
amount increased amount increased amount reverts
to $40,250/$58,000 to $42,500/$62,550 to $33,750/
for single/joint for single /joint $45,000 for
filers filers single /joint
filers
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ENACTED LEGISLATION
Several laws were enacted in 2006 that have an effect on governmental
receipts. The major legislative changes affecting receipts are described
below.
TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005
The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA),
which was signed by President Bush on May 17, 2006, extended previously
enacted tax cuts that helped spur investment and economic expansion,
resulting in more jobs and higher wages for American workers. The
provisions of this Act increased the Alternative Minimum Tax (AMT)
exemption amount for 2006; temporarily extended increased expensing
limits for small businesses; reduced tax rates on capital gains and
dividends; and made other miscellaneous changes to tax law. The major
provisions of this Act are described below.
Expiring Provisions
Extend increased expensing for small business.--Under prior law,
business taxpayers were allowed to expense up to $100,000 in annual
investment expenditures for qualifying property (expanded to include
off-the-shelf computer software) placed in service in taxable years
beginning in 2003 through 2007. The maximum amount that could be
expensed was reduced by the amount by which the taxpayer's cost of
qualifying property exceeded $400,000. Both the deduction and annual
investment limits were indexed annually for inflation, effective for
taxable years beginning after 2003 and before 2008. Also, with respect
to a taxable year beginning after 2002 and before 2008, taxpayers were
permitted to make or revoke expensing elections on amended returns
without the consent of the Internal Revenue Service (IRS) Commissioner.
This Act extended each of these temporary provisions, applicable for
qualifying property (including off-the-shelf computer software) placed
in service in taxable years beginning in 2008 and 2009.
Extend reductions in individual income taxes on capital gains and
dividends.--Under prior law, the maximum individual income tax rate on
net capital gains and dividends was 15 percent for taxpayers in
individual income tax rate brackets above 15 percent and 5 percent (zero
in 2008) for lower income taxpayers. This Act extended these reduced
rates (15 percent and zero), which were scheduled to expire on December
31, 2008, through December 31, 2010.
Extend and modify exceptions provided under Subpart F.--Under the
Subpart F rules, certain U.S. shareholders of a controlled foreign
corporation (CFC) are subject to U.S. tax currently on certain income
earned by the CFC, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the Subpart
F rules includes, among other things, ``foreign personal holding company
[[Page 242]]
income'' and insurance income. Foreign personal holding company income
generally includes many types of income derived by a financial service
company, such as dividends; interest; royalties; rents; annuities; net
gains from the sale of certain property, including securities,
commodities and foreign currency; and income from notional principal
contracts and securities lending activities. Under prior law, for
taxable years beginning before January 1, 2007, certain income derived
in the active conduct of a banking, financing, insurance, or similar
business was provided an exception from Subpart F. This Act extended the
exception for two years, to apply to taxable years beginning before
January 1, 2009. This Act also provided an exception from Subpart F for
dividends, interest, rents, and royalties received by one CFC from a
related CFC to the extent attributable or properly allocable to non-
Subpart F income of the payor, effective for taxable years beginning
after December 31, 2005 and before January 1, 2009.
Estimated Tax Payments by Corporations
Modify the timing of estimated tax payments by corporations.--
Corporations generally are required to pay their income tax liability in
quarterly estimated payments. For corporations that keep their accounts
on a calendar year basis, these payments are due on or before April 15,
June 15, September 15, and December 15 (if these dates fall on a holiday
or weekend, payment is due on the next business day). This Act increased
the estimated tax payments due in July through September by corporations
with assets of at least $1 billion to: 105 percent of the amount
otherwise due in 2006, 106.25 percent of the amount otherwise due in
2012, and 100.75 percent of the amount otherwise due in 2013. For
corporations affected by this provision, the next required estimated tax
payment is reduced accordingly. This Act also allowed corporations to
delay 20.5 percent of the estimated tax payment otherwise due on
September 15, 2010 until October 1, 2010, and 27.5 percent of the
estimated tax payment otherwise due on September 15, 2011 until October
1, 2011.
Alternative Minimum Tax (AMT) Relief for Individuals
Increase and extend AMT relief for individuals.--A temporary provision
of prior law increased the AMT exemption amounts to $40,250 for single
taxpayers, $58,000 for married taxpayers filing a joint return and
surviving spouses, and $29,000 for married taxpayers filing a separate
return and estates and trusts. These temporary increases were effective
for taxable years beginning after December 31, 2002 and before January
1, 2006. This Act increased the AMT exemption amounts, effective for
taxable years beginning after December 31, 2005 and before January 1,
2007, to $42,500 for single taxpayers, $62,550 for married taxpayers
filing a joint return and surviving spouses, and $31,275 for married
taxpayers filing a separate return and estates and trusts.
Under a temporary provision of prior law, taxpayers were permitted to
offset both the regular tax and the AMT with nonrefundable personal tax
credits, effective for taxable years beginning before January 1, 2006.
This Act extended minimum tax relief for nonrefundable personal tax
credits for one year, to apply to taxable year 2006. The extension does
not apply to the child credit, the new saver's credit, the earned income
credit (EITC) or the adoption credit, which were provided AMT relief
through December 31, 2010 under the 2001 tax cut. The refundable portion
of the child credit and the earned income tax credit are also allowed
against the AMT through December 31, 2010.
Offsets
Repeal income limitations on Roth Individual Retirement Account (IRA)
conversions.--Under prior law, taxpayers with adjusted gross income
(AGI) of less than $100,000 were eligible to roll over or convert all or
a portion of a traditional IRA to a Roth IRA. Amounts converted were
treated as distributions for income tax purposes, but the 10-percent tax
on early withdrawals did not apply. This Act repealed the income
limitation on conversions from traditional IRAs to Roth IRAs, effective
for conversions occurring after December 31, 2009. Unless a taxpayer
elects otherwise (or converted amounts are distributed before 2012),
none of the amount converted in 2010 will be included in gross income
for that year; instead, half of the amount converted will be included in
gross income in each year, 2011 and 2012. If converted amounts are
distributed before 2012, the amount included in income in the year of
the distribution is increased by the amount distributed, and the amount
included in income in 2012 (or 2011 and 2012 if the distribution was
made in 2010) is the lesser of: (1) half of the amount includible in
income as a result of the conversion, and (2) the remaining portion of
such amount not already included in income.
Repeal foreign sales corporation (FSC)/extraterritorial income (ETI)
binding contract relief.--The FSC Repeal and ETI Exclusion Act of 2000
replaced the FSC tax provisions of prior law, which the World Trade
Organization (WTO) had found to be a prohibited export subsidy in
violation of international tax standards, with an exclusion from U.S.
tax for extraterritorial income. Transition rules delayed the repeal of
the FSC rules and the effective date of ETI for transactions in the
ordinary course of a trade or business if such transactions were
pursuant to a binding contract between the taxpayer and an unrelated
person and the contract was in effect on September 30, 2000 and at all
other times thereafter. The ETI provisions also were declared a
prohibited export subsidy by the WTO and were repealed by the American
Jobs Creation Act of 2004, effective for transactions after December 31,
2004. Certain transitional tax rules applied to transactions occurring
in 2005 and 2006, providing taxpayers with 80 percent and 60 percent, re
[[Page 243]]
spectively, of the tax benefits that would have been otherwise allowed
under the prior law ETI provisions. Moreover, the ETI provisions of
prior law remained in effect for transactions in the ordinary course of
a trade or business if such transactions were pursuant to a binding
contract between the taxpayer and an unrelated person and the contract
was in effect on September 17, 2003 and at all times thereafter. Both
the FSC and ETI binding contract relief of prior law were repealed under
this Act, effective for taxable years beginning after May 17, 2006.
Impose withholding on certain payments made by government entities.--
This Act imposed withholding on certain payments made by government
entities (the Government of the United States, every State, and every
political subdivision or instrumentality thereof, including multi-State
agencies) to persons providing property or services. The requirement
applies regardless of whether the government entity making the payment
is the recipient of the property or service. The rate of withholding is
three percent and applies to payments made after December 31, 2010.
Political subdivisions of States (or any instrumentality thereof) with
less than $100 million of annual expenditures for property or services
are exempt from the withholding requirement. In addition, the provision
does not apply to: (1) payments made through a public assistance or
public welfare program for which eligibility is determined by a needs or
income test; (2) payments, such as wages, that were subject to mandatory
or voluntary withholding under prior law; (3) payments of interest; (4)
payments for real property; (5) payments to tax-exempt entities or
foreign governments; (6) intra-governmental payments; (7) payments made
pursuant to a classified or confidential contract; and (8) payments to
government employees that are not otherwise excludable from the new
withholding provision with respect to the employees' services as an
employee.
Modify taxation of citizens living abroad.--U.S. citizens who earn
income in a foreign country may be taxed on that income by the foreign
country. Such individuals are allowed a credit against the U.S. income
tax imposed on foreign-source income for foreign taxes paid on that
income; the amount of the credit generally is limited to the amount of
U.S. tax otherwise owed on that income.
A U.S. citizen or resident living abroad may be eligible to exclude
from U.S. taxable income certain foreign earned income and foreign
housing costs, regardless of whether any foreign tax is paid on the
foreign earned income or housing costs. To qualify for these exclusions,
the taxpayer must have his or her tax home in a foreign country and must
be either: (1) a U.S. citizen who is a bona fide resident of a foreign
country or countries for an uninterrupted period that includes an entire
taxable year, or (2) a U.S. citizen or resident present in a foreign
country or countries for at least 330 full days in any 12-consecutive-
month period.
The foreign earned income exclusion generally is available for a
qualified individual's non-U.S. source earned income attributable to
personal services performed by that individual during the period of
foreign residence or presence. Under prior law, the maximum amount of
the foreign earned income exclusion was $80,000 in taxable years 2002
through 2007 and was indexed annually for inflation beginning in taxable
year 2008. This Act accelerated the annual indexation of the maximum
amount of the foreign earned income exclusion by two years, increasing
the limitation for taxable year 2006 to $82,400.
The housing cost exclusion (or deduction for purposes of computing
AGI, if the otherwise excludable housing costs are not paid or
reimbursed by a taxpayer's employer) is equal to the excess of a
taxpayer's ``housing expenses'' over a base housing amount. ``Housing
expenses'' are the reasonable expenses paid or incurred during the
taxable year for housing in a foreign country for the taxpayer, and, if
they live with the taxpayer, the taxpayer's spouse and dependents.
Housing expenses include costs attributable to housing, such as
utilities and insurance, but do not include items that are separately
deductible, such as mortgage interest and real estate taxes. If the
taxpayer maintains a second household outside the United States for a
spouse or dependents who do not reside with the taxpayer because of
dangerous, unhealthful, or otherwise adverse living conditions, the
housing expenses of the second household also are eligible for
exclusion. Under prior law, the base housing amount above which costs
were eligible for exclusion in a taxable year was 16 percent of the
annual salary (computed on a daily basis) of a GS-14 step 1 Federal
employee, multiplied by the number of days of foreign residence or
presence in the taxable year. This Act modified the base housing amount
used in calculating the foreign housing cost exclusion, effective for
taxable years beginning after December 31, 2005, changing it to 16
percent of the maximum amount (computed on a daily basis) of the foreign
earned income exclusion, multiplied by the number of days of foreign
residence or presence in the taxable year. Reasonable housing expenses
in excess of the base housing amount may still be excluded from gross
income (or, if paid by the taxpayer, deductible in computing AGI), but
the amount of the exclusion is limited to 30 percent of the taxpayer's
foreign earned income exclusion. Under this Act, the Secretary of the
Treasury has authority to adjust this 30-percent limitation upwards or
downwards, based on geographic differences in housing costs relative to
housing costs in the United States.
As provided under prior law, the combined foreign earned income
exclusion and housing cost exclusion (including the amount deductible in
computing AGI) may not exceed the taxpayer's total foreign earned income
for the taxable year. Similarly, the taxpayer's foreign tax credit must
be reduced by the amount of the credit attributable to excluded income.
[[Page 244]]
Under prior law, a taxpayer eligible for the foreign earned income and
housing cost exclusions was subject to tax on income in excess of the
exclusion amounts (after deductions), starting in the lowest tax rate
bracket. Under this Act, effective for taxable years beginning after
December 31, 2005, a taxpayer eligible for the foreign earned income and
housing exclusions is subject to tax on income in excess of the
exclusion amounts at the income tax rates that would have been
applicable had the individual not elected to take the exclusions.
Require partial payment with submission of offers-in-compromise.--
Offers-in-compromise are offers to the IRS by a taxpayer to settle
outstanding tax liability for less than the full amount due, generally
based on doubt as to liability for, or collectibility of, the tax. There
are two general categories of offers-in-compromise: (1) lump-sum offers,
in which the taxpayer proposes to make one lump-sum payment of a
specified dollar amount in settlement of the outstanding tax liability,
and (2) periodic-payment offers, in which the taxpayer proposes to make
a series of payments over time in settlement of the outstanding tax
liability. The IRS imposes a user fee of $150 on most offers-in-
compromise, payable upon submission of the offer to the IRS. Enforcement
action generally is suspended during the period that the IRS evaluates
an offer. Under prior law, taxpayers were permitted (but not required)
to make a deposit with their offer; if the offer was rejected, the
deposit generally was returned to the taxpayer. This Act made the
following changes, effective with respect to offers-in-compromise
submitted to the IRS on and after July 16, 2006: (1) Taxpayers making
lump-sum offers (offers to pay in five or fewer installments) are
required to make a down payment of 20 percent of the amount of the offer
upon submission of the offer to the IRS. (2) Taxpayers making periodic-
payment offers are required to comply with the payment schedule proposed
in the offer while the offer is being considered. (3) Offers submitted
to the IRS that do not comply with these payment requirements are
returned to the taxpayer as unprocessable and immediate enforcement
action is permitted. (4) The $150 user fee is applied to the taxpayer's
outstanding tax liability. (5) An offer-in-compromise is deemed accepted
if the IRS does not make a decision with respect to the offer within two
years from the date the offer was submitted. (6) The Secretary of the
Treasury is authorized to issue regulations providing exceptions to the
partial payment requirements in the case of offers from certain low-
income taxpayers and offers based on doubt as to liability.
Modify amortization for certain geological and geophysical
expenditures.--Geological and geophysical expenditures (G&G costs) are
costs incurred by a taxpayer for the purpose of obtaining and
accumulating data that will serve as the basis for the acquisition and
retention of mineral properties by taxpayers exploring for minerals.
Under prior law, G&G costs paid or incurred in taxable years beginning
after August 8, 2005, in connection with oil and gas exploration in the
United States, could be amortized over two years. This Act increased the
amortization period to five years for G&G costs paid or incurred by
certain major integrated oil companies after May 17, 2006. This five-
year amortization rule applies only to integrated oil companies that
have an average daily worldwide production of crude oil of at least
500,000 barrels for the taxable year, have gross receipts in excess of
$1 billion in the last taxable year ending during calendar year 2005,
and either are a crude oil refiner or have an ownership interest in a
crude oil refiner of 15 percent or more.
Modify taxation of unearned income of minors.--An unmarried individual
eligible to be claimed as a dependent on another taxpayer's individual
income tax return generally must file an individual income tax return if
he or she has: (1) earned income only over $5,150 (for 2006); (2)
unearned income only over the minimum standard deduction amount for
dependents ($850 in 2006); or (3) both earned income and unearned income
totaling more than the smaller of (a) $5,150 (for 2006) or (b) the
larger of (i) $850 (for 2006) or (ii) earned income plus $300. Under
prior law, unearned income of a child was taxed under special rules if:
(1) the child had not reached the age of 14 by the close of the taxable
year, (2) the child's unearned income (income other than wages,
salaries, professional fees, or other amounts received as compensation
for personal services actually rendered) was more than $1,700 (for
2006), and (3) the child was required to file a return for the year.
These special rules (referred to as the ``kiddie tax'') applied if the
child could have been claimed as a dependent on the parent's return,
regardless of whether the parent actually claimed the child as a
dependent. Under the kiddie tax, the child's net unearned income over
$1,700 (for 2006) was taxed at the parent's tax rate if that rate was
higher than the child's rate. The remainder of a child's taxable income
was taxed at the child's tax rate, regardless of whether the kiddie tax
applied. Effective for taxable years beginning after December 31, 2005,
this Act increased the age to which the kiddie tax applies from under 14
years of age to under 18 years of age.
Provide other offsets.--Other offsets provided in this Act included:
(1) application of earnings stripping rules to partners that are C
corporations, (2) amendment of information reporting requirements to
include interest paid on tax-exempt bonds, (3) modification of the scope
of the application of the Foreign Investment in Real Property Tax Act of
1980 regime, (4) denial of tax-free treatment to certain corporate spin-
off transactions, (5) imposition of new requirements on pooled financing
bonds, (6) clarification of the domestic manufacturing deduction wage
limitation, and (7) imposition of penalties on certain exempt entities
for participation in prohibited tax shelter transactions as
accommodation parties.
[[Page 245]]
Other Provisions
Provide other changes.--Other changes provided in this Act included:
(1) modification of the tax treatment of income earned by certain
environmental cleanup funds, (2) modification of the rules relating to
taxation of distributions of stock and securities of a controlled
corporation, (3) expansion of eligibility for the qualified veterans'
mortgage bond program, (4) treatment of the sale or exchange of certain
self-created musical works as capital gains, (5) modification of the
vessel tonnage tax, (6) extension of the exemption for a portion of the
Permanent University Fund from the tax-exempt bond arbitrage rules, (7)
election of five-year amortization for the costs of creating or
acquiring a musical composition, (8) acceleration of the increased
capital expenditure limitation on the issuance of qualified small issue
tax-exempt bonds to apply to bonds issued after December 31, 2006, and
(9) modification of the tax treatment of loans to qualified continuing
care facilities.
PENSION PROTECTION ACT OF 2006
The Pension Protection Act of 2006, which was signed by President Bush
on August 17, 2006, was the most sweeping reform of America's pension
system enacted in 30 years. The provisions of this Act strengthened the
private retirement system by making it more difficult for employers to
underfund their pension plans and by preventing employers with
underfunded plans from making promises to their employees that they
cannot keep. Provisions of this Act also provided more incentives to
individuals to save for retirement, modified tax provisions related to
spending for health care, temporarily suspended certain customs duties,
provided incentives for certain charitable contributions, and modified
certain rules relating to activities of tax-exempt organizations. The
major provisions of this Act that affect receipts are described below.
Pension Funding Rules
Reform funding rules for single-employer defined-benefit pension
plans.--Under prior law, defined-benefit pension plans were subject to
minimum funding requirements imposed under both the Internal Revenue
Code and the Employee Retirement Income Security Act of 1974 (ERISA). In
the case of a qualified plan, the Internal Revenue Code excluded such
contributions from gross income and allowed a deduction for the
contributions, subject to certain limits on the maximum deductible
amount. The calculation of the minimum funding requirements and the
limits on deductible contributions were determined under a series of
complex rules and measures of assets and liability, many of which were
manipulable and none of which entailed the use of an accurate measure of
the plan's assets and its true liabilities. This Act replaced the
funding rules of prior law, effective for plan years beginning after
December 31, 2007, with a minimum funding requirement of 100 percent of
plan liabilities, phased in over four years, as follows: 92 percent in
2008, 94 percent in 2009, 96 percent in 2010, and 100 percent in 2011
and subsequent years. Other funding rules provided in this Act: (1)
changed the calculation of the value of credit balances and restricted
the use of credit balances in lieu of cash to fund required
contributions; (2) changed the method of calculating liabilities for
plans considered to be at risk; (3) reduced the time period over which
asset values can be averaged to two years, and limited averaged asset
values to no less than 90 percent and to no more than 110 percent of
current fair market value; (4) required amortization of unfunded
liabilities over seven years, in most cases; (5) updated the mortality
table used to project future benefits; (6) allowed plan sponsors to
deduct from taxable income contributions of up to 150 percent of plan
liability; and (7) modified the interest rate used to calculate pension
liability, requiring the use of a yield curve based on 24-month averages
of the rates on corporate bonds of relevant maturities in the top three
rating categories (AAA, AA and A), phased in at 33\1/3\ percent in 2008,
66\2/3\ percent in 2009 and 100 percent beginning in 2010.
Reform funding rules for multiemployer defined-benefit plans.--
Multiemployer plans are subject to the same general funding rules as the
pre-2006 rules for single-employer plans, except that different rules
apply in some cases. This Act modified the funding of multiemployer
plans by: (1) providing additional funding rules for certain plans that
are in endangered or critical status; and (2) allowing plan sponsors to
deduct from taxable income contributions of up to 140 percent of plan
liability. These changes were effective for plan years beginning after
2007; however, the additional funding rules for plans in endangered or
critical status do no apply to plan years beginning after December 31,
2014.
Other Pension Provisions
Encourage automatic enrollment in pension plans.--Under current law,
most defined-contribution plans may include a qualified cash or deferred
arrangement under which employees may elect to receive cash or to have
contributions made to the plan by the employer on behalf of the employee
in lieu of receiving cash. Contributions made to the plan at the
election of the employee are referred to as ``elective deferrals.'' Such
a plan may be designed so that the employee will receive cash unless an
affirmative election to make contributions is made. Alternatively, a
plan may provide that elective contributions are made at a specified
rate unless the employee elects otherwise; such a plan is sometimes
referred to as an ``automatic enrollment'' plan. In either case, the
employee must have an opportunity to elect to receive cash in lieu of
contributions.
This Act made changes to address employers' concerns about
implementing automatic enrollment plans and to provide incentives for
automatic enrollment, generally effective for plan years beginning after
2007. The
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changes provided in the Act: (1) exempted such plans from State payroll
withholding laws; (2) provided fiduciary relief for investment of
participant account balances in certain default investments; (3)
provided a 90-day period from the initial payroll reduction during which
participants are allowed to opt out of automatic enrollment and receive
a penalty-free return of their automatic elective contributions; and (4)
provided that plans with ``a qualified automatic enrollment feature''
satisfy the nondiscrimination rules regarding elective deferrals and
employer matching contributions, and are not subject to the top-heavy
rules.
Allow certain small employers to establish combined defined-benefit
plans and qualified cash or deferred arrangements.--Under prior law, a
defined-benefit plan could not be combined with a qualified cash or
deferred arrangement (Section 401(k) plan); they had to be structured as
two separate plans. This Act allowed small employers to establish
combined defined-benefit and 401(k) plans, effective for plan years
beginning after December 31, 2009. A small employer is an employer with
an average of at least two and no more than 500 employees on business
days during the preceding calendar year and at least two employees on
the first day of the plan year. The assets of the combined plan must be
held in a single trust and they must be clearly identified and allocated
to the defined-benefit plan and the 401(k) plan to the extent necessary
for the separate application of the Internal Revenue Code and ERISA; in
addition, the combined plan must meet certain benefit, contribution,
vesting, and nondiscrimination requirements.
Make other miscellaneous changes affecting pension plans.--Other
changes in pension plans that affect receipts: (1) permitted workers in
publicly held companies to divest themselves of company stock
attributable to employer contributions after three years of service and
prohibited employers from requiring workers to invest their own
retirement savings in company stock; (2) improved portability of
retirement savings, such as allowing direct rollovers from retirement
plans to Roth IRAs and faster vesting of employer non-elective
contributions; (3) gave taxpayers the option to deposit part of their
individual income tax refund directly into an IRA; and (4) allowed
members of the National Guard and reservists called to active duty to
withdraw money from their IRA or pension without penalty and to repay
the money within two years.
Expiring Provisions
Extend permanently IRA maximum contribution limits and index income
limitations on IRA contributions.--The maximum annual contribution that
can be made to a traditional or Roth IRA by or on behalf of an
individual varies depending on the particular circumstances, including
the individual's income. However, under prior law, the maximum annual
contribution that could be made to all of an Individual's IRAs was the
lesser of: (1) the individual's compensation or (2) $4,000 for taxable
years 2005 through 2007, and $5,000 for taxable year 2008, indexed
thereafter in increments of $500. In the case of a married couple,
contributions could be made up to the dollar limit for each spouse if
the combined compensation of the spouses was at least equal to the
contributed amount. Individuals who attained age 50 before the end of a
taxable year were allowed to make additional ``catch-up'' contributions.
For those individuals, the otherwise maximum contribution limit was
increased by $1,000 for taxable years 2006 through 2010. These
contribution limits, which had been scheduled to expire after December
31, 2010, were extended permanently under this Act.
An individual may make nondeductible contributions to a traditional
IRA up to the IRA contribution limits specified above (to the extent the
taxpayer cannot or does not make deductible contributions). An
individual may make deductible contributions to a traditional IRA up to
the IRA contribution limits specified above, if neither the individual
nor the individual's spouse is an active participant in an employer-
sponsored retirement plan. If an individual (or the individual's spouse)
is an active participant in an employer-sponsored retirement plan, the
deduction is phased out for taxpayers with AGI above certain levels.
Under prior law, the AGI phase-out ranges were: (1) $50,000 to $60,000
for single taxpayers; (2) $80,000 to $100,000 for married taxpayers
filing a joint return for 2007 and subsequent years; and (3) $0 to
$10,000 for married taxpayers filing a separate return. If an individual
was not an active participant in an employer-sponsored retirement plan,
but the individual's spouse was an active participant in such a plan,
the deduction was phased out for taxpayers with AGI between $150,000 and
$160,000. An individual may make nondeductible contributions to a Roth
IRA subject to the IRA contribution limits specified above. However, the
maximum annual contribution is phased out for taxpayers with AGI over
certain levels. Under prior law, the AGI phase-out ranges were: (1)
$95,000 to $110,000 for single taxpayers; (2) $150,000 to $160,000 for
married taxpayers filing a joint return; and (3) $0 to $10,000 for
married taxpayers filing a separate return. Under this Act, the income
thresholds that determine eligibility to make IRA contributions are
indexed for inflation in increments of $1,000 beginning in 2007.
Extend permanently maximum contribution and benefit limits under
qualified pension plans.--Limits on contributions and benefits under
qualified pension plans are based on the type of plan. Under prior law,
annual contributions to a defined-contribution plan with respect to each
plan participant were limited to the lesser of 100 percent of
compensation or $40,000 (adjusted annually for inflation in $1,000
increments after 2002). The maximum annual benefit payable under a
defined-benefit plan was generally the lesser of 100 percent of average
compensation or $160,000 (adjusted annually for inflation for plans
ending after
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December 31, 2002, in increments of $1,000). The annual compensation of
each participant that could be taken into account for purposes of
determining contributions and benefits under a plan generally was
limited to $200,000 in 2002 (indexed annually thereafter in $5,000
increments). The dollar limit on annual elective deferrals under section
401(k) plans, section 403(b) annuities and salary reduction SEPs was
$15,000 in 2006, indexed annually thereafter in $500 increments. The
dollar limit on annual elective deferrals to a SIMPLE plan was $10,000
in 2005 (adjusted for inflation in increments of $500 after 2006). The
dollar limit on contributions to an eligible section 457 plan was the
lesser of 100 percent of includable compensation or $15,000 in 2006,
indexed annually thereafter in increments of $500. Individuals who
attained age 50 before the end of a taxable year were allowed to make
``catch-up'' contributions to a 401(k) plan, section 403(b) annuity, SEP
or SIMPLE plan, or section 457 plan. The amount of catch-up
contributions permitted was the lesser of: (1) the applicable dollar
amount or (2) the participant's compensation for the year after
reduction by any other elective deferrals of the participant for the
year. The applicable dollar amount under a 401(k) plan, section 403(b)
annuity, SEP or section 457 plan was $5,000 for 2006, indexed annually
thereafter in increments of $500. The applicable dollar amount under a
SIMPLE plan was $2,500 in 2006, indexed annually thereafter in
increments of $500. These contribution and benefit limits, which were
scheduled to expire after December 31, 2010, were extended permanently
under this Act.
Extend permanently the ability to make tax-free distributions from
qualified tuition programs (section 529 of the Internal Revenue Code).--
Qualified State tuition programs generally take two forms--prepaid
tuition plans and savings plans. Under a prepaid tuition plan, an
individual may purchase tuition credits or certificates on behalf of a
designated beneficiary, which entitle the beneficiary to the waiver or
payment of qualified higher education expenses at participating
educational institutions. Under a savings plan, an individual may make
contributions to an account established for the purpose of meeting the
qualified higher education expenses of a designated beneficiary. Private
educational institutions are also allowed to establish qualified prepaid
tuition plans (but not savings plans), provided the institution is
eligible to participate in Federal financial aid programs under Title IV
of the Higher Education Act of 1965. Earnings in a qualified savings
program accumulate tax free. Under current law, if a distribution is
used to pay qualified higher education expenses, the distribution is tax
free. Qualified expenses include: tuition and fees; certain expenses for
room and board; certain expenses for books, supplies and equipment; and
expenses for a special needs beneficiary that are necessary in
connection with enrollment or attendance at an eligible education
institution. This Act permanently extended the preferred tax treatment
of the distributions, which was scheduled to expire with respect to
withdrawals after December 31, 2010. This Act also granted broad
authority to the Secretary of the Treasury to issue regulations to carry
out the purposes of section 529 and to prevent abuse of those purposes.
Extend permanently the nonrefundable tax credit (saver's credit) for
certain elective deferrals and IRA contributions.--Under prior law,
effective for taxable years beginning after December 31, 2001 and before
January 1, 2007, a nonrefundable tax credit was provided for up to
$2,000 in contributions made by eligible taxpayers to a qualified plan
or to a traditional or Roth IRA. The credit, which was in addition to
any deduction or exclusion that would otherwise apply with respect to
the contribution, was available to single taxpayers with AGI less than
or equal to $25,000 ($37,500 for heads of household and $50,000 for
married taxpayers filing a joint return). The credit was available to
individuals who were 18 years of age or older (other than individuals
who were full-time students or claimed as a dependent on another
taxpayer's return) and was offset against both the regular and
alternative minimum tax. The credit rate was 50 percent for single
taxpayers with AGI less than or equal to $15,000 ($30,000 for married
taxpayers filing a joint return and $22,500 for heads of household), 20
percent for single taxpayers with AGI between $15,000 and $16,250
(between $30,000 and $32,500 for married taxpayers filing a joint return
and between $22,500 and $24,375 for heads of household), and 10 percent
for single taxpayers with AGI between $16,250 and $25,000 (between
$32,500 and $50,000 for married taxpayers filing a joint return and
between $24,375 and $37,500 for heads of household). The saver's credit
was extended permanently under this Act. In addition, this Act provided
for annual indexing of the income limits applicable to the credit in
increments of $500 beginning in 2007.
Health and Medical Benefits
Modify tax treatment of annuity and life insurance contracts with a
long-term care insurance feature.--Under prior law, annuity contracts
were not allowed to have a qualified long-term care insurance feature;
however, long-term care insurance could be provided by a rider on or as
a part of a life insurance contract. This Act allowed qualified long-
term care insurance to be provided by a rider on or as a part of an
annuity contract and provided special tax treatment for the long-term
care component of a life insurance or annuity contract. Under this Act:
(1) payments for a qualified long-term care insurance contract, which is
a rider on or is part of a life insurance contract or annuity contract,
that are charged against the cash value of the annuity contract or the
cash surrender value of the life insurance contract are not includable
in income and the investment in the contract is reduced (but not below
zero) by the charge; (2) the rules for tax-free exchanges of certain
insurance contracts are expanded to include exchanges of a life
insurance con
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tract, an endowment contract, an annuity contract, or a qualified long-
term care insurance contract for a qualified long-term care insurance
contract; and (3) except as otherwise provided in regulations, the
portion of an annuity or life insurance contract providing long-term
care insurance coverage is treated as a separate contract for Federal
tax purposes. These, and other rules concerning the taxation of long-
term care insurance provided as a rider on or as part of an annuity or
life insurance contract generally will be effective for taxable years
beginning after December 31, 2009 for contracts issued after December
31, 1996.
Permit tax-free distributions from governmental retirement plans for
premiums for health and long-term care insurance for public safety
officers.--Under current law, a distribution from a qualified retirement
plan, a tax-sheltered annuity (a 403(b) annuity), an eligible deferred
compensation plan maintained by a State or local government (a
governmental 457 plan), or an IRA generally is included in the
taxpayer's gross income in the year of distribution, except to the
extent the amount received constitutes a return of after-tax
contributions or a qualified distribution from a Roth IRA. This Act
provided an annual exclusion from gross income for up to $3,000 in
otherwise taxable distributions from an eligible retirement plan of a
qualified public safety officer for the payment of qualified health
insurance premiums made directly to the insurer. Eligible retired public
safety officers are individuals who, by reason of disability or
attainment of normal retirement age, are separated from service with the
employer who maintains the eligible retirement plan from which pension
benefits are received. Qualified health insurance premiums include
premiums for accident or health insurance or qualified long-term care
insurance contracts covering the taxpayer and the taxpayer's spouse and
dependents. Amounts excluded from income are not taken into account in
determining the itemized deduction for medical expenses or the deduction
for health insurance of self-employed individuals. The provision is
effective for distributions in taxable years beginning after December
31, 2006.
Charitable Contributions and Tax-Exempt Organizations
Permit tax-free withdrawals from IRAs for charitable contributions.--
Eligible individuals may make deductible or non-deductible contributions
to a traditional IRA and nondeductible contributions to a Roth IRA. Pre-
tax contributions and earnings in a traditional IRA are included in
income when withdrawn. Qualified withdrawals from a Roth IRA are
excluded from gross income; withdrawals that are not qualified are
included in gross income to the extent attributable to earnings. This
Act provided an exclusion from gross income for otherwise taxable
distributions from a traditional or a Roth IRA made directly to a
qualified charitable organization. The exclusion may not exceed $100,000
per taxpayer per taxable year, is applicable only to distributions made
on or after the date the IRA owner attains age 70\1/2\, and is effective
for distributions made in taxable years beginning after December 31,
2005 and before January 1, 2008. The exclusion applies only if a
charitable contribution deduction for the entire distribution would
otherwise be allowable under current law, determined without regard to
the percentage-of-AGI limitation. No charitable deduction is allowed
with respect to any amount excludable from income under this provision.
Expand enhanced charitable deduction for contributions of food
inventory.--A taxpayer's deduction for charitable contributions of
inventory generally is limited to the taxpayer's basis (typically cost)
in the inventory, or, if less, the fair market value of the inventory.
However, for certain contributions of inventory, C corporations may
claim an enhanced deduction equal to the lesser of: (1) basis plus one
half of the fair market value in excess of basis or (2) two times basis.
To be eligible for the enhanced deduction, the contributed property
generally must be inventory of the taxpayer contributed to a charitable
organization and the donee must: (1) use the property consistent with
the donee's exempt purpose solely for the care of the ill, the needy, or
infants; (2) not transfer the property in exchange for money, other
property, or services; and (3) provide the taxpayer a written statement
that the donee's use of the property will be consistent with such
requirements. To use the enhanced deduction, the taxpayer must establish
that the fair market value of the donated item exceeds basis.
The Katrina Emergency Tax Relief Act of 2005 expanded the enhanced
deduction to apply to qualified contributions of food inventory made
after August 27, 2005 and before January 1, 2006 by all taxpayers (not
just C corporations) engaged in a trade or business. This Act extended
the enhanced charitable deduction for contributions of food inventory
provided under the Katrina Emergency Tax Relief Act of 2005 to apply to
contributions made after December 31, 2005 and before January 1, 2008.
The donated food must meet certain quality and labeling standards, and,
for taxpayers other than C corporations, the total deduction for donated
food inventory may not exceed 10 percent of the taxpayer's net income
from the related trade or business.
Modify basis adjustment to stock of S corporations contributing
appreciated property.--Each shareholder of an S corporation must take
into account his or her pro rata share of a charitable contribution by
the S corporation in determining his or her income tax liability. For
donations of property, this generally is the pro rata share of the
property's fair market value. Under prior law, the shareholder's basis
in the stock of the company was reduced by the amount of the charitable
contribution that flowed through to the shareholder. Under this Act,
effective for charitable contributions made by an S corporation in
taxable years beginning after December 31, 2005 and before January 1,
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2008, shareholders are allowed to adjust their basis in the stock of the
company by their pro rata share of the adjusted basis of the contributed
property instead of by their pro rata share of the market value of the
contributed property.
Make other changes affecting charitable contributions and tax-exempt
organizations.--Other incentives for charitable contributions or
modifications in the tax treatment of tax-exempt organizations provided
in this Act included: (1) extension of the enhanced deduction for
contributions of books to public schools for two years; (2) modification
of the tax treatment of certain payments to controlling exempt
organizations; (3) modification of the deduction for qualified
conservation contributions; (4) modification of the deduction for
charitable contributions of clothing and household items that are not in
good condition and for items of minimal monetary value; (5) expansion of
the definition of gross investment income of private foundations; (6)
increases in penalty excise taxes applicable to certain activities of
charities, social welfare organizations, and private foundations; (7)
modification of recordkeeping and substantiation requirements; and (8)
provision of new rules governing donor advised funds and supporting
organizations.
TAX RELIEF AND HEALTH CARE ACT OF 2006
The Tax Relief and Health Care Act of 2006, which was signed by
President Bush on December 20, 2006, extended a number of expired or
expiring tax provisions, modified health savings accounts, modified
various trade measures, and made a number of other changes to tax law.
This Act also authorized drilling for oil in the Gulf of Mexico, rolled
back a cut in Medicare physician payments, and amended the Surface
Mining Control and Reclamation Act. The major provisions of this Act
that affect receipts are described below.
Expiring Provisions
Extend deduction for qualified tuition and related expenses.--An
above-the-line deduction of up to $4,000 is provided for qualified
higher education expenses paid by a qualified taxpayer during the
taxable year. For a given taxable year, the deduction may not be claimed
if an education tax credit is claimed for the same student. In addition,
the deduction may not be claimed for amounts taken into account in
determining the amount excludable from income due to a distribution from
a Coverdell education IRA or the amount of interest excludable from
income with respect to education savings bonds. A taxpayer may not claim
a deduction for the amount of a distribution from a qualified tuition
plan that is excludable from income; however, the deduction may be
claimed for the amount of a distribution from a qualified tuition plan
that is not attributable to earnings. This Act extended the deduction,
which had expired with respect to expenses incurred in taxable years
beginning after December 31, 2005, to apply to expenses incurred in
taxable years beginning before January 1, 2008.
Extend and modify the new markets tax credit.--The new markets tax
credit is provided for qualified equity investments made to acquire
stock in a corporation or a capital interest in a partnership that is a
qualified community development entity (CDE). A credit of five percent
is provided to the investor for the first three years of investment. The
credit increases to six percent for the next four years. The maximum
amount of annual qualifying equity investment is capped at $2.0 billion
for calendar years 2004 and 2005, and $3.5 billion for calendar years
2006 and 2007. This Act extended the new markets tax credit through 2008
and permitted up to $3.5 billion in qualified equity investment for that
calendar year. This Act also required the Secretary of the Treasury to
prescribe regulations to ensure that non-metropolitan counties receive a
proportional allocation of qualified equity investments.
Extend optional deduction for State and local general sales taxes.--
Under prior law, effective for taxable years beginning after December
31, 2003 and before January 1, 2006, a taxpayer was allowed to elect to
take an itemized deduction for State and local general sales taxes in
lieu of the itemized deduction for State and local income taxes. This
Act extended this deduction for two years, effective for taxable years
beginning before January 1, 2008.
Extend and modify the research and experimentation (R&E) tax credit.--
The 20-percent tax credit for qualified research and experimentation
expenditures above a base amount and the alternative incremental credit
expired with respect to expenditures incurred after December 31, 2005.
This Act: (1) extended the research credit for two years, to apply to
expenditures incurred before January 1, 2008; (2) extended the
alternative incremental credit for one year, without modification, to
apply to expenditures incurred before January 1, 2007; and (3) modified
the alternative incremental credit and established an alternative
simplified credit, to apply to expenditures incurred after December 31,
2006 and before January 1, 2008.
Extend and modify the work opportunity tax credit and the welfare-to-
work tax credit.--The work opportunity tax credit (WOTC) provides
incentives for hiring individuals from certain targeted groups. The
credit generally applies to the first $6,000 of wages paid to several
categories of economically disadvantaged or handicapped workers. The
credit rate is 25 percent of qualified wages for employment of at least
120 hours but less than 400 hours and 40 percent for employment of 400
or more hours.
The welfare-to-work tax credit provides an incentive for hiring
certain recipients of long-term family assistance. The credit is 35
percent of up to $10,000 of eligible wages in the first year of
employment and 50 per
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cent of wages up to $10,000 in the second year of employment. Eligible
wages include cash wages plus the cash value of certain employer-paid
health, dependent care, and educational fringe benefits. The minimum
employment period that employees must work before employers can claim
the credit is 400 hours.
This Act extended both the WOTC and the welfare-to-work tax credit for
one year without modification, effective for wages paid to qualified
individuals who began work for the employer after December 31, 2005 and
before January 1, 2007. For wages paid to individuals who begin work for
the employer after December 31, 2006 and before January 1, 2008, this
Act combined and modified the two credits. Modifications included: (1)
use of the WOTC definition of wages; (2) repeal of the requirement that
a qualified ex-felon be certified as a member of an economically
disadvantaged family; (3) expansion of eligibility by increasing the age
ceiling for the food stamp recipient category; and (4) extension of the
paperwork filing deadline from 21 days to 28 days.
Extend treatment of combat pay for purposes of computing the EITC.--
This Act extended for one year, through December 31, 2007, the prior law
election that allowed combat pay, which is otherwise excluded from gross
income, to be treated as earned income for purposes of calculating the
EITC.
Extend and modify authority to issue Qualified Zone Academy Bonds.--
State and local governments are allowed to issue ``qualified zone
academy bonds,'' the interest on which is effectively paid by the
Federal government in the form of an annual income tax credit. The
proceeds of the bonds must be used for teacher training, purchases of
equipment, curriculum development, or rehabilitation and repairs at
certain public school facilities. Under prior law, a nationwide total of
$400 million of qualified zone academy bonds were authorized to be
issued in each of calendar years 1998 through 2005 and unused authority
could be carried forward for up to two years. This Act authorized the
issuance of an additional $400 million of qualified zone academy bonds
in each of calendar years 2006 and 2007. This Act also: (1) extended the
arbitrage requirements that apply to interest-bearing tax-exempt bonds
to qualified zone academy bonds, (2) imposed new spending requirements
on the issuers of these bonds, and (3) imposed new reporting
requirements on the issuers of these bonds.
Extend the above-the-line deduction for qualified out-of-pocket
classroom expenses.--Taxpayers who itemize deductions (do not use the
standard deduction) and incur unreimbursed, job-related expenses may
deduct those expenses to the extent that when combined with other
miscellaneous itemized deductions they exceed two percent of AGI.
Through 2005, certain teachers and other elementary and secondary school
professionals could deduct up to $250 in annual qualified out-of-pocket
classroom expenses above-the-line. Expenses claimed as an above-the-line
deduction could not be claimed as an itemized deduction. This Act
extended this above-the-line deduction to apply to expenses incurred
before January 1, 2008.
Extend and expand expensing of brownfields remediation costs.--
Taxpayers may elect to treat certain environmental remediation
expenditures that would otherwise be chargeable to a capital account as
deductible in the year paid or incurred. This Act extended this
provision, making it available for environmental remediation
expenditures paid or incurred after December 31, 2005 and before January
1, 2008. In addition, this Act expanded the provision to apply to
expenditures paid or incurred to abate contamination at sites
contaminated by petroleum products, which include crude oil, crude oil
condensates and natural gasoline.
Extend tax incentives for the District of Columbia (DC).--A one-time,
nonrefundable $5,000 tax credit is available to purchasers of a
principal residence in DC who have not owned a residence in DC during
the year preceding the purchase. The credit phases out for taxpayers
with modified AGI between $70,000 and $90,000 ($110,000 and $130,000 for
joint returns). This Act extended the credit for two years, making it
available with respect to purchases after December 31, 2005 and before
January 1, 2008.
The DC Enterprise Zone includes the DC Enterprise Community and DC
census tracts with a poverty rate of at least 20 percent. Businesses in
the zone are eligible for: (1) A wage credit equal to 20 percent of the
first $15,000 in annual wages paid to qualified employees who reside
within DC; (2) $35,000 in increased section 179 expensing; and (3) in
certain circumstances, tax-exempt bond financing. In addition, a capital
gains exclusion is allowed for certain investments held more than five
years and made within the DC Enterprise Zone, or within any DC census
tract with a poverty rate of at least 10 percent. This Act extended the
DC Enterprise Zone incentives for two years, through December 31, 2007.
Extend tax incentives for employment and investment on Indian
reservations.--This Act extended for two years, through December 31,
2007, the employment tax credit for qualified workers employed on an
Indian reservation and the accelerated depreciation rules for qualified
property used in the active conduct of a trade or business within an
Indian reservation. The employment tax credit is not available for
employees involved in certain gaming activities or who work in a
building that houses certain gaming activities. Similarly, property used
to conduct or house certain gaming activities is not eligible for the
accelerated depreciation recovery periods.
Extend modified recovery period for qualified leasehold improvements
and qualified restaurant property.--A taxpayer generally must capitalize
the cost of property used in a trade or business and recover
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such cost over time through annual deductions for depreciation or
amortization. Tangible property generally is depreciated under the
modified accelerated cost recovery system (MACRS). Under this system,
depreciation is determined by applying specified recovery periods,
placed-in-service conventions, and depreciation methods to the cost of
various types of depreciable property. Depreciation allowances for
improvements made on leased property are determined under MACRS, even if
the recovery period assigned to the property is longer than the term of
the lease. Under prior law, the recovery period for qualified leasehold
improvement property and qualified restaurant property was temporarily
reduced from 39 years to 15 years, effective for such property placed in
service after October 22, 2004 and before January 1, 2006. This Act
extended the 15-year recovery period applicable to qualified leasehold
improvement property and qualified restaurant property, effective for
such property placed in service before January 1, 2008.
Extend tax on failure to comply with mental health parity requirements
applicable to group health plans.--Group health plans that provide both
mental health benefits and medical and surgical benefits cannot impose
aggregate lifetime or annual dollar limits on mental health benefits
that are not imposed on substantially all medical and surgical benefits.
An excise tax of $100 per day for each individual affected (during the
period of noncompliance) is imposed on an employer sponsoring a group
plan that fails to meet these requirements. For a given taxable year,
the tax is limited to the lesser of 10 percent of the employer's group
health insurance expenses for the prior taxable year or $500,000. This
Act extended the mental health parity requirements and excise tax for
failure to comply with these requirements, which had been scheduled to
expire with respect to benefits furnished after December 31, 2006,
through December 31, 2007.
Extend deduction for corporate donations of computer technology.--The
charitable contribution deduction that may be claimed by corporations
for donations of inventory property generally is limited to the lesser
of fair market value or the corporation's basis in the property.
However, corporations are provided enhanced deductions, not subject to
this limitation, for: (1) a ``qualified research contribution'', or (2)
a ``qualified computer contribution.'' The enhanced deduction is equal
to the lesser of: (1) basis plus one-half of the item's fair market
value in excess of basis, or (2) two times basis. This Act extended the
enhanced deduction for a qualified computer contribution, which expired
with respect to donations made after December 31, 2005, to apply to
donations made before January 1, 2008. (The enhanced deduction for
``qualified research contributions'' does not expire.) In addition, this
Act expanded the definition of property eligible for either the enhanced
deduction relating to research equipment or computers to property
assembled by the taxpayer; under prior law the deduction was restricted
to property constructed by the taxpayer.
Extend Archer Medical Savings Accounts (Archer MSAs).--Self-employed
individuals and employees of small firms are allowed to establish Archer
MSAs; the number of accounts is capped at 750,000. In addition to other
requirements: (1) individuals who establish Archer MSAs must be covered
by a high-deductible health plan (and no other plan) with a deductible
of at least $1,750 but not greater than $2,650 for policies covering a
single person and a deductible of at least $3,500 but not greater than
$5,250 in all other cases (these amounts are indexed annually for
inflation); (2) tax-preferred contributions are limited to 65 percent of
the deductible for single policies and 75 percent of the deductible for
other policies; and (3) either an individual or an employer, but not
both, may make a tax-preferred contribution to an Archer MSA for a
particular year. Under prior law, no new contributions could be made to
an Archer MSA after December 31, 2005, except for the following: (1)
those made by or on behalf of individuals who previously had Archer MSA
contributions and (2) those made by individuals employed by a
participating employer. This Act extended the Archer MSA program for two
years, through December 31, 2007.
Extend suspension of net income limitation on percentage depletion for
marginal oil and gas wells.--Taxpayers are allowed to recover their
investment in oil and gas wells through depletion deductions. For
certain properties, deductions may be determined using the percentage of
depletion method; however, in any year, the amount deducted generally
may not exceed 100 percent of the net income from the property. Under
prior law, for taxable years beginning after December 31, 1997 and
before January 1, 2006, domestic oil and gas production from
``marginal'' properties was exempt from the 100-percent-of-net-income
limitation. This Act extended the exemption to apply to taxable years
beginning after December 31, 2005 and before January 1, 2008.
Extend economic development credit for American Samoa.--Certain
domestic corporations with business operations in the U.S. possessions
are eligible for the possession tax credit, which offsets the U.S. tax
imposed on certain income related to operations in the U.S. possessions
(including, among other places, American Samoa). The possession tax
credit is available only to a corporation that qualifies as an existing
credit claimant; the determination of whether a corporation is an
existing credit claimant is made separately for each possession. The
credit is computed separately for each possession with respect to which
the corporation is an existing claimant and the credit is subject to
either an economic activity-based limitation or an income-based limit.
Under prior law, the possession tax credit was repealed for new
claimants for taxable years beginning after December 31, 1995, and was
phased
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out for existing credit claimants for taxable years beginning after
December 31, 1995 and before December 31, 2006. This Act extended and
modified the credit with respect to American Samoa. Under the provision,
a domestic corporation that was an existing credit claimant with respect
to American Samoa and that elected the application of the possession tax
credit for its last taxable year beginning before January 1, 2006 is
allowed to claim a possession tax credit based on the economic activity-
based limitation rules for the first two taxable years beginning after
December 31, 2005 and before January 1, 2008.
Extend placed-in-service deadline for certain Gulf Opportunity Zone
property.--Taxpayers are allowed to recover the cost of certain property
used in a trade or business or for the production of income through
annual depreciation deductions. The amount of the allowable depreciation
deduction for a taxable year generally is determined under MACRS, which
assigns applicable recovery periods and depreciation methods to
different types of property. Under the Gulf Opportunity Zone Act of
2005, qualifying Gulf Opportunity Zone (GO Zone) property was provided
an additional first-year depreciation deduction equal to 50 percent of
the adjusted basis of the property. In order to qualify, property
generally had to be tangible property with a recovery period of 20 years
or less and included: (1) certain computer software; (2) water utility
property; (3) leasehold improvement property; (4) nonresidential real
property; and (5) residential rental property. In addition: (1)
substantially all of the use of the property had to be in the GO Zone
and in the active conduct of a trade or business by the taxpayer in the
GO Zone; (2) the original use of the property in the GO Zone had to
commence with the taxpayer on or after August 28, 2005; and (3) the
property had to be acquired by purchase by the taxpayer on or after
August 28, 2005 and placed in service on or before December 31, 2007
(December 31, 2008 in the case of nonresidential real property and
residential rental property). This Act extended the placed-in-service
deadline to December 31, 2010 for nonresidential real property and
residential rental property located in those portions of the GO Zone in
a county or parish in which hurricanes occurring in 2005 damaged more
than 60 percent of the housing units. However, only the adjusted basis
of such property attributable to manufacture, construction, or
production before January 1, 2010 (``progress expenditures'') is
eligible for the additional first-year depreciation.
Extend IRS authority to fund undercover operations.--The IRS is
permitted to fund certain necessary and reasonable expenses of
undercover operations, which places it on equal footing with other
Federal law enforcement agencies. These undercover operations include
international and domestic money laundering and narcotics operations.
This Act extended this funding authority, which expired on December 31,
2006, through December 31, 2007.
Extend provisions permitting disclosure of tax return information
relating to terrorist activity.--The disclosure of tax return
information relating to terrorism is permitted in two situations. The
first is when an executive of a Federal law enforcement or intelligence
agency has reason to believe that the return information is relevant to
a terrorist incident, threat or activity and submits a written request.
The second is when the IRS wishes to apprise a Federal law enforcement
agency of a terrorist incident, threat or activity. This Act extended
this disclosure authority, which expired on December 31, 2006, through
December 31, 2007.
Extend provisions permitting disclosure of certain other tax return
information.--Certain law permits disclosure of taxpayer identity
information and signatures to any agency, body, or commission of any
State for the purpose of carrying out with such agency, body or
commission a combined Federal and State employment tax reporting program
approved by the Secretary of the Treasury. This Act extended this
disclosure authority, which expired on December 31, 2006, through
December 31, 2007.
Energy Provisions
Extend placed-in-service date for tax credit for energy produced from
certain renewable sources.--Taxpayers are allowed a tax credit for
electricity produced from wind, closed-loop biomass, open-loop biomass,
geothermal energy, solar energy, small irrigation power, municipal solid
waste, and qualified hydropower. The credit rate is 1.5 cents per
kilowatt hour for electricity produced from wind, closed-loop biomass,
geothermal, and solar power, and 0.75 cent per kilowatt hour for
electricity produced from open-loop biomass, small irrigation power,
municipal solid waste, and qualified hydropower (both rates are adjusted
for inflation since 1992). A credit is also provided for the production
of refined coal and Indian coal at qualified facilities. The credit for
refined coal is $4.375 per ton (adjusted for inflation since 1992) and
the credit for Indian coal is $1.50 per ton for coal produced after
December 31, 2005 and before January 1, 2010 and $2.00 per ton for coal
produced after December 31, 2009 and before January 1, 2013. To qualify
for the credit under prior law, electricity generally had to be produced
at a facility placed in service before January 1, 2008 (January 1, 2006,
in the case of solar facilities) and coal had to be produced at a
facility placed in service before January 1, 2009. This Act extended the
placed-in-service date by one year, through December 31, 2008, for all
facilities except solar energy, refined coal, and Indian coal
facilities. For these facilities the placed-in-service termination dates
of prior law were not changed.
Extend and modify other energy tax provisions.--Other energy tax
provisions provided in this Act: (1) authorized the issuance of an
additional $400 million
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of clean renewable energy bonds and extended the authority to issue such
bonds through December 31, 2008; (2) modified the advanced coal credit
with respect to sub-bituminous coal; (3) extended the deduction for
expenditures associated with the installation of energy-efficient
property in a commercial building; (4) extended the tax credit for the
construction of qualified new energy-efficient homes to apply to homes
the construction of which is substantially completed after December 31,
2005 and that are purchased after December 31, 2005 and before January
1, 2009; (5) extended the tax credit for the purchase of certain
residential solar energy property to apply to property placed in service
after December 31, 2005 and before January 1, 2009; and (6) extended the
business energy tax credit for the cost of certain solar energy,
microturbine, and fuel cell property to apply to property purchased
before January 1, 2009.
Health Savings Accounts
Modify health savings accounts.--Individuals with a high-deductible
health plan (and no other health plan other than a plan that provides
certain permitted coverage) may establish a health savings account
(HSA). Individuals who may be claimed as a dependent on another person's
tax return cannot establish HSAs and individuals who enroll in Medicare
cannot make contributions to an HSA. In general, HSAs provide tax-
favored treatment for current medical expenses as well as the ability to
save on a tax-favored basis for future medical expenses. Contributions
to an HSA may be made by both an individual and the individual's
employer, all contributions are aggregated for purposes of the maximum
annual contribution limit, and contributions to Archer MSAs reduce the
annual contribution limit for HSAs. Contributions to an HSA made by an
employer are excluded from income and employment taxes and, within
limits, contributions to an HSA made by or on behalf of an eligible
individual are deductible by the individual in determining AGI (whether
or not the individual itemizes deductions). Earnings on amounts in an
HSA are not taxable and distributions for qualified medical expenses are
not included in gross income; however, distributions from an HSA that
are not used for qualified medical expenses are included in gross income
and except in the case of death, disability or the attainment of age 65,
are subject to an additional tax of 10 percent. Under prior law, the
maximum aggregate annual contribution that could be made to an HSA was
the lesser of: (1) 100 percent of the annual deductible under the high
deductible health plan or (2) for 2007, $2,850 in the case of self-only
coverage and $5,650 in the case of family coverage. In the case of
policy holders and covered spouses who were age 55 or older, the HSA
annual contribution limit was greater than the otherwise applicable
limit by $700 in 2006, $800 in 2007, $900 in 2008, and $1,000 in 2009
and subsequent years. This Act modified HSAs by: (1) allowing one-time
rollovers of certain amounts (not greater than the balance on September
21, 2006) from flexible spending arrangements (FSAs) and health
reimbursement arrangements (HRAs) directly to HSAs, effective for
distributions on or after December 20, 2006 and before January 1, 2012;
(2) treating certain FSA coverage as disregarded coverage for purposes
of determining if tax deductible contributions can be made to an HSA,
effective for taxable years beginning after December 31, 2006; (3)
repealing the provision that limited the maximum deductible contribution
to the annual deductible under the high-deductible health plan,
effective for taxable years beginning after December 31, 2006; (4)
modifying the 12-month period over which the Consumer Price Index (CPI)
for a calendar year is determined for purposes of making cost-of-living
adjustments to HSA contribution limits and high-deductible health plan
requirements, effective for adjustments for taxable years beginning
after 2007; (5) allowing individuals who become eligible individuals in
a month other than January to make the full deductible HSA contribution
for the year, effective for taxable years beginning after December 31,
2006; (6) modifying employer comparable contribution requirements for
contributions made to non-highly compensated employees; and (7) allowing
one-time rollovers from IRAs directly to HSAs up to the annual HSA
maximum contribution, effective for taxable years beginning after
December 31 2006.
Trade Measures
Extend Generalized System of Preferences (GSP).--Under GSP, duty-free
access is provided to approximately 3,400 products from eligible
beneficiary developing countries that meet certain worker rights,
intellectual property protection, and other statutory criteria. This Act
extended this program, which was scheduled to expire after December 31,
2006, through December 31, 2008. This Act also provided that the
President should revoke any existing competitive need limitation (CNL)
waiver that has been in effect for at least five years, if a GSP-
eligible product from a specific country has an annual trade level in
the previous calendar year that exceeds 150 percent of the annual trade
cap or 75 percent of all U.S. imports of that product.
Extend Andean Trade Preference Act (ATPA).--The ATPA, which was
scheduled to expire after December 31, 2006, was designed to provide
economic alternatives for Bolivia, Columbia, Ecuador, and Peru in their
fight against narcotics production and trafficking. This Act extended
the ATPA for six-months through June 30, 2007. An additional six-month
extension, through December 31, 2007, was granted to any ATPA
beneficiary country that concludes a trade promotion agreement with the
United States, provided the Congress and that country's legislature both
approve the agreement by June 30, 2007.
Modify African Growth and Opportunity Act (AGOA) and AGOA Acceleration
Act.--The African Growth and Opportunity Act (AGOA) and the AGOA
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Acceleration Act, enacted in 2000 and 2004, respectively, reduced
barriers to trade, thereby increasing U.S.-Africa trade, creating jobs,
and increasing opportunities for Africans and Americans alike. This Act
modified previous AGOA legislation by: (1) extending the deadline for
use of third country fabric benefits, which was scheduled to expire
after September 30, 2007, through September 30, 2012, with a 3.5 percent
cap; (2) providing an exception to the third country fabric benefit for
apparel goods made from fabric or yarn components that are in ``abundant
supply'' in Africa; and (3) providing duty-free treatment to certain
textiles and textile articles (non-apparel) of wholly made African
fabric imported from lesser-developed AGOA beneficiaries.
Other trade measures.--This Act also: (1) authorized the President to
grant permanent normal trade relations status to Vietnam; (2) provided
new rules of origin for duty-free apparel imports from Haiti, subject to
meeting statutory criteria; (3) offered temporary duty reductions on a
variety of items not manufactured in the United States; and (5) extended
the period from 15 to 30 days before changes made in the Harmonized
Tariff Schedule of the United States to implement certain international
tariff nomenclature obligations become effective.
Other Provisions
Expand qualified mortgage bond program.--Under current law, State and
local governments may issue mortgage revenue bond (MRBs) to provide low-
interest rate financing to qualified individuals for the purchase,
improvement, or rehabilitation of owner-occupied residences. Several
restrictions, including purchase price limitations, mortgagor income,
and the first-time homebuyer requirement (except with regard to
residences in certain targeted areas) apply to the financing of
mortgages with MRBs. Effective for bonds issued after December 20, 2006
and before January 1, 2008, this Act waived the first-time homebuyer
requirement with respect to financing for veterans who served in the
active military. The exception applies without regard to the date the
veteran last served on active duty or the date on which the veteran
applied for the loan after leaving active duty; however, each veteran
may use the exception only one time.
Allow prepayment of premium liability for coal industry health
benefits.--The United Mine Workers of America (UMWA) Combined Benefit
Fund was established by the Coal Industry Retiree Health Benefit Act of
1992 to assume responsibility of payments for medical care expenses of
certain retired miners and their dependents. The Combined Benefit Fund
is financed by assessments on current and former signatories to labor
agreements with the UMWA, past transfers from an overfunded United Mine
Workers pension fund, and transfers from the Abandoned Mine Reclamation
Fund. The Social Security Administration is responsible for assigning
eligible retired miners and their dependents to current and former
signatories to labor agreements with the UMWA and calculating annual
contributions to be paid by each such signatory for each beneficiary
assigned to the signatory. The term ``assigned operator'' is used to
refer to the signatory to whom liability for a particular beneficiary of
the Combined Benefit Fund has been assigned. Effective December 20,
2006, this Act allowed certain assigned operators to prepay their
premium liability to the Combined Benefit Fund. Under this Act: (1) the
payment by the assigned operator (or any related person on behalf of the
assigned operator) must be no less than the present value of the total
premium liability of the assigned operator, as determined by the
operator's enrolled actuary, using actuarial methods and assumptions
each of which is reasonable and which are reasonable in the aggregate;
and (2) the enrolled actuary must file with the Department of Labor an
actuarial report regarding the valuation made by the actuary.
Provide other changes.--Other provisions in this Act: (1) allowed U.S.
businesses operating as branches in Puerto Rico to claim the domestic
manufacturing deduction for two years; (2) allowed individuals to take
advantage of a refundable credit with respect to certain long-term
unused AMT credits existing prior to January 1, 2013; (3) allowed
individuals to treat premiums paid or accrued before December 31, 2007
on qualified mortgage insurance contracts issued after January 1, 2007
as qualified mortgage interest (subject to income limits); (4) modified
the excise tax on unrelated business taxable income of charitable
remainder trusts; and (5) reformed the reward program for individuals
who provide information regarding violations of the tax laws.
UNITED STATES-OMAN FREE TRADE AGREEMENT IMPLEMENTATION ACT
This Act, which was signed by President Bush on September 26, 2006,
approved and provided for U.S implementation of the United States-Oman
Free Trade Agreement, as signed by the United States and Oman on January
19, 2006. When this Agreement enters into force, it will level the
playing field for U.S. workers and businesses, provide additional market
access for U.S. goods, help Oman's leaders develop long-term
opportunities for their people, and advance our shared goal of building
a Middle East Free Trade Area. By strengthening our relations with a
strategic friend and ally in the Middle East, this Agreement will also
help protect America's national security interests.
[[Page 255]]
ADMINISTRATION PROPOSALS
IMPROVE THE TAX SYSTEM TO MAKE THE U.S. MORE COMPETITIVE
Americans deserve a tax system that is simple, fair, and pro-growth--
in tune with our dynamic, 21st century economy. The tax system should
allow taxpayers to make decisions based on economic merit, free of tax-
induced distortions. The tax system should promote the competitiveness
of American workers and businesses in the global economy. The Report of
the President's Advisory Panel on Federal Tax Reform has helped lay
groundwork on ways to ensure that our tax system better meets the needs
of today's economy.
The President's tax relief enacted in 2001 and 2003 helped move the
tax code in this direction. The President has proposed changes that
would move the tax code yet further in this direction. The Budget
includes proposals to make health care more affordable and consumer-
driven, to promote savings for all Americans, and to encourage
investment by entrepreneurs. The Budget also recognizes that tax policy
analysis needs to account fully for the economic benefits of policy
changes on our economy. In the coming months, the Treasury Department
will engage in a public dialogue on how our tax system can be improved
to make the U.S. more competitive in the global economy.
MAKE PERMANENT CERTAIN TAX RELIEF ENACTED IN 2001 AND 2003
Extend permanently reductions in individual income taxes on capital
gains and dividends.--The maximum individual income tax rate on net
capital gains and dividends is 15 percent for taxpayers in individual
income tax rate brackets above 15 percent and 5 percent (zero in 2008,
2009 and 2010) for lower income taxpayers. The Administration proposes
to extend permanently these reduced rates (15 percent and zero), which
are scheduled to expire on December 31, 2010.
Extend permanently increased expensing for small business.--Under
current law, beginning in 2010, taxpayers may expense up to $25,000 in
annual investment expenditures for qualifying property, and the maximum
amount that may be expensed is reduced by the amount by which the
taxpayer's cost of qualifying property exceeds $200,000. Neither of
these dollar amounts is indexed for inflation. However, under temporary
provisions first enacted in 2003, business taxpayers are allowed to
expense up to $100,000 in annual investment expenditures for qualifying
property (expanded to include off-the-shelf computer software) placed in
service in taxable years beginning in 2003 through 2009. The maximum
amount that may be expensed is reduced by the amount by which the
taxpayer's cost of qualifying property exceeds $400,000. Both the
temporary deduction and annual investment limits are indexed annually
for inflation, effective for taxable years beginning after 2003 and
before 2010. Also, with respect to a taxable year beginning after 2002
and before 2010, taxpayers are permitted to make or revoke expensing
elections on amended returns without the consent of the IRS
Commissioner. The Administration proposes to extend permanently each of
these temporary provisions, applicable for qualifying property
(including off-the-shelf computer software) placed in service in taxable
years beginning after 2009.
Extend permanently provisions expiring in 2010.--Most of the
provisions of the 2001 tax cut sunset on December 31, 2010. The
Administration proposes to extend those provisions permanently.
TAX INCENTIVES
Simplify and Encourage Saving
Expand tax-free savings opportunities.--Under current law, individuals
can contribute to traditional IRAs, nondeductible IRAs, and Roth IRAs,
each subject to different sets of rules. For example, contributions to
traditional IRAs are deductible, while distributions are taxed;
contributions to Roth IRAs are taxed, but distributions are excluded
from income. In addition, eligibility to contribute is subject to
various age and income limits. While primarily intended for retirement
saving, withdrawals for certain education, medical, and other non-
retirement expenses are penalty free. The eligibility and withdrawal
restrictions for these accounts complicate compliance and limit
incentives to save.
The Administration proposes to replace current law IRAs with two new
savings accounts: a Lifetime Savings Account (LSA) and a Retirement
Savings Account (RSA). Regardless of age or income, individuals could
make annual nondeductible contributions of $2,000 to an LSA and $5,000
(or earnings if less) to an RSA. Distributions from an LSA would be
excluded from income and could be made at any time for any purpose
without restriction. Distributions from an RSA would be excluded from
income after attaining age 58 or in the event of death or disability.
All other distributions would be included in income (to the extent they
exceed basis) and subject to an additional tax. Distributions would be
deemed to come from basis first. The proposal would be effective for
contributions made after December 31, 2007 and future year contribution
limits would be indexed for inflation.
Existing Roth IRAs would be renamed RSAs and would be subject to the
new rules for RSAs. Existing traditional and nondeductible IRAs could be
converted into an RSA by including the conversion amount (excluding
basis) in gross income, similar to a current-law Roth conversion.
However, no income limit would apply to the ability to convert.
Taxpayers who convert IRAs to RSAs before January 1, 2009 could spread
the included conversion amount over four years. Existing traditional or
nondeductible IRAs that are not converted to RSAs could not accept new
contributions. New traditional IRAs could be created to accommodate roll
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overs from employer plans, but they could not accept new individual
contributions. Individuals wishing to roll an amount directly from an
employer plan to an RSA could do so by including the rollover amount
(excluding basis) in gross income (i.e., ``converting'' the rollover,
similar to a current law Roth conversion).
Saving will be further simplified and encouraged by administrative
changes already planned for the 2007 filing season that will allow
taxpayers to have their tax refunds directly deposited into more than
one account. Consequently, taxpayers will be able, for example, to
direct that a portion of their tax refunds be deposited into an LSA or
RSA.
Consolidate employer-based savings accounts.--Current law provides
multiple types of tax-preferred employer-based savings accounts to
encourage saving for retirement. The accounts have similar goals but are
subject to different sets of rules regulating eligibility, contribution
limits, tax treatment, and withdrawal restrictions. For example, 401(k)
plans for private employers, SIMPLE 401(k) plans for small employers,
403(b) plans for 501(c)(3) organizations and public schools, and 457
plans for State and local governments are all subject to different
rules. To qualify for tax benefits, plans must satisfy multiple
requirements. Among the requirements, the plan generally may not
discriminate in favor of highly compensated employees with regard either
to coverage or to amount or availability of contributions or benefits.
Rules covering employer-based savings accounts are among the lengthiest
and most complicated sections of the tax code and associated
regulations. This complexity imposes substantial costs on employers,
participants, and the Government, and likely has inhibited the adoption
of retirement plans by employers, especially small employers.
The Administration proposes to consolidate 401(k), SIMPLE 401(k),
403(b), and 457 plans, as well as SIMPLE IRAs and SARSEPs, into a single
type of plan--Employee Retirement Savings Accounts (ERSAs) that would be
available to all employers. ERSA non-discrimination rules would be
simpler and include a new ERSA non-discrimination safe-harbor. Under one
of the safe-harbor options, a plan would satisfy the nondiscrimination
rules with respect to employee deferrals and employee contributions if
it provided a 50-percent match on elective contributions up to six
percent of compensation. By creating a simplified and uniform set of
rules, the proposal would substantially reduce complexity. The proposal
would be effective for taxable years beginning after December 31, 2007.
Encourage Entrepreneurship and Investment
Increase expensing for small business.--Business taxpayers are
currently allowed to expense up to $100,000 in annual investment
expenditures for qualifying property (expanded to include off-the-shelf
computer software) placed in service in taxable years beginning in 2003
through 2009. The maximum amount that may be expensed is reduced by the
amount by which the taxpayer's cost of qualifying property exceeds
$400,000. Both the deduction and annual investment limits are indexed
annually for inflation, effective for taxable years beginning after 2003
and before 2010. Also, with respect to a taxable year beginning after
2002 and before 2010, taxpayers are permitted to make or revoke
expensing elections on amended returns without the consent of the IRS
Commissioner. The Administration proposes to increase the amount of
annual investment expenditures that taxpayers are allowed to expense to
$200,000, and to raise the amount of qualifying investment at which the
phase-out begins to $800,000, effective for qualifying property placed
in service in taxable years beginning after 2007. These higher amounts
would be indexed for inflation, effective for taxable years beginning
after 2008.
Invest in Health Care
Provide a flat $15,000 deduction for family coverage ($7,500 for
individual coverage) for those with and who purchase health insurance.--
The Administration proposes to provide a flat $15,000 deduction to all
families who purchase health insurance ($7,500 for those purchasing
individual coverage), whether directly or through an employer, that
meets minimum requirements. The full deduction would apply regardless of
how much a family or individual spends on health insurance; that is, a
family or individual that spends less than the full deduction on health
insurance would still receive the full deduction. The deduction would
apply for purposes of both the income and payroll tax.
The new, flat deduction would replace the existing exclusion for
employer-provided health insurance, the self-employed premium deduction,
and the medical itemized deduction for those under 65 years of age. The
current exclusion or deduction from income of health care spending,
whether for insurance premiums or out-of-pocket expenses, except under a
Health Savings Account (HSA), would also be repealed. Employers would be
required to report the value of health insurance coverage to their
employees on their annual Form W-2 and such amounts would be subject to
withholding and employment taxes. Businesses would continue to deduct
employer-provided health insurance as a business expense. In addition,
the phase-out rate for the EITC for taxpayers with qualifying children
would be reduced to 15 percent. These provisions would be effective for
tax years beginning after December 31, 2008.
Expand and make health savings accounts (HSAs) more flexible.--Current
law allows individuals to accumulate funds in an HSA or medical savings
account (MSA) on a tax-preferred basis to pay for medical expenses,
provided they are covered by an HSA-qualified high-deductible health
plan (HDHP), and no other health plan. Under current law, individual
contributions to HSAs are deductible for income tax purposes, while
employer contributions to HSAs are excluded from both the income and
payroll tax. The higher de
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ductible under HSA-qualified health plans increases the cost
consciousness of health care consumers by increasing their exposure to
the cost of health care.
In addition to higher deductibles, the Administration also recognizes
that higher coinsurance levels encourage cost consciousness among health
care consumers. Therefore, the Administration proposes to allow health
plans to be considered HSA-eligible if they meet all the existing
requirements of an HDHP except that, in lieu of satisfying the minimum
deductible requirement, they have at least a 50 percent coinsurance
requirement and a minimum out-of-pocket exposure that would result in
the same (or lower) premium as coverage under a high-deductible health
plan under the current requirements for the same family or individual.
The Administration also proposes that additional changes be made to
HSAs to encourage the use of HSAs and coverage under the HSA-eligible
high-deductible health plans including: (1) allowing family coverage to
include coverage where each individual in the family can receive
benefits once they have reached the minimum deductible for an individual
HDHP; (2) allowing both spouses to contribute the catch-up contribution
to a single HSA owned by one spouse if both spouses are eligible
individuals; (3) allowing an individual to be covered by a flexible
spending arrangement (FSA) or health reimbursement arrangement (HRA)
with first dollar coverage and still contribute to an HSA, but offset
the maximum allowable HSA contribution by the level of FSA or HRA
coverage; (4) allowing qualified medical expenses to include any medical
expense incurred on or after the first day of HDHP coverage if
individuals have established an HSA by their return filing date for that
year; and (5) excluding from the comparability rules extra employer
contributions to HSAs on behalf of employees who are chronically ill or
employees who have spouses or dependents who are chronically ill. All of
the HSA-related proposals would be effective for years beginning after
December 31, 2007.
Improve the Health Coverage Tax Credit.--The Health Coverage Tax
Credit (HCTC) was created under the Trade Act of 2002 for the purchase
of qualified health insurance. Eligible persons include certain
individuals who are receiving benefits under the Trade Adjustment
Assistance (TAA) or the Alternative TAA (ATAA) program and certain
individuals between the ages of 55 and 64 who are receiving pension
benefits from the Pension Benefit Guaranty Corporation (PBGC). The tax
credit is refundable and can be claimed through an advance payment
mechanism at the time the insurance is purchased.
To make the requirements for qualified State-based coverage under the
HCTC more consistent with the rules applicable under the Health
Insurance Portability and Accountability Act (HIPAA) and thus encourage
more plans to participate in the HCTC program, the Administration
proposes to allow State-based coverage to impose a pre-existing
condition restriction for a period of up to 12 months, provided the plan
reduces the restriction period by the length of the eligible
individual's creditable coverage (as of the date the individual applied
for the State-based coverage). This provision would be effective for
eligible individuals applying for coverage after December 31, 2007.
Also, in order to prevent an individual from losing the benefit of the
HCTC just because his or her spouse becomes eligible for Medicare, the
Administration proposes to permit spouses of HCTC-eligible individuals
to claim the HCTC when the HCTC-eligible individual becomes entitled to
Medicare coverage. The spouse, however, would have to be at least 55
years old and meet the other HCTC eligibility requirements. This
provision would be effective for taxable years beginning after December
31, 2007.
To improve the administration of the HCTC, the Administration proposes
to: (1) modify the definition of ``other specified coverage'' for
``eligible ATAA recipients,'' to be the same as the definition applied
to ``eligible TAA recipients;'' (2) clarify that certain PBGC pension
recipients are eligible for the tax credit; (3) allow State-based
continuation coverage to qualify without meeting the requirements for
State-based qualified coverage; and (4) for purposes of the State-based
coverage rules, permit the Commonwealths of Puerto Rico and Northern
Mariana Islands, as well as American Samoa, Guam, and the U.S. Virgin
Islands to be deemed as States.
Allow the orphan drug tax credit for certain pre-designation
expenses.--Current law provides a 50-percent credit for expenses related
to human clinical testing of drugs for the treatment of certain rare
diseases and conditions (``orphan drugs''). A taxpayer may claim the
credit only for expenses incurred after the Food and Drug Administration
(FDA) designates a drug as a potential treatment for a rare disease or
condition. This creates an incentive to defer clinical testing for
orphan drugs until the taxpayer receives the FDA's approval and
increases complexity for taxpayers by treating pre-designation and post-
designation clinical expenses differently. The Administration proposes
to allow taxpayers to claim the orphan drug credit for expenses incurred
prior to FDA designation if designation occurs before the due date
(including extensions) for filing the tax return for the year in which
the FDA application was filed. The proposal would be effective for
qualified expenses incurred after December 31, 2006.
Provide Incentives for Charitable Giving
Extend permanently tax-free withdrawals from IRAs for charitable
contributions.--Under current law, eligible individuals may make
deductible or non-deductible contributions to a traditional IRA and
nondeductible contributions to a Roth IRA. Pre-tax contributions and
earnings in a traditional IRA are included in income when withdrawn.
Qualified withdrawals from a Roth IRA are excluded from gross income;
withdrawals that are not qualified are included
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in gross income to the extent attributable to earnings. The Pension
Protection Act of 2006 provided an exclusion from gross income for
otherwise taxable distributions from a traditional or a Roth IRA made
directly to a qualified charitable organization. The exclusion may not
exceed $100,000 per taxpayer per taxable year, is applicable only to
distributions made on or after the date the IRA owner attains age 70\1/
2\, and is effective for distributions made in taxable years beginning
after December 31, 2005 and before January 1, 2008. The exclusion
applies only if a charitable contribution deduction for the entire
distribution would otherwise be allowable under current law, determined
without regard to the percentage-of-AGI limitation. No charitable
deduction is allowed with respect to any amount excludable from income
under this provision.
The Administration proposes to permanently extend this exclusion,
effective for distributions made in taxable years beginning after
December 31, 2007.
Extend permanently the enhanced charitable deduction for contributions
of food inventory.--A taxpayer's deduction for charitable contributions
of inventory generally is limited to the taxpayer's basis (typically
cost) in the inventory, or, if less, the fair market value of the
inventory. However, for certain contributions of inventory, C
corporations may claim an enhanced deduction equal to the lesser of: (1)
basis plus one half of the fair market value in excess of basis, or (2)
two times basis. To be eligible for the enhanced deduction, the
contributed property generally must be inventory of the taxpayer
contributed to a charitable organization and the donee must: (1) use the
property consistent with the donee's exempt purpose solely for the care
of the ill, the needy, or infants; (2) not transfer the property in
exchange for money, other property, or services; and (3) provide the
taxpayer a written statement that the donee's use of the property will
be consistent with such requirements. To use the enhanced deduction, the
taxpayer must establish that the fair market value of the donated item
exceeds basis.
The Katrina Emergency Tax Relief Act of 2005 expanded the enhanced
deduction to apply to qualified contributions of food inventory made
after August 27, 2005 and before January 1, 2006 by all taxpayers (not
just C corporations) engaged in a trade or business. The Pension
Protection Act of 2006 extended the enhanced charitable deduction for
contributions of food inventory provided under the Katrina Emergency Tax
Relief Act of 2005 to apply to contributions made after December 31,
2005 and before January 1, 2008. The donated food must meet certain
quality and labeling standards, and, for taxpayer's other than C
corporations, the total deduction for donated food inventory may not
exceed 10 percent of the taxpayer's net income from the related trade or
business. The Administration proposes to permanently extend the enhanced
charitable deduction for contributions of food inventory to apply to
contributions made after December 31, 2007.
Extend permanently the deduction for corporate donations of computer
technology.--The charitable contribution deduction that may be claimed
by corporations for donations of inventory property generally is limited
to the lesser of fair market value or the corporation's basis in the
property. However, corporations are provided enhanced deductions, not
subject to this limitation, for contributions of computer technology and
equipment for education purposes. The enhanced deduction is equal to the
lesser of: (1) basis plus one-half of the item's fair market value in
excess of basis, or (2) two times basis. To qualify for the enhanced
deduction, equipment contributed must have been constructed or assembled
by the taxpayer and be donated no later than three years after
completion. This provision expires with respect to donations made after
December 31, 2007. The Administration proposes to permanently extend
this deduction, effective for distributions made in taxable years
beginning after December 31, 2007.
Permanently increase limits on contributions of property interests
made for conservation purposes.--In general, a deduction is permitted
for charitable contributions, subject to certain limitations that depend
on the type of taxpayer, the property contributed, and the donee
organization. Exceptions to these general rules are provided for certain
types of contributions, including qualified conservation contributions.
The special rules for qualified conservation contributions were enhanced
under the Pension Reform Act of 2006, applicable for qualified
conservation contributions made in taxable years beginning after
December 31, 2005 and before January 1, 2008. These special rules: (1)
increased the cap on deductions for qualified conservation contributions
from 30 percent to 50 percent of the excess of the donor's contribution
base over the amount of all other allowable charitable contributions,
(2) increased the cap on deductions for qualified conservation
contributions applicable to qualified ranchers and farmers to 100
percent of the excess of the donor's contribution base over the amount
of all other allowable charitable contributions in the case of
individuals and to 100 percent of the excess of taxable income over the
amount of all other allowable charitable contributions in the case of
corporations, and (3) increased the number of years qualified
conservation contributions in excess of the 50- and 100-percent caps may
be carried forward from five to 15 years. The Administration proposes to
permanently extend these special rules, applicable for qualified
conservation contributions made in taxable years beginning after
December 31, 2007.
Extend permanently basis adjustment to stock of S corporations
contributing appreciated property.--Each shareholder of an S corporation
must take into account his or her pro rata share of a charitable
contribution by the S corporation in determining his or her income tax
liability. For donations of property, this generally is the pro rata
share of the property's fair market value. Under prior law, the
shareholder's
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basis in the stock of the company was reduced by the amount of the
charitable contribution that flowed through to the shareholder. Under
the Pension Protection Act of 2006, effective for charitable
contributions made by an S corporation in taxable years beginning after
December 31, 2005 and before January 1, 2008, shareholders are allowed
to adjust their basis in the stock of the company by their pro rata
share of the adjusted basis of the contributed property instead of by
their pro rata share of the market value of the contributed property.
The Administration proposes to permanently extend this provision,
effective for charitable contributions made by an S corporation in
taxable years beginning after December 31, 2007.
Reform excise tax based on investment income of private foundations.--
Under current law, private foundations that are exempt from Federal
income tax are subject to a two-percent excise tax on their net
investment income (one-percent if certain requirements are met). The
excise tax on private foundations that are not exempt from Federal
income tax, such as certain charitable trusts, is equal to the excess of
the sum of the excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax that
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. To encourage increased charitable
activity and simplify the tax laws, the Administration proposes to
replace the two rates of tax on the net investment income of private
foundations that are exempt from Federal income tax with a single tax
rate of one percent. The excise tax on private foundations not exempt
from Federal income tax would be equal to the excess of the sum of the
one-percent excise tax that would have been imposed if the foundation
were tax exempt and the amount of the unrelated business income tax that
would have been imposed if the foundation were tax exempt, over the
income tax imposed on the foundation. The proposed change would be
effective for taxable years beginning after December 31, 2007.
Repeal the $150 million limitation on qualified 501(c)(3) bonds.--
Current law contains a $150 million limitation on the volume of
outstanding, non-hospital, tax-exempt bonds for the benefit of any one
501(c)(3) organization. The limitation was repealed in 1997 for bonds
issued after August 5, 1997, at least 95 percent of the net proceeds of
which are used to finance capital expenditures incurred after that date.
However, the limitation continues to apply to bonds more than five
percent of the net proceeds of which finance or refinance working
capital expenditures, or capital expenditures incurred on or before
August 5, 1997. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the $150 million limitation in its entirety.
Repeal certain restrictions on the use of qualified 501(c)(3) bonds
for residential rental property.--Tax-exempt, 501(c)(3) organizations
generally may utilize tax-exempt financing for charitable purposes.
However, existing law contains a special limitation under which
501(c)(3) organizations may not use tax-exempt financing to acquire
existing residential rental property for charitable purposes unless the
property is rented to low-income tenants or is substantially
rehabilitated. In order to simplify the tax laws and provide consistent
treatment of bonds for 501(c)(3) organizations, the Administration
proposes to repeal the residential rental property limitation.
Strengthen Education
Extend permanently the above-the-line deduction for qualified out-of-
pocket classroom expenses.--Under current law, teachers who itemize
deductions (do not use the standard deduction) and incur unreimbursed,
job-related expenses are allowed to deduct those expenses to the extent
that, when combined with other miscellaneous itemized deductions, they
exceeded two percent of AGI. Current law also allows certain teachers
and other elementary and secondary school professionals to treat up to
$250 in annual qualified out-of-pocket classroom expenses as a non-
itemized deduction (deductible above-the-line). Unreimbrsed expenditures
for certain books, supplies, and equipment related to classroom
instruction qualify for the above-the-line deduction. Expenses claimed
as an above-the-line deduction may not be claimed as an itemized
deduction. This additional deduction is effective for expenses incurred
in table years beginning after December 31, 2001 and before January 1,
2008. The Administration proposes to extend permanently the above-the-
line deduction to apply to qualified out-of-pocket expenditures incurred
in taxable years beginning after December 31, 2007.
Allow the saver's credit for contributions to qualified tuition
programs (section 529 of the Internal Revenue Code).--Under current law,
taxpayers age 18 or older who are not dependents or full-time students
may receive a nonrefundable credit (the saver's credit) on up to $2,000
of their compensation contributed to employer-sponsored qualified
retirement plans and IRAs. The credit ranges between 10 and 50 percent
of the amount contributed, depending on the taxpayer's filing status and
AGI (adjusted for inflation). In determining the credit, qualified
contributions are reduced by distributions from qualified plans and IRAs
during the current tax year, the two preceding tax years, and the
following year, up to the due date of the return, including extensions.
Under current law, taxpayers may contribute to a section 529 qualified
tuition program (QTP) to save for higher education expenses of a
designated beneficiary. Contributions to a QTP are not deductible from
income for Federal tax purposes, but earnings on contributions
accumulate tax-free. Taxpayers may exclude from gross
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income amounts distributed from a QTP and used for qualified higher
education expenses, provided the distribution is not used for the same
educational expenses for which another tax benefit is claimed.
Nonqualified distributions are subject to an additional tax.
The Administration proposes to allow the saver's credit for qualified
contributions to QTPs controlled by the taxpayer. AGI would be modified
to include the excludable portion of the taxpayer's Social Security
benefits in determining the applicable rate for the saver's credit. The
credit would apply to an annual aggregate contribution of up to $2,000
(or earnings includible in gross income, if less) to the taxpayer's
elective deferral plans, IRAs, and QTPs. For an individual who is
married filing a joint return, the earnings limitation would be binding
only if the combined includible compensation of the spouses was less
than $4,000. Qualified contributions would be reduced by distributions
from elective deferral plans, IRAs, and QTPs during the current tax
year, the two preceding tax years, and the following tax year up to the
due date of the return, including extensions. The credit would be
effective for years beginning after December 31, 2007.
Protect the Environment
Extend permanently expensing of brownfields remediation costs.--
Taxpayers may elect, with respect to expenditures paid or incurred
before January 1, 2008, to treat certain environmental remediation
expenditures that would otherwise be chargeable to a capital account as
deductible in the year paid or incurred. The Administration proposes to
extend this provision permanently, making it available for expenditures
paid or incurred after December 31, 2007, and facilitating its use by
businesses to undertake projects that may be uncertain in overall
duration.
Eliminate the volume cap for private activity bonds for water
infrastructure.--Bonds are classified as private activity bonds if they
meet a private business use test and a private payments test. Private
activity bonds may be issued on a tax-exempt basis only if they meet
specified requirements, including targeting requirements that limit such
bond financing to specifically defined facilities and programs. For
example, qualified private activity bonds can be used to finance
facilities for the furnishing of water and for sewer facilities.
Qualified private activity bonds are subject to the same general rules
applicable to governmental bonds. Most qualified private activity bonds
are also subject to a number of additional rules and limitations, in
particular an annual State volume cap limitation.
The Administration proposes to remove from the annual State volume cap
limitation qualified private activity bonds issued to finance water and
sewage facilities. Municipalities that use these bonds for wastewater
and drinking water systems must implement (if they have not already)
full-cost pricing for services, to help their systems become self-
financing like the electric and gas utilities and minimize the need for
future Federal financing. The volume cap would be removed for
obligations issued after December 31, 2007.
Restructure Assistance to New York City for Continued Recovery from the
Attacks of
September 11th
Provide tax incentives for transportation infrastructure.--The
Administration proposes to restructure the tax benefits for New York
recovery that were enacted in 2002. Some of the tax benefits that were
provided to New York following the attacks of September 11, 2001, likely
will not be usable in the form in which they were originally provided.
As such, the Administration proposed in the Mid-Session Review of the
2005 Budget to sunset certain existing New York Liberty Zone tax
benefits and in their place provide tax credits to New York State and
New York City for expenditures incurred in building or improving
transportation infrastructure in or connecting with the New York Liberty
Zone. The tax credit would be available as of the date of enactment,
subject to an annual limit of $200 million ($2 billion in total over 10
years), evenly divided between the State and the City. Any unused credit
limit in a given year would be added to the $200 million allowable in
the following year, including years beyond the 10-year period of the
credit. Similarly, expenditures that could not be credited in a given
year because of the credit limit would be carried forward and used
against the next year's limitation. The credit would be allowed against
any payments (e.g., income tax withholding) made by the City and State
under any provision of the Internal Revenue Code, other than Social
Security and Medicare payroll taxes and excise taxes. The Secretary of
the Treasury may prescribe such rules as are necessary to ensure that
the expenditures are made for the intended purpose. The Administration
also proposes to terminate the additional first-year depreciation
deduction for certain real property, which was provided to eligible
property within the New York Liberty Zone under the 2002 economic
stimulus act.
SIMPLIFY THE TAX LAWS FOR FAMILIES
Clarify uniform definition of a child.--The 2004 tax relief act
created a uniform definition of a child, allowing, in many
circumstances, a taxpayer to claim the same child for five different
child-related tax benefits. Under the new rules, a qualifying child must
meet relationship, residency, and age tests. While the new rules
simplify the determination of eligibility for many child-related tax
benefits, the elimination of certain complicated factual tests to
determine if siblings and certain other family members are eligible to
claim a qualifying child may have some unintended consequences. The new
rules effectively deny the EITC to some young taxpayers who are the sole
guardians of their younger siblings. Yet some taxpayers are able to
avoid income limitations on child-related tax benefits by allowing other
family members, who have lower in
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comes, to claim the taxpayers' sons or daughters as qualifying children.
The 2004 tax relief act had other unintended consequences, which made
some of the eligibility rules less uniform. For example, it allowed
dependent filers to claim the child tax credit, even though they are
generally ineligible for most other child-related tax benefits. It also
allowed taxpayers to claim the child tax credit on behalf of a married
child who files a joint return with his or her spouse, even though the
taxpayer generally cannot claim other benefits for the married child.
These exceptions create confusion and add complexity to the tax code.
To ensure that deserving taxpayers receive child-related tax benefits,
the Administration proposes to clarify the uniform definition of a
child. First, the definition of a qualifying child would be further
simplified. A taxpayer would not be a qualifying child of another
individual if the taxpayer is older than that individual. However, an
individual could be a qualifying child of a younger sibling if the
individual is permanently and totally disabled. Also, under the
proposal, an individual who is married and filing jointly (for any
reason other than to obtain a refund of overwithheld taxes) would not be
considered a qualifying child for the child-related tax benefits,
including the child tax credit. Second, the proposal clarifies when a
taxpayer is eligible to claim child-related tax benefits. If a parent
resides with his or her child for over half the year, the parent would
be the only individual eligible to claim the child as a qualifying
child. The parent could waive the child-related tax benefits to another
member of the household who has higher AGI and is otherwise eligible for
the tax benefits. In addition, dependent filers would not be allowed to
claim qualifying children. The proposal is effective for taxable years
beginning after December 31, 2007.
Simplify EITC eligibility requirement regarding filing status,
presence of children, and work and immigrant status.--To qualify for the
EITC, taxpayers must satisfy requirements regarding filing status, the
presence of children in their households, and their work and immigration
status in the United States. These rules are confusing, require
significant record-keeping, and are costly to administer. Under the
proposal, married taxpayers who reside with children could claim the
EITC without satisfying a complicated household maintenance test if they
live apart from their spouse for the last six months of the year. In
addition, certain taxpayers who live with children but do not qualify
for the larger child-related EITC could claim the smaller EITC for very
low-income childless workers. The simplification of the filing status
and residency requirements would be effective for taxable years
beginning after December 31, 2007. Effective January 1, 2008, the
proposal would also improve the administration of the EITC with respect
to eligibility requirements for undocumented workers.
Reduce computational complexity of refundable child tax credit.--
Taxpayers with earned income in excess of $11,750 may qualify for a
refundable (or ``additional'') child tax credit even if they do not have
any income tax liability. Over 70 percent of additional child tax credit
claimants also claim the EITC. However, the two credits have a different
definition of earned income and different U.S. residency requirements.
In addition, some taxpayers have to perform multiple computations to
determine the amount of the additional child tax credit they can claim.
First, they must compute the additional child tax credit using a formula
based on earned income. Then, if they have three or more children, they
may recalculate the credit using a formula based on social security
taxes and claim the higher of the two amounts.
Under the proposal, the additional child tax credit would use the same
definition of earned income as is used for the EITC. Taxpayers (other
than members of the Armed Forces stationed overseas) would be required
to reside with a child in the United States to claim the additional
child tax credit (as they are currently required to do for the EITC).
Taxpayers with three or more children would do only one computation
based on earned income to determine the credit amount. The proposal
would be effective for taxable years beginning after December 31, 2007.
IMPROVE TAX COMPLIANCE
The Federal tax system is based on voluntary compliance with the tax
laws. Under this system, taxpayers report and pay their taxes
voluntarily with minimal interaction with the IRS. While the vast
majority of American taxpayers pay their taxes timely and accurately,
there remains in aggregate a difference between what taxpayers should
pay and what they actually pay on a timely basis. In 2001, the overall
compliance rate was 86 percent, after including late payments and
recoveries from IRS enforcement activities. While this rate of
compliance is high, a large amount of the tax that should be paid is
not, resulting in the so-called ``tax gap''. \1\
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\1\ See Chapter 13, Stewardship, in the Analytical Perspectives
volume.
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In September 2006, the Treasury Department released a comprehensive
strategy to improve tax compliance. \2\ The strategy builds upon the
demonstrated experience and current efforts of the Treasury Department
and IRS to improve compliance.
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\2\ Comprehensive Strategy for Reducing the Tax Gap, U.S. Treasury
Department, September 26, 2006.
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Four key principles guided development of the strategy:
Unintentional taxpayer errors and intentional taxpayer
evasion should both be addressed.
Sources of non-compliance should be targeted with
specificity.
Enforcement activities should be combined with a commitment
to taxpayer service.
Tax policy and compliance proposals should be sensitive to
taxpayer rights and maintain an appropriate balance between
enforcement activity and imposition of taxpayer burden.
[[Page 262]]
These principles point to the need for a comprehensive, integrated,
multi-year strategy to improve tax compliance. Components of this
strategy must include: (1) legislative proposals to reduce opportunities
for evasion; (2) a multi-year commitment to compliance research; (3)
continued improvements in information technology; (4) improvements in
IRS compliance activities; (5) enhancements of taxpayer service; (6)
simplification of the tax law; and (7) coordination between the
government and its partners and stakeholders.
The IRS has taken a number of steps to improve compliance. To enhance
the IRS' efforts, the Administration's Budget includes a number of
legislative proposals intended to improve tax compliance with minimum
taxpayer burden. The Administration proposes to expand information
reporting, improve compliance by businesses, strengthen tax
administration, and expand penalties.
Expand information reporting.--Compliance with the tax laws is highest
when payments are subject to information reporting to the IRS. Specific
information reporting proposals would: (1) require information reporting
on payments to corporations; (2) require basis reporting on security
sales; (3) expand broker information reporting; (4) require information
reporting on merchant payment card reimbursements; (5) require a
certified tax identification number (TIN) from non-employee service
providers; (6) require increased information reporting for certain
government payments for property and services; and (7) increase
information return penalties.
Improve compliance by businesses.--Improving compliance by businesses
of all sizes is important. Specific proposals to improve compliance by
businesses would: (1) require electronic filing by certain large
businesses; (2) implement standards clarifying when employee leasing
companies can be held liable for their clients' Federal employment
taxes; and (3) amend collection due process procedures applicable to
employment tax liabilities.
Strengthen tax administration.--The IRS has taken a number of steps
under existing law to improve compliance. These efforts would be
enhanced by specific tax administration proposals that would: (1) expand
IRS access to information in the National Directory of New Hires
database; (2) permit the IRS to disclose to prison officials return
information about tax violations; and (3) make repeated failure to file
a tax return a felony.
Expand penalties.--Penalties play an important role in discouraging
intentional non-compliance. Specific proposals to expand penalties
would: (1) expand preparer penalties; (2) impose a penalty on failure to
comply with electronic filing requirements; and (3) create an erroneous
refund claim penalty.
IMPROVE TAX ADMINISTRATION AND OTHER MISCELLANEOUS PROPOSALS
Implement IRS administrative reforms.--The Administration has four
proposals relating to administrative reforms. The first proposal
modifies employee infractions subject to mandatory termination and
permits a broader range of available penalties. It strengthens taxpayer
privacy while reducing employee anxiety resulting from unduly harsh
discipline or unfounded allegations. The second proposal allows the IRS
to terminate installment agreements when taxpayers fail to make timely
tax deposits and file tax returns on current liabilities. The third
proposal eliminates the requirement that the IRS Chief Counsel provide
an opinion for any accepted offer-in-compromise of unpaid tax (including
interest and penalties) equal to or exceeding $50,000. This proposal
requires that the Secretary of the Treasury establish standards to
determine when an opinion is appropriate. The fourth proposal modifies
the way that Financial Management Services (FMS) recovers its
transaction fees for processing IRS levies by permitting FMS to add the
fee to the liability being recovered thereby shifting the cost of
collection to the delinquent taxpayer. The offset amount would be
included as part of the 15-percent limit on continuous levies against
income.
Extend IRS authority to fund undercover operations.--The IRS is
permitted to fund certain necessary and reasonable expenses of
undercover operations, placing it on equal footing with other Federal
law enforcement agencies. These undercover operations include
international and domestic money laundering and narcotics operations.
The Administration proposes to extend this funding authority, which
expires on December 31, 2007, through December 31, 2010.
Eliminate the special exclusion from unrelated business taxable income
for gain or loss on the sale or exchange of certain brownfields.--In
general, an organization that is otherwise exempt from Federal income
tax is taxed on income from any trade or business regularly carried on
by the organization that is not substantially related to the
organization's exempt purposes. In addition, income derived from
property that is debt-financed generally is subject to unrelated
business income tax. The 2004 job creation act created a special
exclusion from unrelated business taxable income of gain or loss from
the sale or exchange of certain qualifying brownfield properties. The
exclusion applies regardless of whether the property is debt-financed.
The new provision adds considerable complexity to the Internal Revenue
Code and, because there is no limit on the amount of tax-free gain,
could exempt from tax real estate development considerably beyond mere
environmental remediation. The proposal would eliminate this special
exclusion effective for taxable years beginning after December 31, 2007.
[[Page 263]]
Limit related party interest deductions.--Current law (section 163(j)
of the Internal Revenue Code) denies U.S. tax deductions for certain
interest expenses paid to a related party where: (1) the corporation's
debt-to-equity ratio exceeds 1.5 to 1, and (2) net interest expenses
exceed 50 percent of the corporation's adjusted taxable income (computed
by adding back net interest expense, depreciation, amortization,
depletion, and any net operating loss deduction). If these thresholds
are exceeded, no deduction is allowed for interest in excess of the 50-
percent limit that is paid to a related party or paid to an unrelated
party but guaranteed by a related party, and that is not subject to U.S.
tax. Any interest that is disallowed in a given year is carried forward
indefinitely and may be deductible in a subsequent taxable year. A
three-year carryforward for any excess limitation (the amount by which
interest expense for a given year falls short of the 50-percent limit)
is also allowed. Because of the opportunities available under current
law to reduce inappropriately U.S. tax on income earned on U.S.
operations through the use of foreign related-party debt, the
Administration proposes to tighten the interest disallowance rules of
section 163(j) as follows: (1) the current law 1.5 to 1 debt-to-equity
safe harbor would be eliminated; (2) the adjusted taxable income
threshold for the limitation would be reduced from 50 percent to 25
percent of adjusted taxable income with respect to disqualified interest
other than interest paid to unrelated parties on debt that is subject to
a related-party guarantee, which generally would remain subject to the
current law 50 percent threshold; and (3) the indefinite carryforward
for disallowed interest would be limited to ten years and the three-year
carryforward of excess limitation would be eliminated. The Department of
Treasury also is conducting a study of these rules and the potential for
further modifications to ensure the prevention of inappropriate income-
reduction opportunities.
Repeal telephone tax on local telephone service.--Under prior law, a
three-percent Federal excise tax was imposed on amounts paid for local
telephone service, toll telephone service (essentially long distance
telephone service), and teletypewriter exchange service. In accordance
with multiple court decisions that concluded that the tax did not apply
to long distance services sold at flat per-minute rates for interstate,
intrastate, and international calls, the IRS is no longer collecting tax
on telephone service other than local-only telephone service. The
Administration proposes to repeal the tax on local telephone service
effective for amounts paid pursuant to bills first rendered more than 90
days after enactment of legislation repealing the tax.
Modify financing of the Airport and Airway trust fund.--The
Administration supports a reauthorization proposal that would make the
Federal Aviation Administration's (FAA's) financing system more cost-
based. The FAA's current excise tax system, largely based on taxes on
the price of airline tickets, does not have a direct relationship
between the taxes paid by users and the air traffic control services
provided by the FAA. Under the reauthorization proposal, FAA would
collect user fees from commercial aviation operators for air traffic
control services starting in 2009. For non-commercial users, FAA would
continue to recover its costs for air traffic control services via a
fuel tax. Both commercial and non-commercial users would continue to pay
fuel taxes to support FAA's Airport Improvement Program.
Anticipated receipt of donations to the National Park Service through
the National Park Centennial Challenge Fund.--The President's National
Parks Centennial Challenge encourages the public to increase donations
to national parks by proposing to match contributions for signature
projects and programs on a dollar-for-dollar basis up to $100 million a
year for ten years. As part of a broader initiative to prepare for the
National Park Service Centennial in 2016, this Challenge continues the
National Park Service's legacy of leveraging philanthropic investment
for the benefit of our national parks.
Transition from the non-foreign cost-of-living adjustment (COLA) to
locality pay for employees in non-foreign areas.--Federal employees
working outside the continental United States in Alaska, Hawaii or the
US territories presently receive a COLA, which is an untaxed annual pay
adjustment that is not creditable for retirement. By transitioning to
locality pay, Federal employees in the non-foreign areas will contribute
a larger percentage of their pay into the Federal retirement fund as
locality pay is retirement-creditable. The proposal would establish a
yearly reduction in the COLA, offset by a yearly increase in applicable
locality pay, with the intent of eliminating the COLA over seven years.
IMPROVE UNEMPLOYMENT INSURANCE
Strengthen the financial integrity of the unemployment insurance
system by reducing improper benefit payments and tax avoidance.--The
Administration has a multi-part proposal to strengthen the financial
integrity of the unemployment insurance (UI) system and to encourage the
early reemployment of UI beneficiaries. The Administration's proposal
will boost States' ability to recover benefit overpayments and deter tax
evasion schemes by permitting them to use a portion of recovered funds
to expand enforcement efforts in these areas. In addition, the proposal
would require States to impose a monetary penalty on UI benefit fraud,
which would be used to reduce overpayments; make it easier for States to
use private collection agencies in the recovery of hard-to-collect
overpayments and delinquent employer taxes; require States to charge
employers found to be at fault when their actions lead to overpayments;
permit collection of delinquent UI overpayments and employer taxes
through garnishment of Federal tax refunds; and improve the
[[Page 264]]
accuracy of hiring data in the National Directory of New Hires, which
would reduce benefit overpayments. The Administration's proposal would
also permit States to request waivers of certain Federal requirements in
order to carry out demonstration projects that improve the
administration of the UI program, such as speeding reemployment of UI
beneficiaries. These efforts to strengthen the financial integrity of
the UI system and encourage early reemployment of UI beneficiaries will
keep State UI taxes down and improve the solvency of the State trust
funds.
Extend unemployment insurance surtax.--The Federal unemployment tax on
employers is scheduled to drop from 0.8 percent to 0.6 percent with
respect to wages paid after December 31, 2007. The 0.8 percent rate is
proposed to be extended for five years, through December 31, 2012.
MODIFY ENERGY PROVISIONS
Repeal reduced recovery period for natural gas distribution lines.--
The Energy Policy Act of 2005 reduced the recovery period for new
natural gas distribution lines that are placed in service before January
1, 2011 from 20 years to 15 years. The Administration proposes to repeal
this provision for natural gas distribution lines placed in service
after December 31, 2007.
Modify amortization for certain geological and geophysical
expenditures.--Geological and geophysical expenditures (G&G costs) are
costs incurred by a taxpayer for the purpose of obtaining and
accumulating data that will serve as the basis for the acquisition and
retention of mineral properties by taxpayers exploring for minerals.
Under the Energy Policy Act of 2005, G&G costs paid or incurred in
taxable years beginning after August 8, 2005, in connection with oil and
gas exploration in the United States, could be amortized over two years.
The Tax Increase Prevention and Reconciliation Act of 2006 increased the
amortization period to five years for G&G costs paid or incurred by
certain major integrated oil companies after May 17, 2006. This five-
year amortization rule applies only to integrated oil companies that
have an average daily worldwide production of crude oil of at least
500,000 barrels for the taxable year, have gross receipts in excess of
$1 billion in the last taxable year ending during calendar year 2005,
and either are a crude oil refiner or have an ownership interest in a
crude oil refiner of 15 percent or more. The Administration proposes to
increase the amortization period to five years for all companies,
effective for amounts paid or incurred in taxable years beginning after
December 31, 2007.
PROMOTE TRADE
Implement free trade agreements.--Free trade agreement negotiations
with Panama were completed, with the expectation that implementation
could begin as early as FY 2008. The FTA signed with Peru and the
recently completed agreement with Colombia could also begin
implementation in FY 2008. Free trade agreements are expected to be
completed with Korea, Malaysia, and the United Arab Emirates (UAE), with
implementation to begin in FY 2009. These agreements will continue the
Administration's effort to use free trade agreements to benefit U.S.
consumers and producers as well as strengthen the economies of our
partner countries.
Establish Reconstruction Opportunity Zones (ROZs) in Pakistan and
Afghanistan.--In March 2006, the President announced his intention to
establish ROZs in Afghanistan and the border regions of Pakistan. ROZs
are a critical part of the Administration's broader counterterrorism
strategy in these areas, designed to connect isolated regions to the
global economy and create vital employment opportunities in territories
prone to extremism. The creation of ROZs will encourage investment and
economic development in these areas by granting duty-free entry to the
United States for certain goods produced in designated territories. By
stimulating economic activity in remote and underdeveloped regions, ROZs
can also serve as a powerful catalyst for peace, prosperity, stability,
growth and good governance. In early 2007, the Administration will work
closely with Congress and private sector stakeholders to implement this
important initiative.
EXTEND EXPIRING PROVISIONS
Extend AMT relief for individuals.--A temporary provision of current
law increased the AMT exemption amounts to $42,500 for single taxpayers,
$62,550 for married taxpayers filing a joint return and surviving
spouses, and $31,275 for married taxpayers filing a separate return and
estates and trusts. Effective for taxable years beginning after December
31, 2006, the AMT exemption amounts decline to $33,750 for single
taxpayers, $45,000 for married taxpayers filing a joint return and
surviving spouses, and $22,500 for married taxpayers filing a separate
return and estates and trusts. A temporary provision of current law
permits nonrefundable personal tax credits to offset both the regular
tax and the AMT for taxable years beginning before January 1, 2007.
The Administration proposes to increase the AMT exemption amounts to
$43,900 for single taxpayers, $65,350 for married taxpayers filing a
joint return, and $32,675 for married taxpayers filing a separate return
and estates and trusts through taxable year 2007 to prevent the number
of AMT taxpayers from increasing. Non-refundable personal tax credits
also would be allowed to offset both the regular tax and the AMT through
taxable year 2007.
Extend permanently the research and experimentation (R&E) tax
credit.--The Administration proposes to extend permanently the tax
credits for research and experimentation expenditures, which are
[[Page 265]]
scheduled to expire with respect to expenditures incurred after December
31, 2007.
Extend the work opportunity tax credit.--The work opportunity tax
credit provides incentives for hiring individuals from certain targeted
groups. The credit applies to wages paid to qualified individuals who
begin work for the employer before January 1, 2008. The Administration
proposes to extend the credit for one year, making it applicable to
wages paid to qualified individuals who begin work after December 31,
2007 and before January 1, 2009.
Extend the first-time homebuyer credit for the District of Columbia.--
A one-time nonrefundable $5,000 credit is available to purchasers of a
principal residence in the District of Columbia who have not owned a
residence in the District during the year preceding the purchase. The
credit phases out for taxpayers with modified adjusted gross income
between $70,000 and $90,000 ($110,000 and $130,000 for joint returns).
The credit does not apply to purchases after December 31, 2007. The
Administration proposes to extend the credit for one year, making the
credit available with respect to purchases after December 31, 2007 and
before January 1, 2009.
Extend authority to issue Qualified Zone Academy Bonds.--Current law
allows State and local governments to issue ``qualified zone academy
bonds,'' the interest on which is effectively paid by the Federal
government in the form of an annual income tax credit. The proceeds of
the bonds have to be used for teacher training, purchases of equipment,
curriculum development, or rehabilitation and repairs at certain public
school facilities. A nationwide total of $400 million of qualified zone
academy bonds were authorized to be issued in each of calendar years
1998 through 2007. In addition, unused authority arising in 1998 and
1999 can be carried forward for up to three years and unused authority
arising in 2000 through 2007 can be carried forward for up to two years.
The Administration proposes to authorize the issuance of an additional
$400 million of qualified zone academy bonds in calendar year 2008;
unused authority could be carried forward for up to two years. Reporting
of issuance would be required.
Extend deferral of gains from sales of electric transmission
property.--Generally, the gain on the sale of business assets is subject
to current income tax unless a special rule provides for nonrecognition
or deferral of the gain. One such special rule applies to qualifying
electric transmission transactions. Under this rule, a taxpayer may
elect to recognize the gain from a qualifying electric transmission
transaction ratably over the eight-year period beginning with the year
of the transaction. Deferral is allowed only with respect to proceeds
that are used to purchase other gas or electric utility property during
the four-year period beginning on the date of the transaction (the
reinvestment period). A sale or other disposition of property is a
qualifying electric transmission transaction if: (1) the property is
used in the trade or business of providing electric transmission
services or is an ownership interest in a entity whose principal trade
or business is providing electric transmission services, and (2) the
sale or other disposition is to an independent transmission company and
occurs before January 1, 2008. In general, whether the purchaser
qualifies as an independent transmission company depends on
determinations by the Federal Energy Regulatory Commission (FERC) or, in
the case of facilities subject to the jurisdiction of the Public Utility
Commission of Texas, by that Commission. The special rule allowing the
deferral of tax on the gain from the sale or disposition of electric
transmission property would be extended for one year, allowing taxpayers
to elect deferral with respect to sales or dispositions that occur
before January 1, 2009.
Extend provisions permitting disclosure of tax return information
relating to terrorist activity.--The disclosure of tax return
information relating to terrorism is permitted in two situations. The
first is when an executive of a Federal law enforcement or intelligence
agency has reason to believe that the return information is relevant to
a terrorist incident, threat or activity and submits a written request.
The second is when the IRS wishes to apprise a Federal law enforcement
agency of a terrorist incident, threat or activity. The Administration
proposes to extend this disclosure authority, which expires on December
31, 2007, through December 31, 2008.
Extend excise tax on coal at current rates.--Excise taxes levied on
coal mined and sold for use in the United States are deposited in the
Black Lung Disability Trust Fund. Amounts deposited in the Fund are used
to cover the cost of program administration and compensation, medical,
and survivor benefits to eligible miners and their survivors, when mine
employment terminated prior to 1970 or when no mine operator can be
assigned liability. Current tax rates on coal sold by a producer are
$1.10 per ton of coal from underground mines and $0.55 per ton of coal
from surface mines; however, these rates may not exceed 4.4 percent of
the price at which the coal is sold. Effective for coal sold after
December 31, 2013, the tax rates on coal from underground mines and
surface mines will decline to $0.50 per ton and $0.25 per ton,
respectively, and will be capped at 2 percent of the price at which the
coal is sold. The Administration proposes to repeal the reduction in
these tax rates effective for sales after December 31, 2013, and keep
current rates in effect until the Black Lung Disability Trust Fund debt
is repaid.
[[Page 266]]
Extend the exception for retirement plan distributions provided
individuals called to active duty for at least 179 days.--Under current
law, a taxpayer who receives a distribution from a qualified retirement
plan prior to age 59\1/2\, death or disability is subject to a 10-
percent early withdrawal tax unless a specific exception to the tax
applies. One of the exceptions to the tax applies to qualified reservist
distributions. An individual who receives a qualified reservist
distribution may, at any time during a two-year period beginning on the
day after the end of the active duty period, make contributions to an
IRA in an amount not exceeding the amount of the qualified reservist
distribution. Such contributions are not subject to the dollar
limitations otherwise applicable to contributions to IRAs. The exception
to the tax for qualified reservist distributions applies to individuals
ordered or called to active duty after September 11, 2001 and before
December 31, 2007. The Administration proposes to extend the exception
to individuals ordered or called to active duty before December 31,
2008.
Table 17-3. EFFECT OF PROPOSALS ON RECEIPTS
(In millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2007 2008 2009 2010 2011 2012 2008-12 2008-17
--------------------------------------------------------------------------------------------------------------------------------------------------------
Make Permanent Certain Tax Relief Enacted in 2001 and 2003
(assumed in the baseline):
Dividends tax rate structure............................... 344 683 695 -3,595 -13,789 1,491 -14,515 -89,973
Capital gains tax rate structure........................... ......... ......... ......... -3,405 -17,477 -7,269 -28,151 -79,059
Expensing for small business............................... ......... ......... ......... -3,728 -4,947 -3,376 -12,051 -20,158
Marginal individual income tax rate reductions............. ......... ......... ......... ......... -71,892 -113,251 -185,143 -793,780
Child tax credit \1\....................................... ......... ......... ......... ......... -5,265 -21,128 -26,393 -135,380
Marriage penalty relief \1\................................ ......... ......... ......... ......... -5,380 -7,971 -13,351 -41,317
Education incentives....................................... ......... ......... ......... ......... -739 -1,336 -2,075 -9,673
Repeal of estate and generation-skipping transfer taxes, -156 -1,373 -2,290 -3,067 -26,845 -57,652 -91,227 -442,490
and modification of gift taxes............................
Other incentives for families and children................. ......... ......... ......... 6 -179 -866 -1,039 -5,341
----------------------------------------------------------------------------------------
Total, make permanent certain tax relief enacted in 2001 188 -690 -1,595 -13,789 -146,513 -211,358 -373,945 -1,617,171
and 2003................................................
Tax Incentives:
Simplify and encourage saving:
Expand tax-free savings opportunities...................... ......... 1,527 3,545 3,023 1,075 -1,314 7,856 -592
Consolidate employer-based savings accounts................ ......... -80 -120 -132 -141 -150 -623 -1,484
----------------------------------------------------------------------------------------
Total, simplify and encourage saving..................... ......... 1,447 3,425 2,891 934 -1,464 7,233 -2,076
Encourage entrepreneurship and investment:
Increase expensing for small business...................... ......... -1,597 -2,180 -1,541 -1,135 -847 -7,300 -10,095
Invest in health care:
Provide a flat $15,000 deduction for family coverage ......... ......... -31,433 -38,892 -30,843 -20,033 -121,201 5,150
($7,500 for individual coverage) for those with and who
purchase health insurance \1\.............................
Expand and make health savings accounts (HSAs) more ......... -318 -593 -784 -937 -1,037 -3,669 -10,366
flexible..................................................
Improve the Health Coverage Tax Credit \1\................. ......... -1 -3 -4 -5 -5 -18 -51
Allow the orphan drug tax credit for certain pre- ......... ......... ......... ......... ......... ......... ......... -1
designation expenses......................................
----------------------------------------------------------------------------------------
Total, invest in health care............................. ......... -319 -32,029 -39,680 -31,785 -21,075 -124,888 -5,268
Provide incentives for charitable giving:
Extend permanently tax-free withdrawals from IRAs for ......... -120 -255 -235 -171 -147 -928 -1,867
charitable contributions..................................
Extend permanently the enhanced charitable deduction for ......... -44 -96 -106 -116 -127 -489 -1,345
contributions of food inventory...........................
Extend permanently the deduction for corporate donations of ......... -50 -118 -147 -154 -162 -631 -1,570
computer technology.......................................
Permanently increase limits on contributions of property ......... -48 -35 -22 -18 -21 -144 -265
interests made for conservation purposes..................
Extend permanently basis adjustment to stock of S ......... -3 -15 -21 -25 -28 -92 -301
corporations contributing appreciated property............
Reform excise tax based on investment income of private ......... -61 -91 -97 -103 -110 -462 -1,163
foundations...............................................
Repeal the $150 million limitation on qualified 501(c)(3) ......... -2 -3 -9 -13 -14 -41 -104
bonds.....................................................
Repeal certain restrictions on the use of qualified ......... -2 -5 -10 -17 -24 -58 -286
501(c)(3) bonds for residential rental property...........
----------------------------------------------------------------------------------------
Total, provide incentives for charitable giving.......... ......... -330 -618 -647 -617 -633 -2,845 -6,901
Strengthen education:
Extend permanently the above-the-line deduction for ......... -18 -180 -183 -185 -188 -754 -1,739
qualified out-of-pocket classroom expenses................
[[Page 267]]
Allow the saver's credit for contributions to qualified ......... -63 -163 -176 -189 -200 -791 -1,966
tuition programs..........................................
----------------------------------------------------------------------------------------
Total, strengthen education.............................. ......... -81 -343 -359 -374 -388 -1,545 -3,705
Protect the environment:
Extend permanently expensing of brownfields remediation 61 -244 -400 -352 -342 -331 -1,669 -2,851
costs.....................................................
Eliminate the volume cap for private activity bonds for ......... -1 -3 -5 -9 -13 -31 -184
water infrastructure......................................
----------------------------------------------------------------------------------------
Total, protect the environment........................... 61 -245 -403 -357 -351 -344 -1,700 -3,035
Restructure assistance to New York City for continued
recovery from the attacks of September 11th:
Provide tax incentives for transportation infrastructure... ......... -200 -200 -200 -200 -200 -1,000 -2,000
----------------------------------------------------------------------------------------
Total, tax incentives.................................... 61 -1,325 -32,348 -39,893 -33,528 -24,951 -132,045 -33,080
Simplify the Tax Laws for Families:
Clarify uniform definition of a child \1\.................... 17 64 48 31 40 15 198 350
Simplify EITC eligibility requirement regarding filing ......... 31 -25 -22 -22 -21 -59 -164
status, presence of children, and work and immigration
status \1\..................................................
Reduce computational complexity of refundable child tax ......... ......... ......... ......... ......... ......... ......... ..........
credit \1\..................................................
----------------------------------------------------------------------------------------
Total, simplify the tax laws for families.................. 17 95 23 9 18 -6 139 186
Improve Tax Compliance: \5\
Expand information reporting................................. ......... 232 1,075 1,848 2,488 2,903 8,546 28,849
Improve compliance by businesses............................. ......... 143 91 38 21 20 313 421
Strengthen tax administration................................ ......... ......... ......... 1 1 1 3 17
Expand penalties............................................. ......... 3 5 11 18 20 57 178
----------------------------------------------------------------------------------------
Total, improve tax compliance.............................. ......... 378 1,171 1,898 2,528 2,944 8,919 29,465
Improve Tax Administration and Other Miscellaneous Proposals:
Implement IRS administrative reforms and extend IRS authority ......... ......... ......... ......... ......... ......... ......... ..........
to fund undercover operations \4\...........................
Eliminate the special exclusion from unrelated business ......... 2 14 28 28 23 95 126
taxable income for gain or loss on the sale or exchange of
certain brownfields.........................................
Limit related party interest deductions...................... 86 148 155 163 171 180 817 1,859
Repeal excise tax on local telephone service \2\............. -552 -463 -148 -74 -74 -74 -833 -1,211
Modify financing of the Airport and Airway trust fund \2\.... ......... ......... -6,407 -6,705 -7,005 -7,326 -27,443 -69,732
Anticipated receipt of donations to the National Park Service ......... 100 100 100 100 100 500 1,000
through the National Park Centennial Challenge Fund.........
Transition from the non-foreign COLA to locality pay for ......... 1 2 3 4 5 15 50
employees in non-foreign areas..............................
----------------------------------------------------------------------------------------
Total, improve tax administration and other miscellaneous -466 -212 -6,284 -6,485 -6,776 -7,092 -26,849 -67,908
proposals \2\.............................................
Improve Unemployment Insurance:
Strengthen the financial integrity of the unemployment ......... ......... 29 29 -16 -64 -22 -1,469
insurance system by reducing improper benefit payments and
tax avoidance \2\...........................................
Extend unemployment insurance surtax \2\..................... ......... 1,073 1,542 1,580 1,617 1,633 7,445 1,526
----------------------------------------------------------------------------------------
Total, improve unemployment insurance \2\.................. ......... 1,073 1,571 1,609 1,601 1,569 7,423 57
Modify Energy Provisions:
Repeal reduced recovery period for natural gas distribution ......... 52 88 107 119 106 472 906
lines.......................................................
Modify amortization for certain geological and geophysical ......... 15 55 81 67 56 274 582
expenditures................................................
Indirect effect of energy proposals \3\...................... ......... -45 -93 -163 -92 -98 -491 -1,019
----------------------------------------------------------------------------------------
Total, modify energy provisions............................ ......... 22 50 25 94 64 255 469
Promote Trade:
Implement free trade agreements and modify other trade- ......... -241 -502 -760 -994 -1,240 -3,737 -13,072
related provisions \2\......................................
Extend Expiring Provisions:
AMT relief for individuals................................... -9,123 -47,922 11,431 ......... ......... ......... -36,491 -36,491
Research & Experimentation (R&E) tax credit.................. ......... -3,221 -7,071 -9,145 -10,601 -11,799 -41,837 -117,309
Work opportunity tax credit.................................. ......... -71 -192 -162 -80 -51 -556 -582
First-time homebuyer credit for DC........................... ......... -1 -19 ......... ......... ......... -20 -20
Authority to issue Qualified Zone Academy Bonds.............. ......... -3 -8 -13 -18 -20 -62 -162
Deferral of gains from sales of electric transmission -63 -48 -52 -65 -39 5 -199 41
property....................................................
Disclosure of tax return information related to terrorist ......... ......... ......... ......... ......... ......... ......... ..........
activity \4\................................................
Excise tax on coal \2\....................................... ......... ......... ......... ......... ......... ......... ......... 1,081
[[Page 268]]
Exception for retirement plan distributions provided -* -* -* -* -* -* -* -*
individuals called to active duty for at least 179 days.....
----------------------------------------------------------------------------------------
Total, extend expiring provisions \2\...................... -9,186 -51,266 4,089 -9,385 -10,738 -11,865 -79,165 -153,442
Total budget proposals, including proposals assumed in the -9,386 -52,166 -33,825 -66,771 -194,308 -251,935 -599,005 -1,854,496
baseline \2\................................................
Total budget proposals, excluding proposals assumed in the -9,574 -51,476 -32,230 -52,982 -47,795 -40,577 -225,060 -237,325
baseline \2\................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------
* $500,000 or less.
\1\ Affects both receipts and outlays. Only the receipt effect is shown here. For the outlay effect, see summary Table S-5 of the Budget volume.
\2\ Net of income offsets.
\3\ Indirect effect on receipts of proposed alternative fuels and fuel efficiency standards. These proposals are discussed in the Energy chapter of the
Budget volume.
\4\ No net budgetary impact.
\5\ ``Tax gap''-related proposals.
[[Page 269]]
Table 17-4. RECEIPTS BY SOURCE
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
Source 2006 -----------------------------------------------------------------------
Actual 2007 2008 2009 2010 2011 2012
----------------------------------------------------------------------------------------------------------------
Individual income taxes
(federal funds):
Existing law.............. 1,043,908 1,177,703 1,294,636 1,349,248 1,476,448 1,673,666 1,819,724
Proposed legislation.... .......... -8,857 -48,022 -18,111 -48,131 -156,377 -183,157
-----------------------------------------------------------------------------------
Total individual income 1,043,908 1,168,846 1,246,614 1,331,137 1,428,317 1,517,289 1,636,567
taxes......................
===================================================================================
Corporation income taxes:
Federal funds:
Existing law............ 353,914 341,867 318,385 326,647 334,665 350,891 377,546
Proposed legislation.. .......... 190 -3,444 -6,837 -9,206 -10,314 -10,910
-----------------------------------------------------------------------------------
Total Federal funds 353,914 342,057 314,941 319,810 325,459 340,577 366,636
corporation income taxes.
-----------------------------------------------------------------------------------
Trust funds:
Hazardous substance 1 .......... .......... .......... .......... .......... ..........
superfund..............
-----------------------------------------------------------------------------------
Total corporation income 353,915 342,057 314,941 319,810 325,459 340,577 366,636
taxes......................
===================================================================================
Social insurance and
retirement receipts (trust
funds):
Employment and general
retirement:
Old-age and survivors 520,069 542,098 576,237 608,106 643,935 680,272 714,061
insurance (Off-budget).
Disability insurance 88,313 92,032 97,848 103,264 109,347 115,518 121,256
(Off-budget)...........
Hospital insurance...... 177,429 185,163 198,726 208,700 221,160 233,811 245,766
Railroad retirement:
Social Security 1,894 1,993 2,073 2,137 2,203 2,258 2,319
equivalent account...
Rail pension and 2,338 2,364 2,441 2,529 2,473 2,507 2,712
supplemental annuity.
-----------------------------------------------------------------------------------
Total employment and 790,043 823,650 877,325 924,736 979,118 1,034,366 1,086,114
general retirement.......
-----------------------------------------------------------------------------------
On-budget............... 181,661 189,520 203,240 213,366 225,836 238,576 250,797
Off-budget.............. 608,382 634,130 674,085 711,370 753,282 795,790 835,317
-----------------------------------------------------------------------------------
Unemployment insurance:
Deposits by States \1\ . 35,938 37,574 37,584 36,792 37,203 38,150 39,352
Proposed legislation.. .......... .......... .......... 36 36 -20 -108
Federal unemployment 7,394 7,323 6,183 5,785 5,925 6,065 6,207
receipts \1\ ..........
Proposed legislation.. .......... .......... 1,341 1,928 1,975 2,022 2,069
Railroad unemployment 88 88 95 106 112 114 122
receipts \1\ ..........
-----------------------------------------------------------------------------------
Total unemployment 43,420 44,985 45,203 44,647 45,251 46,331 47,642
insurance................
-----------------------------------------------------------------------------------
Other retirement:
Federal employees' 4,308 4,704 4,633 4,798 4,909 4,964 4,972
retirement--employee
share..................
Proposed legislation.. .......... .......... 1 2 3 4 5
Non-Federal employees 50 38 33 31 28 26 23
retirement \2\ ........
-----------------------------------------------------------------------------------
Total other retirement.... 4,358 4,742 4,667 4,831 4,940 4,994 5,000
-----------------------------------------------------------------------------------
Total social insurance and 837,821 873,377 927,195 974,214 1,029,309 1,085,691 1,138,756
retirement receipts........
===================================================================================
On-budget................. 229,439 239,247 253,110 262,844 276,027 289,901 303,439
Off-budget................ 608,382 634,130 674,085 711,370 753,282 795,790 835,317
===================================================================================
Excise taxes:
Federal funds:
Alcohol taxes........... 8,484 8,614 8,798 8,953 9,109 9,318 9,524
Proposed legislation.. .......... .......... -76 -26 .......... .......... ..........
Tobacco taxes........... 7,710 7,605 7,496 7,393 7,298 7,208 7,123
Transportation fuels tax -2,386 -2,960 -3,459 -4,101 -4,798 -1,227 234
Proposed legislation.. .......... .......... -74 -139 -190 -57 ..........
Telephone and teletype 4,897 -10,892 -1,712 197 100 100 100
services...............
Proposed legislation.. .......... -736 -616 -197 -100 -100 -100
Other Federal fund 3,755 1,493 1,932 1,987 2,057 2,128 2,208
excise taxes...........
Proposed legislation.. .......... .......... 15 -121 -155 -163 -172
-----------------------------------------------------------------------------------
Total Federal fund excise 22,460 3,124 12,304 13,946 13,321 17,207 18,917
taxes....................
-----------------------------------------------------------------------------------
[[Page 270]]
Trust funds:
Highway................. 38,378 39,707 40,858 41,911 42,696 43,402 44,045
Proposed legislation.. .......... .......... 12 14 -27 -65 -131
Airport and airway...... 10,590 11,426 12,094 12,808 13,556 14,341 15,162
Proposed legislation.. .......... .......... .......... -8,485 -8,882 -9,279 -9,706
Sport fish restoration 519 547 564 581 600 619 638
and boating safety.....
Tobacco assessments..... 891 960 960 960 960 960 960
Black lung disability 607 624 629 640 659 679 692
insurance..............
Inland waterway......... 81 84 85 86 87 88 89
Oil spill liability..... 54 199 205 214 225 233 244
Vaccine injury 184 195 196 198 199 202 203
compensation...........
Leaking underground 197 196 199 204 206 210 212
storage tank...........
-----------------------------------------------------------------------------------
Total trust funds excise 51,501 53,938 55,802 49,131 50,279 51,390 52,408
taxes....................
-----------------------------------------------------------------------------------
Total excise taxes.......... 73,961 57,062 68,106 63,077 63,600 68,597 71,325
===================================================================================
Estate and gift taxes:
Federal funds............. 27,877 25,260 26,786 28,757 22,920 20,407 48,691
Proposed legislation.... .......... 17 -1,081 -1,318 -1,179 -18,733 -48,170
-----------------------------------------------------------------------------------
Total estate and gift taxes. 27,877 25,277 25,705 27,439 21,741 1,674 521
===================================================================================
Customs duties:
Federal funds............. 23,533 25,430 28,105 29,786 32,066 33,837 35,501
Proposed legislation.... .......... .......... -322 -671 -1,015 -1,326 -1,655
Trust funds............... 1,277 1,336 1,440 1,536 1,637 1,740 1,849
-----------------------------------------------------------------------------------
Total customs duties........ 24,810 26,766 29,223 30,651 32,688 34,251 35,695
===================================================================================
MISCELLANEOUS RECEIPTS: \3\
Miscellaneous taxes....... 423 534 542 549 558 567 577
Exercise of warrants...... 118 .......... .......... .......... .......... .......... ..........
United Mine Workers of 119 72 65 44 24 5 3
America combined benefit
fund.....................
Deposit of earnings, 29,945 32,638 36,115 37,625 39,040 40,680 42,804
Federal Reserve System...
Defense cooperation....... 12 8 8 8 8 8 8
Fees for permits and 10,226 10,083 10,468 10,600 10,806 11,020 11,213
regulatory and judicial
services.................
Fines, penalties, and 3,796 3,243 3,254 2,910 2,929 2,948 2,969
forfeitures..............
Gifts and contributions... 378 189 194 199 201 203 206
Proposed legislation.... .......... .......... 100 100 100 100 100
Refunds and recoveries.... -55 -56 -56 -56 -56 -56 -56
-----------------------------------------------------------------------------------
Total miscellaneous receipts 44,962 46,711 50,690 51,979 53,610 55,475 57,824
===================================================================================
Total budget receipts....... 2,407,254 2,540,096 2,662,474 2,798,307 2,954,724 3,103,554 3,307,324
On-budget................. 1,798,872 1,905,966 1,988,389 2,086,937 2,201,442 2,307,764 2,472,007
Off-budget................ 608,382 634,130 674,085 711,370 753,282 795,790 835,317
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MEMORANDUM
Federal funds............. 1,517,453 1,635,493 1,681,337 1,774,042 1,874,190 1,965,503 2,115,280
Trust funds............... 616,863 653,127 692,062 709,365 747,034 789,414 827,684
Interfund transactions.... -335,444 -382,654 -385,010 -396,470 -419,782 -447,153 -470,957
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Total on-budget............. 1,798,872 1,905,966 1,988,389 2,086,937 2,201,442 2,307,764 2,472,007
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Off-budget (trust funds).... 608,382 634,130 674,085 711,370 753,282 795,790 835,317
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Total....................... 2,407,254 2,540,096 2,662,474 2,798,307 2,954,724 3,103,554 3,307,324
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\1\ Deposits by States cover the benefit part of the program. Federal unemployment receipts cover administrative
costs at both the Federal and State levels. Railroad unemployment receipts cover both the benefits and
adminstrative costs of the program for the railroads.
\2\ Represents employer and employee contributions to the civil service retirement and disability fund for
covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal
government.
\3\ Includes both Federal and trust funds.