Reading Between the Lines of the Latest Tax-Cut Package

The headlines last week were large on the subject of the tax-cut bill Republican leaders hustled through Congress and over to the president.

But if the breathless commentary has you rushing to see what new goodies there might be, you can relax: Many of the provisions either are extensions of items already in the law or don't take effect for several years -- or both.

The bill does raise some planning possibilities, though, so it's a good idea to take a look at what's happening and check out what it could do for you -- or to you. Here's a quick look at some of the key provisions and when they take effect. Don't get too excited, though -- a lot of you will find these cuts are false advertising.

Effective on 2006 Tax Returns

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The provision that will be the most helpful for the most people when they do their returns next spring is yet another year of partial temporary relief from the alternative minimum tax. This tax, as you no doubt know, is designed to prevent the rich from zeroing out their taxes through legal deductions. It is almost a flat tax, with two brackets (26 and 28 percent), far fewer deductions than the regular tax, and a large "exemption amount," which functions as a sort of standard deduction.

For each of the past several years, Congress has enacted a temporary increase in the exclusion amount, which helps keep the AMT off the backs of middle-income taxpayers. This "patch" expired at the end of last year, but last week's bill revives and raises it for this year. This year, the amounts will be $62,550 for married couples and $42,500 for singles.

They were $58,000 and $40,250 last year and had been scheduled to drop to $45,000 and $33,750 this year.

An analysis by Deloitte Tax LLP figures that a hypothetical family of four with an income of $185,000 and itemized deductions of about $33,000 could have been hit with about $3,700 in the alternative minimum tax this year absent the patch.

At the same time, though, the AMT will continue to "claw back" a big chunk of the benefits that well-to-do, but not rich, taxpayers may think they'll get from the low 15 percent maximum rate on capital gains, which are profits from the sale of assets such as stocks and bonds.

Capital gains are not themselves subject to the AMT, but because the exemption amount is phased out when your adjusted gross income exceeds a certain amount and capital gains are included in AGI, a big capital gain for many taxpayers will expose more of their other income to the AMT.

According to a recent study by Congress's Joint Committee on Taxation done at the request of Democrats on the House Ways and Means Committee, more than one third of all capital gains are recognized by people in the phaseout range, the result being that the effective tax rate on their gains is as much as 22 percent rather than the advertised 15.

This bait and switch may well be a factor in the surge in tax receipts the Republicans have been crowing about.

The impact is harshest on taxpayers with income between $100,000 to $500,000. The truly rich are typically not affected by the AMT because their ordinary rates are already higher than the AMT's, and the law requires that you pay whichever tax, regular or AMT, is higher.