|
More Tax Changes: The Tax Relief and Health
Care Act of 2006
President Bush signed the Tax Relief and Health Care Act into
law in late 2006. The new law, which offers $45.1 billion in tax
breaks and adds more than 200 changes to the Tax Code, extended
several tax provisions that were scheduled to expire,
resurrected several tax provisions that had already expired and
added a few surprises.
For instance, the new law retroactively restored some popular
expired tax cuts to the beginning of 2006. Those included the
deduction for state and local sales taxes, the higher education
tuition deduction, the teacher's classroom expense deduction and
the research tax credit.
The new law also enhanced some important incentives,
bolstered Health Savings Accounts, extended some expiring energy
credits and includes miscellaneous tax relief, including a
refundable credit worth up to 20 percent to certain taxpayers
with long-term unused AMT credits who have AMT income from
incentive stock options.
Here's a recap of some of the provisions that were extended:
Deduction of state and local general sales tax: The
American Jobs Creation Act of 2004 allowed taxpayers to deduct
either state and local income taxes or state and local general
sales taxes as an itemized deduction, according to the CCH Tax
Briefing. This deduction expired on December 31, 2005. However,
the popularity of the deduction, especially among residents of
states without an income tax, did not go unnoticed on Capitol
Hill. Thus, the new law extends it through 2007. According to
CCH, taxpayers can calculate their deduction either by saving
receipts or using the Optional State Sales Tax Tables in IRS
Publication 600. According to CCH, taxpayers may alternate from
year to year between sales tax and state income tax deduction.
Similarly, in taking the sales tax deductions, alternating from
year to year between using the IRS sales tax tables and the
actual expense method is permitted, CCH reported. In some cases,
taxpayers may want to consider timing the purchase of big-ticket
sales tax purchases to achieve the best possible tax break.
Higher education tuition deduction: The new law
extends the popular above-the-line higher education tuition
deduction through 2007. For 2006, and again in 2007, a $4,000
above-the-line education deduction is available each year to
single taxpayers with adjusted gross incomes (AGI) of $65,000 or
less ($130,000 for joint filers). For those single taxpayers
with incomes between $65,001 and $80,000 ($130,001 to $160,000
for joint filers) a $2000 above-the-line education deduction is
available. These are the same levels set for the deduction in
2004 and 2005.
Teacher's classroom expense deduction: Teachers and
other education workers can deduct, above the line, up to $250
of certain out-of-pocket classroom expenses such as paper, pens,
glue and scissors, software and books. The position can be with
any class from kindergarten through grade 12 as long as the work
covers at least 900 hours during the school year. This
deduction, which recognizes that many education professionals
purchase classroom supplies with their own money, was claimed by
more than 3 million taxpayers in 2005.
Work opportunity tax credit and welfare-to-work tax
credit: Congress created the Work Opportunity and
Welfare-to-Work tax credits to give employers tax incentives to
hire economically disadvantaged individuals. According to CCH,
the new law retroactively renews the two popular credits for
2006 and for 2007, combines them, with enhancement, into one
credit.
Energy extenders: The new law also extends for one
year a host of energy related tax provisions scheduled to expire
at the end of 2007 under current law, such as the credits for
residential energy efficient property and new energy efficient
homes, and the deduction for energy efficient commercial
buildings.
Other extenders include:
- Research tax credit;
- Election to treat combat pay as earned income for
purposes of the earned income credit;
- Archer medical savings accounts (Archer MSAs).
Health savings accounts (HSA): The new law enhances
the use of health savings accounts (HSAs). Unlike the extenders,
the HSA enhancements are permanent and most take effect for tax
years beginning after 2006, according to CCH. For instance,
employees with a health flexible spending account (FSA) or a
health reimbursement account (HRA) will be allowed to make a
one-time transfer of the balance in their FSA or HRA to an HSA.
The new law also allows employees a one-time,
once-in-a-lifetime, rollover of funds from their IRAs into an
HSA. The election to make the rollover is irrevocable. The
change is designed to give employees quicker access to their
funds for medical expenses. The provision applies to tax years
beginning after December 31, 2006.
The bill also has a number of tax provisions that offer even
more tax relief to a wide variety of taxpayers. Those include,
according to CCH:
- A refundable credit worth up to 20 percent for the
next five years, to certain taxpayers with long-term unused AMT
credits who have AMT income from incentive stock options;
- An itemized mortgage insurance premium deduction
available on qualified residences, with phase-out starting at
$100,000 AGI, for 2007 only. The premium must be paid or accrued
with respect to a mortgage insurance contract issued after
December 31, 2006.
And last, the bill also increases the penalty for filing a
frivolous tax return from $500 to $5,000.
January 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
|
