[JOINT
COMMITTEE PRINT]
DESCRIPTION
OF REVENUE PROVISIONS
CONTAINED
IN THE PRESIDENT'S
FISCAL
YEAR 2007 BUDGET PROPOSAL
Prepared
by the Staff
of the
JOINT
COMMITTEE ON TAXATION
March
2006
U.S.
Government Printing Office
Washington:
2006
JCS-1-06
[JOINT
COMMITTEE PRINT]
DESCRIPTION
OF REVENUE PROVISIONS
CONTAINED
IN THE PRESIDENT'S
FISCAL
YEAR 2007 BUDGET PROPOSAL
Prepared
by the Staff
of the
JOINT
COMMITTEE ON TAXATION
March
2006
U.S.
Government Printing Office
Washington:
2006
JCS-1-06
CONTENTS
Page
INTRODUCTION.............................................................1
I.
MAKING PERMANENT TAX CUTS ENACTED IN 2001 AND 2003....................2
A.
Permanently Extend Certain Provisions Expiring
Under EGTRRA and JGTRRA
......................................................................2
II TAX
INCENTIVES
Provisions
Related to Savings............................................6
1. Expansion
of tax free savings opportunities...........................6
2.
Consolidation of employer-based savings accounts.....................18
3.
Individual development accounts......................................30
B.
Increase Section 179 Expensing.......................................34
C.
Health Care Provisions...............................................37
1.
Facilitate the growth of HSA-eligible health coverage................37
2.
Modify the refundable credit for health insurance costs of eligible
individuals.............................................................51
3.
Expand human clinical trial expenses qualifying for the orphan drug tax
credit..................................................................58
D.
Provisions Relating to Charitable Giving.............................61
1.
Permit tax-free withdrawals from individual retirement arrangements for
charitable
contributions................................................61
2.
Expand and increase the enhanced charitable deduction for
contributions
of
food
inventory..........................................................65
3.
Reform excise tax based on investment income of private foundations 71
4.
Modify tax on unrelated business taxable income of charitable remainder
trusts..................................................................75
5.
Modify the basis adjustment to stock of S corporations contributing
appreciated
............................................................78
6.
Repeal the $150 million limit for qualified 501(c)(3) bonds..........79
7.
Repeal the restrictions on the use of qualified 501(c)(3) bonds
for
residential rental property.........................................81
E Extend the Above-the-Line Deduction for
Qualified Out-of-Pocket
Classroom
Expenses......................................................85
F.
Establish Opportunity Zones..........................................89
G.
Permanently Extend Expensing of Brownfields Remediation Costs........96
H.
Restructure Assistance to New York...................................99
III.SIMPLY
THE TAX LAWS FOR FAMILIES...................................105
A.
Clarify Uniform Definition of Child.................................105
B.
Simplify EIC Eligibility Requirements Regarding Filing Status
Presence
of Children, and Work and Immigrant Status....................111
C.
Reduce Computational Complexity of Refundable
Child Tax
Credit......................................................117
IV.
PROVISIONS RELATED TO THE EMPLOYER-BASED PENSION SYSTEM............120
A.
Provisions Relating to Cash Balance Plans...........................120
B.
Strengthen Funding for Single-Employer Pension Plans................138
1.
Background and summary..............................................138
2.
Funding and deduction rules.........................................139
3. Form
5500, Schedule B actuarial statement and summary annual
report 158
4.
Treatment of grandfathered floor-offset plans.......................163
5. Limitations
on plans funded below target levels.....................165
6.
Eliminate plant shutdown benefits 171
7.
Proposals relating to the Pension Benefit Guaranty Corporation
("PBGC")...............................................................174
C.
Reflect Market Interest Rates in Lump-Sum Payments..................186
V. TAX
SHELTERS, ABUSIVE TRANSACTIONS, AND TAX COMPLIANCE..............190
A.
Combat Abusive Foreign Tax Credit Transactions......................190
B.
Modify the Active Trade or Business Test for Certain Corporate
Divisions..............................................................192
C.
Impose Penalties on Charities that Fail to Enforce
Conservation
Easements.................................................198
D.
Eliminate the Special Exclusion from Unrelated Business Taxable
Income
("UBIT") for Gain or Loss on Sale or Exchange of Certain
Brownfield
Properties..................................................201
E.
Limit Related-Party Interest Deductions.............................211
F.
Modify Certain Tax Rules for Qualified Tuition Programs.............214
VI.TAX
ADMINISTRATION PROVISIONS AND UNEMPLOYMENT INSURANCE............223
A. IRS
Restructuring and Reform Act of 1998............................223
1.
Modify section 1203 of the IRS Restructuring and
Reform
Act of 1998.....................................................223
2.
Modifications with respect to frivolous returns and
submissions............................................................226
3. Termination
of installment agreements...............................228
4.
Consolidate review of collection due process cases in the United
States
Tax Court.......................................................230
5.
Office of Chief Counsel review of offers in compromise..............231
B.
Initiate Internal Revenue Service ("IRS") Cost Saving
Measures......233
1.
Allow the Financial Management Service to retain transaction
fees
from levied amounts...............................................233
2.
Expand the authority to require electronic filing by large
businesses
and exempt organizations....................................233
C.
Other Provisions....................................................235
1.
Allow Internal Revenue Service ("IRS") to access information
in the
National
Directory
of New Hires ("NDNH")........................................235
2.
Extension of IRS authority to fund undercover operations............236
D.
Reduce the Tax Gap..................................................238
1.
Implement standards clarifying when employee leasing companies can be held
liable
for their clients' Federal employment taxes.....................238
2.
Increased information reporting on payment card transactions........242
3.
Increased information reporting for certain government payments for goods
and
services...........................................................243
4.
Amend collection due process procedures for employment tax
liabilities............................................................245
5.
Expand the signature requirement and penalty provisions applicable to paid
preparers..............................................................247
E Strengthen the Financial Integrity of
Unemployment Insurance........249
1.
Reduce improper benefit payments and tax avoidance..................249
2.
Extension of Federal Unemployment Surtax............................251
VII.
MODIFY ENERGY POLICY ACT OF 2005..................................253
A.
Repeal Temporary 15-Year Recovery Period for Natural Gas
Distribution
Lines.....................................................253
B.
Modify Amortization for Certain Geological and Geophysical
Expenditures...........................................................256
VIII.EXPIRING
PROVISIONS...............................................258
A.
Extend Alternative Minimum Tax Relief for Individuals...............258
B.
Permanently Extend the Research and Experimentation
("R&E")
Tax Credit.....................................................261
C.
Extend and Modify the Work Opportunity Tax Credit and
Welfare-to-Work
Tax Credit.............................................278
D.
Extend District of Columbia Homebuyer Tax Credit....................286
E.
Extend Authority to Issue Qualified Zone Academy Bonds..............289
F.
Extend Provisions Permitting Disclosure of Tax Return
Information
Relating to Terrorist Activity.............................294
G.
Permanently Extend and Expand Disclosure of Tax Return
Information
for Administration of Student Loans........................300
H.
Extend Excise Tax on Coal at Current Rates..........................304
I.
Election to Treat Combat Pay as Earned Income for
Purposes
of the Earned Income Credit...................................306
IX.OTHER
PROVISIONS MODIFYING THE INTERNAL REVENUE CODE................308
A.
Extension of the Rate of Rum Excise Tax Cover Over to Puerto
Rico
and Virgin Islands................................................308
B.
Establish Program of User Fees for Certain Services Provided to
the
Alcohol Industry by the Alcohol and Tobacco Tax and Trade
Bureau.................................................................310
ESTIMATED
BUDGET EFFECTS OF THE REVENUE PROVISIONS CONTAINED
IN THE
PRESIDENT'S FISCAL YEAR 2007 BUDGET PROPOSAL....................314
INTRODUCTION
This
document, prepared by the staff of the
Joint Committee on Taxation,
provides
a description and analysis of the revenue provisions modifying
the
Internal Revenue Code of 1986 (the "Code") that are contained in the
President's
fiscal year 2007 budget proposal, as submitted to the Congress
on
February 6, 2006. The document
generally follows the order of the
proposals
as included in the Department of the Treasury's explanation of
the
President's budget proposal. For each
provision, there is a
description
of present law and the proposal (including effective date), a
reference
to relevant prior budget proposals or recent legislative action,
and an
analysis of policy issues related to the proposal.
I. MAKING PERMANENT TAX CUTS ENACTED IN 2001
AND 2003
A. Permanently Extend Certain Provisions
Expiring
Under
EGTRRA and JGTRRA
Present
Law
The
Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA")
The
Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA")
made a
number of changes to the Federal tax laws, including reducing
individual
tax rates, repealing the estate tax, increasing and expanding
various
child-related credits, providing tax relief to married couples,
providing
additional education-related tax incentives, increasing and
expanding
various pension and retirement-saving incentives, and providing
individuals
relief relating to the alternative minimum tax. However, in
order
to comply with reconciliation procedures under the Congressional
Budget
Act of 1974, EGTRRA included a "sunset" provision, pursuant to which
the
provisions of the Act expire at the end of 2010. Specifically, EGTRRA's
provisions
do not apply for taxable, plan, or limitation years beginning
after
December 31, 2010, or to estates of decedents dying after, or gifts
or
generation-skipping transfers made after, December 31, 2010. EGTRRA
provides
that, as of the effective date of the sunset, both the Code and
the
Employee Retirement Income Security Act of 1974 ("ERISA") will be
applied
as though EGTRRA had never been enacted.
For example, the estate
tax,
which EGTRRA repeals for decedents dying in 2010, will return as to
decedents
dying after 2010, in pre-EGTRRA form, without the various interim
changes
made by the Act (e.g., the rate reductions and exemption
equivalent
amount increases applicable to decedents dying before 2010).
Similarly,
the top individual marginal income tax rate, which EGTRRA
reduced
to 35 percent will return to its pre-EGTRRA level of 39.6 percent
in 2011
under present law. Likewise beginning
in 2011, all other
provisions
of the Code and ERISA will be applied as though the relevant
provisions
of EGTRRA had never been enacted.
The
Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA")
In
general
The
Jobs and Growth Tax Relief Reconciliation Act of 2003 ("JGTRRA")
changed
the expensing of certain depreciable business assets, individual
capital
gains tax rates and the tax rates on dividends received by
individuals. The modifications to the expensing provision
sunset
for
taxable years beginning after December 31, 2007. The capital gains
and
dividend rate provisions sunset for taxable years beginning after
December
31, 2008.
Expensing
provisions
Section
179 provides that the maximum amount a taxpayer may expense, for
taxable
years beginning in 2003 through 2007, is $100,000 of the cost of
qualifying
property placed in service for the taxable year. In general,
qualifying
property is defined as depreciable tangible personal property
that is
purchased for use in the active conduct of a trade or business.
Off-the-shelf
computer software placed in service in taxable years
beginning
before 2008 is treated as qualifying property.
The $100,000
amount
is reduced (but not below zero) by the amount by which the cost of
qualifying
property placed in service during the taxable year exceeds
$400,000.The
$100,000 and $400,000 amounts are indexed for inflation for
taxable
years beginning after 2003 and before 2008.
An
expensing election is made under rules prescribed by the Secretary
(sec.
179(c)(1)). Under Treas. Reg. sec.
1.179-5, applicable to property
placed
in service in taxable years beginning after 2002 and before 2008,
a
taxpayer is permitted to make or revoke an election under section 179
without
the consent of the Commissioner on an amended Federal tax return
for
that taxable year. This amended return must be filed within the time
prescribed
by law for filing an amended return for the taxable year.
For
taxable years beginning in 2008 and thereafter, an expensing election
may be
revoked only with consent of the Commissioner (sec. 179(c)(2)).
Individual
capital gains rates Under JGTRRA, for taxable years beginning
before
January 1, 2009,generally the maximum rate of tax on net capital
gain of
a non-corporate taxpayer is 15 percent.
In addition,
any net
capital gain which otherwise would have been taxed at a 10- or
15-percent
rate generally is taxed at a five-percent rate (zero for taxable
years
beginning after 2007). For taxable years beginning after
December
31, 2008, generally the rates on net capital gain are 20 percent
and 10
percent, respectively. Any gain from
the sale or exchange of
property
held more than five years that would otherwise be taxed at the 10
percent
rate is taxed at an eight percent rate.
Any gain from the sale or
exchange
of property held more than five years and the holding period for
which
began after December 31, 2000, which would otherwise be taxed at a 20
percent
rate is taxed at an 18-percent rate.
Taxation
of dividends received by individuals
Under
rules enacted in JGTRRA, dividends received by a non-corporate
shareholder
from domestic corporations and qualified foreign corporations
generally
are taxed at the same rates that apply to net capital gain.
Thus,
dividends received by an individual, estate, or trust are taxed
at
rates of five (zero for taxable years beginning after 2007) and 15
percent. This treatment applies to taxable years
beginning before
January
1, 2009. For taxable years beginning after December 31, 2008,
dividends
received by a non-corporate shareholder are taxed at the same
rates
as ordinary income.
Description
of Proposal
The
proposal repeals the sunset provisions of EGTRRA and JGTRRA.
Specifically,
the proposal permanently extends all provisions of EGTRRA
that
expire at the end of 2010. Thus, the
estate tax remains repealed
after
2010, and the individual rate reductions and other provisions of
the Act
that are in effect in 2010 will remain in place after 2010.
Also,
the proposal permanently extends the provisions of JGTRRA relating
to
expensing, capital gains, and
dividends.
Effective
date.The proposal is effective on the date of enactment.
Analysis
In
general
The
policy merits of permanently extending the provisions of EGTRRA and
JGTRRA
that sunset depend on considerations specific to each provision.
In
general, however, advocates of eliminating the sunset provisions may
argue
that it was never anticipated that the sunset actually would be
allowed
to take effect, and that eliminating them promptly would promote
stability
and rationality in the tax law. In this
view, if the sunsets
were
eliminated, other rules of EGTRRA and JGTRRA that phase in or phase
out
provisions over the immediately preceding years would be made more
rational. On the other hand, others may argue that
certain provisions
of
EGTRRA and JGTRRA would not have been enacted at all, or would not have
been
phased in or phased out in the same manner, if the sunset provisions
had not
been included in EGTRRA and JGTRRA, respectively.
COMPLEXITY
ISSUES
The
present-law sunset provisions of EGTRRA and JGTRRA arguably contribute
to
complexity by requiring taxpayers to contend with (at least) two
different
possible states of the law in planning their affairs. For
example,
under the sunset provision of EGTRRA, an individual
planning
his or her estate will face very different tax regimes depending
on
whether the individual dies in 2010 (estate tax repealed) or 2011
(estate
tax not repealed). This "cliff
effect" requires taxpayers to plan
an
estate in such a way as to be prepared for both contingencies,
thereby
creating a great deal of complexity. On
the other hand, some may
argue
that this kind of uncertainty is always present to some degree-with
or
without a sunset provision, taxpayers always face some risk that the
Congress
will change a provision of law relevant to the planning
of
their affairs. Others may acknowledge
this fact, but nevertheless
argue
that the sunset provision creates an unusual degree of uncertainty
and
complexity as to the areas covered by the Act, because they consider
it unlikely
that the sunset will actually go into effect.
In this view,
the
sunset provision of EGTRRA leaves taxpayers with less guidance as to
the
future state of the law than is usually available, making it difficult
to
arrange their affairs. In addition to
the complexity created by the
need to
plan for the sunset, uncertainty about the timing and details of
how the
sunset might be eliminated arguably creates further complexity.
Even if
it is assumed that the sunset provisions will take effect, it is
not
clear how the sunsets would apply to certain provisions. It would be
relatively
simple to apply the EGTRRA sunset to some provisions, such as
the
individual rate reductions. With
respect to other provisions,
however,
further guidance would be needed as to the effect of the sunset.
For
example, if the Code will be applied after 2010 as if the Act had never
been
enacted, then one possible interpretation of the pension provisions
is that
contributions made while EGTRRA was in effect will no longer be
valid,
possibly resulting in the disqualification of plans. While this
result
was likely not intended, without further guidance taxpayers may be
unsure
as to the effect of the sunset.
More
broadly, in weighing the overall complexity effects of the present-law
sunsets
and the proposed sunset repeal, some would point out that the
sunset
provisions are not the only feature of EGTRRA and JGTRRA that
generates
"cliff effects" and similar sources of uncertainty and complexity
for
taxpayers. For example, under EGTRRA's
estate tax provisions, a
decedent
dying in 2008 has an exemption equivalent amount of $2 million,
one
dying in 2009 has an exemption equivalent amount of $3.5 million, and
one
dying in 2010 effectively has an infinite exemption but not a complete
"step-up"
in the basis of assets. Thus, the estates of individuals at
certain
wealth levels will incur significant estate tax if they die in
2008,
but none at all if they die in 2009; the estates of individuals at
other
wealth levels will incur significant estate tax if they die in 2009,
but
none at all if they die in 2010. These
discontinuities are not caused
by the
sunset provisions, but they generate a similar sort of uncertainty and
complexity
for many taxpayers. Similar phase-ins
and phase-outs are found
in
other provisions of EGTRRA and generate complexity and uncertainty,
irrespective
of whether EGTRRA as a whole sunsets or not. In light of
these
issues, some may argue that a more detailed reconsideration of EGTRRA
or
certain of its provisions would better serve the goal of tax simplification.
Beyond
phase-ins and phase-outs, some may argue that EGTRRA included other
provisions
that increased the complexity of the Code, and that allowing
those
provisions to expire at the end of 2010 (or effectively requiring that
they be
reconsidered before then) may reduce complexity, albeit
potentially
years in the future. Others would argue
that some of
EGTRRA's
provisions reduced complexity, such as the repeal of the overall
limitation
on itemized deductions and changes relating to the earned income
tax
credit, and that permanently extending these provisions would
contribute
to simplification of the tax laws.
Prior
Action
A
similar proposal was included in the President's fiscal year 2003, 2004,
2005,
and 2006 budget proposals.
II. TAX INCENTIVES
A. Provisions Related to Savings
1. Expansion of tax free savings
opportunities
Present
Law
In
general
Present
law provides for a number of vehicles that permit individuals to
save on
a tax-favored basis. These savings
vehicles have a variety of
purposes,
including encouraging saving for retirement, encouraging saving
for
particular purposes such as education or health care, and encouraging
saving
generally.
The
present-law provisions include individual retirement
arrangements,
qualified retirement plans and similar employer-sponsored
arrangements,
Coverdell education savings accounts, qualified tuition
programs,
health savings accounts, Archer medical savings accounts,annuity
contracts,
and life insurance. Certain of these
arrangements are discussed
in more
detail below.
Individual
retirement arrangements ("IRAs")
In
general
There
are two general types of individual retirement arrangements ("IRAs")
under
present law: traditional IRAs, to which
both deductible and
nondeductible
contributions may be made, and Roth
IRAs. The Federal
income
tax rules regarding each type of IRA (and IRA contributions) differ.
The
maximum annual deductible and nondeductible contributions that can be
made to
a traditional IRA and the maximum contribution that can be made to
a Roth
IRA by or on behalf of an individual varies depending on the
particular
circumstances, including the individual's income. However,
the
contribution limits for IRAs are coordinated so that the maximum annual
contribution
that can be made to all of an individual's IRAs is the lesser
of a
certain dollar amount ($4,000 for 2006) or the individual's
compensation. In the case of a married
couple,contributions can be made up
to the
dollar limit for each spouse if the combined compensation of
the
spouses is at least equal to the contributed amount. An individual who
has
attained age 50 before the end of the taxable year may also make
catch-up
contributions to an IRA. For this
purpose, the dollar limit is
increased
by a certain dollar amount ($1,000 for 2006).
IRA
contributions
generally must be made in cash.
Traditional
IRAs
An
individual may make deductible contributions to a traditional IRA up to
the IRA
contribution limit 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 adjusted gross income over certain levels for the taxable
year. The adjusted gross income phase-out ranges
are: (1) for single
taxpayers,
$50,000 to $60,000; (2) for married taxpayers filing joint
returns,
$75,000 to $85,000 for 2006 and $80,000 to $100,000 for years
after
2006 and (3) for married taxpayers filing separate returns, $0 to
$10,000. If an individual is not an active
participant in an
employer-sponsored
retirement plan, but the individual's spouse is, the
deduction
is phased out for taxpayers with adjusted gross income between
$150,000
and $160,000.
To the
extent an individual cannot or does not make deductible contributions
to an
IRA or contributions to a Roth IRA, the individual may make
nondeductible
contributions to a traditional IRA, subject to the same
limits
as deductible contributions. An
individual who has attained age 50
before
the end of the taxable year may also make nondeductible catch-up
contributions
to an IRA.
An
individual who has attained age 70-½ prior to the close of a year is
not
permitted to make contributions to a traditional IRA.
Amounts
held in a traditional IRA are includible in income when withdrawn,
except
to the extent the withdrawal is a return of nondeductible
contributions. Early withdrawals from an IRA generally are
subject to an
additional
10-percent tax. That is, includible
amounts withdrawn prior
to
attainment of age 59-½ are subject to an additional 10-percent tax,
unless
the withdrawal is due to death or disability, is made in the form
of
certain periodic payments, is used to pay medical expenses in excess of
7.5
percent of adjusted gross income, is used to purchase health insurance
of
certain unemployed individuals, is used for higher education expenses,
or is
used for first-time homebuyer expenses of up to $10,000.
Distributions
from traditional IRAs generally are required to begin by the
April 1
of the year following the year in which the IRA owner attains age
70-½. If an IRA owner dies after minimum required
distributions have
begun,
the remaining interest must be distributed at least as rapidly as
under
the minimum distribution method being used as of the date of death.
If the
IRA owner dies before minimum distributions have begun, then the
entire
remaining interest must generally be distributed within five years
of the
IRA owner's death. The five-year rule
does not apply if
distributions
begin within one year of the IRA owner's death and are
payable
over the life or life expectancy of a designated beneficiary.
Special
rules apply if the beneficiary of the IRA is the surviving spouse.
Roth
IRAs
Individuals
with adjusted gross income below certain levels may make
nondeductible
contributions to a Roth IRA. The maximum annual contribution
that
may be made to a Roth IRA is the lesser of a certain dollar amount
($4,000
for 2006) or the individual's compensation for the year. An
individual
who has attained age 50 before the end of the taxable year may
also
make catch-up contributions to a Roth IRA up to a certain dollar
amount
($1,000 for 2006).
The
contribution limit is reduced to the extent an individual makes
contributions
to any other IRA for the same taxable year.
As under the
rules
relating to traditional IRAs, a contribution of up to the dollar
limit
for each spouse may be made to a Roth IRA provided the combined
compensation
of the spouses is at least equal to the contributed amount.
The
maximum annual contribution that can be made to a Roth IRA is phased
out for
taxpayers with adjusted gross income over certain levels for the
taxable
year. The adjusted gross income
phase-out ranges are: (1) for
single
taxpayers, $95,000 to $110,000; (2) for married taxpayers filing
joint
returns, $150,000 to $160,000; and (3) for married taxpayers filing
separate
returns, $0 to $10,000. Contributions
to a Roth IRA may be made
even
after the account owner has attained age 70-½.
Taxpayers
with modified adjusted gross income of $100,000 or less generally
may
convert a traditional IRA into a Roth IRA, except for married
taxpayers
filing separate returns The amount converted is includible in
income
as if a withdrawal had been made, except that the 10-percent early
withdrawal
tax does not apply.
Amounts
held in a Roth IRA that are withdrawn as a qualified distribution
are not
includible in income, or subject to the additional 10-percent tax
on
early withdrawals. A qualified distribution is a distribution that (1)
is made
after the five-taxable year period beginning with the first taxable
year
for which the individual made a contribution to a Roth IRA, and (2) is
made
after attainment of age 59-½, on account of death or disability, or is
made
for first-time homebuyer expenses of up to $10,000.
Distributions
from a Roth IRA that are not qualified distributions are
includible
in income to the extent attributable to earnings. To determine
the
amount includible in income, a distribution that is not a qualified
distribution
is treated as made in the following order:
(1)
regular Roth IRA contributions; (2) conversion contributions (on a
first
in, first out basis); and (3) earnings.
To the extent a
distribution
is treated as made from a conversion contribution, it is
treated
as made first from the portion, if any, of the conversion
contribution
that was required to be included in income as a result of the
conversion. The amount includible in income is also
subject to the
10-percent
early withdrawal tax unless an exception applies. The same
exceptions
to the early withdrawal tax that apply to traditional IRAs
apply
to Roth IRAs.
Roth
IRAs are not subject to the minimum distribution rules during the IRA
owner's
lifetime. Roth IRAs are subject to the
post-death minimum
distribution
rules that apply to traditional IRAs.
Saver's
credit
Present
law provides a temporary nonrefundable tax credit for eligible
taxpayers
for qualified retirement savings contributions. The maximum
annual
contribution eligible for the credit is $2,000. The credit rate
depends
on the adjusted gross income ("AGI") of the taxpayer.
Taxpayers
filing joint returns with AGI of $50,000 or less, head of
household
returns of $37,500 or less, and single returns of $25,000 or less
are
eligible for the credit. The AGI limits
applicable to single taxpayers
apply
to married taxpayers filing separate returns.
The credit is in
addition
to any deduction or exclusion that would otherwise apply with
respect
to the contribution. The credit offsets
minimum tax liability as
well as
regular tax liability. The credit is
available to individuals who
are 18
or over, other than individuals who are full-time students or
claimed
as a dependent on another taxpayer's return.
The credit is
available
with respect to contributions to various types of retirement
savings
arrangements, including contributions to a traditional or Roth
IRA.
Coverdell
education savings accounts
Present
law provides tax-exempt status to Coverdell education savings
accounts,
meaning certain trusts or custodial accounts that are created or
organized
in the United States exclusively for the purpose of paying the
qualified
higher education expenses of a designated beneficiary.
The
aggregate annual contributions that can be made by all contributors to
Coverdell
education savings accounts for the same beneficiary is $2,000 per
year. In the case of contributors who are
individuals, the maximum
contribution
limit is reduced for individuals with adjusted gross
income
between $95,000 and $110,000 ($190,000 to $220,000 in the case of
married
taxpayers filing a joint return). Contributions to a Coverdell
education
savings account are not deductible.
Distributions
from a Coverdell education savings account are not includible
in the
distributee's income to the extent that the total distribution does
not
exceed the qualified education expenses incurred by the beneficiary
during
the year the distribution is made. If a
distribution from a
Coverdell
education savings account exceeds the qualified education
expenses
incurred by the beneficiary during the year of the distribution,
the
portion of the excess that is treated as earnings generally is subject
to income
tax and an additional 10-percent tax Amounts in a Coverdell
education
savings account may be rolled over on a tax-free basis to
another
Coverdell education savings account of the same beneficiary or of
a
member of the family of that beneficiary.
Qualified
tuition programs
Present
law provides tax-exempt status to a qualified tuition program,
defined
as a program established and maintained by a State or agency or
instrumentality
thereof, or by one or more eligible educational institutions.
Under a
qualified tuition program, a person may purchase tuition credits or
certificates
on behalf of a designated beneficiary, or in the case of a
State
program, may make contributions to an account that is established for
the
purpose of meeting qualified higher education expenses of the
designated
beneficiary of the account.
Contributions to a qualified
tuition
program must be made in cash, and the program must have
adequate
safeguards to prevent contributions in excess of amounts
necessary
to provide for the beneficiary's qualified higher education
expenses. Contributions to a qualified tuition program
are not
deductible. Contributions to a
qualified tuition program
generally
are treated as a completed gift eligible for the gift tax annual
exclusion.
Distributions
from a qualified tuition program are not includible in the
distributee's
gross income to the extent that the total distribution does
not
exceed the qualified education expenses incurred by the beneficiary
during
the year the distribution is made. If a
distribution from a
qualified
tuition program exceeds the qualified education expenses incurred
by the
beneficiary during the year of the distribution, the portion of the
excess
that is treated as earnings generally is subject to income tax and
an
additional 10-percent tax. Amounts in a
qualified tuition program
may be
rolled over on a tax-free basis to another qualified tuition
program
for the same beneficiary or for a member of the family of that
beneficiary.
Health
savings accounts
A
health savings account ("HSA") is a trust or custodial account used
to
accumulate
funds on a tax-preferred basis to pay for qualified medical
expenses. Within limits,contributions to an HSA made
by or on behalf of
an eligible
individual are deductible by the individual. Contributions to
an HSA
are excludable from income and employment taxes if made by the
individual's
employer. Earnings on amounts in HSAs are not taxable.
Distributions
from an HSA for qualified medical expenses are not includible
in
gross income. Distributions from an HSA
that are not used for qualified
medical
expenses are includible in gross income and are
subject
to an additional 10 percent-tax unless the distribution is made
after
death, disability, or the individual attains the age of Medicare
eligibility
(i.e., age 65).
Eligible
individuals for HSAs are individuals who are covered by a high
deductible
health plan and no other health plan that is not a high
deductible
health plan. A high deductible health
plan is a health plan
that
has a deductible that is at least $1,050 for self-only coverage or
$2,100
for family coverage (for 2006) and that has an out-of-pocket expense
limit
that is no more than $5,250 in the case of self-only coverage and
$10,500
in the case of family coverage (for 2006).
The
maximum aggregate annual contribution that can be made to an HSA is
the
lesser of (1) 100 percent of the annual deductible under the high
deductible
health plan, or (2) the maximum deductible permitted under an
Archer
MSA high deductible health plan under present law, as adjusted for
inflation. For 2006, the amount of the maximum
deductible under an Archer
MSA
high deductible health plan is $2,700 in the case of self-only coverage
and
$5,450 in the case of family coverage.
The annual contribution limits
are
increased for individuals who have attained age 55 by the end of the
taxable
year. In the case of policyholders and
covered spouses
who are
age 55 or older, the HSA annual contribution limit is greater than
the
otherwise applicable limit by $700 in 2006, $800 in 2007, $900 in 2008,
and
$1,000 in 2009 and thereafter.Archer medical savings accounts
("MSAs")
Like
HSAs, an Archer MSA is a tax-exempt trust or custodial account to which
tax-deductible
contributions may be made by individuals with a high
deductible
health plan
Archer
MSAs provide ta x benefits similar to, but generally not as
favorable
as, those provided by HSAs for certain individuals covered by
high deductible
health plans. The rules relating to Archer MSAs and HSAs
are
similar. The main differences
include:(1) only self-employed
individuals
and employees of small employers are eligible to have an
Archer
MSA; (2) for MSA purposes, a high deductible plan is a health plan
with
(a) an annual deductible of at least $1,800 and no more than $2,700 in
the
case of individual coverage and at least $3,650 and no more than $5,450
in the
case of family coverage (for 2006), and (b) maximum out-of-pocket
expenses
of no more than $3,650 in the case of individual coverage
and no
more than $6,650 in the case of family coverage (for 2006); and (3)
the
additional tax on distributions not used for medical expenses is 15
percent
rather than 10 percent After 2005, no new contributions can be made
to
Archer MSAs except by or on behalf of individuals who previously had
Archer
MSA contributions and employees who are employed by a participating
employer.
Description of
Proposal
In general
The
proposal consolidates traditional and Roth IRAs into a single type of
account,
a Retirement Savings Account ("RSA"). The proposal also creates
a new
type of account that can be used to save for any purpose, a Lifetime
Savings
Account ("LSA").
The tax
treatment of both RSAs and LSAs is generally
similar
to that of present-law Roth IRAs; that is, contributions are not
deductible
and earnings on contributions generally are not taxable when
distributed. The major difference between the tax
treatment of LSAs and
RSAs is
that all distributions from LSAs are tax free, whereas tax-free
treatment
of earnings on amounts in RSAs applies only to distributions
made
after age 58 or in the event of death or disability.
Retirement
Savings Accounts
Under
the proposal, an individual may make annual nondeductible
contributions
to an RSA of up to the lesser of $5,000 or the individual's
compensation
for the year. As under present-law
rules for IRAs, in the
case of
a married couple, contributions of up to the dollar limit may be
made
for each spouse if the combined compensation of both spouses is at
least
equal to the total amount contributed for both spouses. Contributions
to an
RSA may be made regardless of the individual's age or adjusted gross
income. Contributions to an RSA may be made only in
cash. Contributions
to an
RSA are taken into account for purposes of the Saver's credit.
Earnings
on contributions accumulate on a tax-free basis.
Qualified
distributions from RSAs are excluded from gross income. Under
the
proposal, qualified distributions are distributions made after age 58
or in
the event of death or disability. Distributions from an RSA that are
not
qualified distributions are includible in income (to the extent that
the
distribution exceeds basis) and subject to a 10-percent additional tax.