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New Tax Law Includes Changes to Roth IRAs and Capital Gains

  • May 23rd, 2006

On May 17, 2006, President Bush signed a new tax bill into law that makes a number of changes to tax law, including changing who can participate in a Roth IRA, extending the capital gains tax reduction, making unearned income by minors up to age 18 taxable at the parent's tax rate, and increasing the Alternative Minimum Tax exemption.

The new law increases the number of people who can participate in a Roth IRA. With a Roth IRA, unlike a traditional IRA, you don't receive a tax deduction when you invest your money, but your original deposits and the earnings on them are not taxed when you withdraw. However, not everyone can participate in a Roth IRA'ā€¯individuals with incomes of more than $110,000 and couples with more than $160,000 cannot put money into a Roth IRA, and households with income of more than $100,000 cannot convert a traditional IRA into a Roth IRA.

The new law, which takes affect in 2010, doesn't change the income threshold for people who are starting a new Roth IRA, but it will allow people with incomes of more than $100,000 to convert a traditional IRA into a Roth IRA. While you will have to pay taxes on the conversion, if you convert in 2010, you can split the taxes into two payments to be paid in 2011 and 2012. If you convert after 2010, you will have one year to pay the taxes.

For more information on retirement planning, click here.

The new tax law also extends the capital gains tax reduction passed in 2003. The reduction was supposed to be in effect only until 2008, but the new law extends the rate until 2010. The tax rate on taxpayers in the highest tax brackets will remain at no more than 15 percent. Taxpayers in the 10 percent and 15 percent tax bracket will pay a 5 percent rate until 2007, and, starting in 2008, they won't have to pay any capital gains taxes when they sell assets, such as stocks or mutual funds.

Another change in the tax law may affect seniors who have opened custodial accounts (or UTMA account) for their grandchildren. The law makes unearned income by minors up to age 18 taxable at the parent's tax rate. Previously, the first $850 of investment gain from a custodial account was tax free, the second $850 was taxed at the child's rate, and any income over that was taxed at the parent's or grandparent's rate. When a child turned 14, anything over $850 was taxed at the child's rate. Under the new law, any income over $1,700 is taxed at the parent's or grandparent's rate until the child turns 18.

For more information on custodial accounts, click here.

Finally, the new law also increases the Alternative Minimum Tax exemption for one year. It was originally scheduled to return the amount to $42,500 for married taxpayers and $33,750 for single taxpayers, but instead will be increased to $62,550 for married taxpayers and $42,500 for single taxpayers.

Local Elder Law Attorneys in Ashburn, VA

Evan Farr

The Law Firm of Evan H. Farr, P.C.
Fairfax, VA

William Fralin

The Estate Planning & Elder Law Firm PC
Bethesda, MD

Daniel Steven

Daniel N. Steven, LLC
Rockville, MD


Last Modified: 05/23/2006

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