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

Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) is a tax-related act signed by President George W. Bush in May 2006 that contains revisions to pre-existing tax laws.

Understanding Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)

Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) includes tax revisions concerning investor-related tax breaks, business provisions, individual retirement accounts (IRAs) and alternative minimum taxes.

For the most part, the provisions in TIPRA are beneficial for the vast majority of taxpayers. For example, lowered capital gains tax rates were extended until 2010 under TIPRA, and higher exemption amounts for the alternative minimum tax (AMT) enable qualified taxpayers to pay a lower amount of taxes in those areas. Furthermore, TIPRA also includes some retirement-related benefits. For example, TIPRA enables taxpayers with modified adjusted gross incomes surpassing $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 the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) is its extension of the alternative minimum tax (AMT) reduction. An alternative minimum tax (AMT) recalculates income tax after adding certain tax preference items back into adjusted gross income. 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. For 2017, the AMT exemption for individual taxpayers was $54,300. Beginning in 2018 the AMT exemption for individual filers is $70,300. For married couples filing jointly, the figures are $84,500 in 2017 and $109,400 in 2018.

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 2015 when Congress passed a law indexing the AMT exemption amount to inflation.