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US Minimum Wage And Tax Relief Bill Finally Approved By Congress

by Mike Godfrey, Tax-News.com, Washington

28 May 2007


New legislation increasing the federal minimum wage by more than two dollars per hour and providing small businesses with a number of offsetting tax relief measures was approved by the United States Congress last week.

The measure, included in a supplementary military spending bill, will increase the federal minimum wage to $7.25 per hour over two years. The supplemnetal bill was approved in the house with a final 280-142 vote, and in the Senate with a 80-14 vote and now awaits President Bush's signature.

The minimum wage will go up in three stages: from the current $5.15 to $5.85 60 days after enactment; to $6.55 one year later; and to $7.25 one year after that. According to Sen. Edward Kennedy (D - Mass.), the principal advocate for the increase in Congress, an estimated 13 million Americans will benefit from the move.

The bill also contains a $4.84 billion package of tax relief to help small firms swallow the increase in the minimum wage - much less than desired by Republicans and half of the amount originally voted for in the Senate.

Initially one of the Democrats' priorities after taking control of Congress following last November's mid-term elections, the minimum wage legislation repeatedly stalled as lawmakers haggled over the amount of accompanying tax relief. Once agreed, the measures were delayed further when included in a previous military spending bill that was vetoed by President Bush because it set an artificial deadline for troop withdrawal from Iraq. Democrats have been forced to compromise with the new supplemental bill, which removes such commitments.

“While there are many aspects of this conference report that I cannot support, I am pleased that it will finally allow us to get a minimum wage bill to the President’s desk," said Kennedy.

"This increase is long overdue. The minimum wage bill passed the House and Senate in January and February of this year. Unfortunately, Republicans prevented the bill from going to conference until they could make sure it included a big enough tax giveaway for businesses. We’ve overcome many obstacles – and faced every procedural trick in the book – to get this minimum wage increase across the finish line. Democrats stood together, and stood firm, to say that no one who works hard for a living should have to live in poverty," he added.

The tax relief provisions in the bill would:

  • Extend the Work Opportunity Tax Credit (WOTC) for 3 1/2 years with disabled veterans and outward migration provisions.
  • Increase the 179 expensing limit to $125,000 and the phase-out to $500,000 and extend through 2008 179 for Go Zone businesses.
  • Extend enhanced credit treatment for 2 additional years through 2010 and modify the carryover allocation and Federally subsidized rules for certain low income housing credit buildings.
  • Treat certain qualified GO Zone repairs or reconstruction as “qualified rehabilitation” for purposes of the mortgage revenue bond and Gulf Opportunity Zone bond rules, and call for GAO study of certain tax incentives in the GO Zone.
  • Allow employers to receive full tip credit despite increase in Federal minimum wage.
  • Allow an unincorporated business owned jointly by a married couple to file as a sole proprietorship instead of a partnership.
  • Allow WOTC and the tip credit to be taken under the Alternative Minimum Tax.
  • Bring about several changes to the S Corp rules, including ESBT provision.

The offset provisions would:

  • reduce the amount of credits taxpayers claim under the FICA/tip tax credit as a result of increase in the minimum wage.
  • raise the age from under-18 to under-19 (under-24 if a student) at which a child’s unearned income in excess of $1700 is taxed at the parent’s rate to discourage the practice of transferring investments to one’s child for the purpose of avoiding higher tax rates.
  • Modify the rule that the IRS must stop charging interest and filing related penalties if the IRS fails to notify the taxpayer about a deficiency within 18 months after the taxpayer filed the return – extended to 36 months.
  • Eliminate the requirement that the IRS hold a collection due process hearing before issuing a levy on delinquent employment taxes so these trust fund taxes are not allowed to pyramid. Taxpayers are still afforded CDP hearing once every two years.
  • Extend permanently IRS user fees.
  • Increase the bad check threshold to $1,250 from $750 and increase the bad check fee to $25 from $15.
  • Expand preparer penalties to all types of tax returns (e.g., employment, excise, exempt orgs., estate and gift tax) and increase the amount of the penalties.
  • Create a new penalty on claims for refund that are filed without any reasonable basis.


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