Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)

What Is the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)?

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) is a piece of legislation that was signed by President George W. Bush in May 2006, which contains several revisions to pre-existing tax laws, affecting both individuals and corporations.

Understanding the Tax Increase Prevention and Reconciliation Act of 2005

TIPRA includes tax revisions concerning investor-related tax breaks, business provisions, individual retirement account (IRAs), and alternative minimum taxes.

The provisions in TIPRA are beneficial for the vast majority of taxpayers. For example, under TIPRA reduced capital gains tax rates were extended until 2010, and higher exemption amounts for the alternative minimum tax (AMT) enable qualified taxpayers to pay a lower amount of taxes in those areas.

TIPRA also includes some retirement-related benefits. For example, TIPRA enables taxpayers with modified adjusted gross income (AGI) in excess of $100,000 to be eligible for a Roth IRA conversion. A Roth IRA conversion refers to the process of converting a traditional IRA to a Roth IRA. The process generally requires an individual to pay income tax on the IRA contributions. In this process, the taxable amount that is converted is added to one’s income taxes, and their regular income rate is applied to their total income.

Alternative Minimum Taxes

One of the most notable provisions of TIPRA is its extension of the AMT reduction. An alternative minimum tax recalculates income tax after adding certain tax preference items back into AGI. AMT calculates taxable income after allowed deductions, and preferential deductions are added back into the taxpayer's income to calculate their alternative minimum taxable income (AMTI). The AMT exemption is then subtracted to determine the final taxable figure.

The AMT exemption amount is the amount of AMTI that is exempted from AMT. The AMT exemption amount for the tax year 2020 is $72,900 and begins to phase out at $518,400 ($113,400 for married couples filing jointly for whom the exemption begins to phase out at $1,036,800). The 2021 AMT exemption amount will increase to $73,600 ($114,600 if married) and began to phase out at $523,600 ($1,047,200 for married taxpayers filing jointly).

AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. However, the regulation was not originally indexed to inflation or tax cuts, which can cause bracket creep, a condition in which upper-middle-income taxpayers are subject to this tax instead of solely the wealthy taxpayers for which the AMT was invented. This changed however in 2013 when Congress passed a law indexing the AMT exemption amount to inflation.