Tax Changes from the 2006
Tax Relief and Health Care Act
The recently
passed 2006 Tax Relief and Health Care Act is a wide-ranging measure that
preserves a variety of popular tax breaks for families and businesses, extends energy
provisions encouraging alternative and renewable energy sources, and includes
trade, oil drilling, and Medicare provisions. Here is a look at the key tax
provisions in the new law that directly affect individual taxpayers.
Extension and modification of certain tax
relief provisions.
The new law extends through 2007, and in certain circumstances
modifies, provisions which under prior law either expired at the end of 2005 or
would have expired at the end of 2006. These include:
Tuition deduction.
The tax
deduction for qualified higher education expenses is extended through 2007. The
deduction allows taxpayers to deduct up to $4,000 (depending on their income)
of higher education expenses in lieu of claiming the Hope or Lifetime Learning
tax credits. The deduction is taken “above-the-line,” meaning that it may be
claimed by all individual taxpayers regardless of whether they itemize their
deductions.
State and
local general sales taxes.
The tax break
allowing individual taxpayers to elect to take an itemized deduction for state
and local general sales taxes in lieu of the itemized deduction permitted for
state and local income taxes is extended through 2007. Taxpayers have two
options for determining deductible sales tax: (i) actual sales tax paid if receipts
are maintained for IRS verification or (ii) approximate sales tax paid as
estimated in tables provided by the Secretary of the Treasury plus sales tax on
certain additional items (such as a boat or car) that may be added to the table
amount.
Combat pay
treated as earned income for purpose of the earned income tax credit.
The rule
allowing excluded combat pay to count as income for purposes of calculating the
earned income tax credit is extended through 2007.
Deduction
for certain expenses of elementary and secondary school teachers.
The tax break
permitting elementary and secondary school teachers and certain other school
professionals to deduct up to $250 of out-of-pocket costs incurred to purchase
books, supplies and other classroom equipment is extended through 2007. The
deduction is available to all individual taxpayers regardless of whether they
itemize their deductions.
Tax credit
for first-time homebuyers in the
The tax break
allowing first-time homebuyers in D.C. to claim a tax credit of up to $5,000 on
the purchase price of the home is extended through 2007.
Availability
of medical savings accounts.
New
contributions to Archer medical savings accounts (“Archer MSAs”) may be made
through 2007 (instead of through 2005, as under prior law). New contributions
may be made after 2007 only by or for individuals who previously had Archer
MSAs, and employees who are employed by a participating employer. Individuals
may make tax-deductible contributions to an Archer MSA to pay for health care
expenses. The distributions are tax-free if used to pay for eligible medical
expenses.
Extension of certain expiring energy
provisions and other energy provisions.
The new law
provides an extension through 2008 of a number of energy provisions that would
have expired at the end of 2007 under prior law. For individuals, the most
important of these provisions is a one-year extension of the 30% tax credit for
the purchase of residential solar water heating, solar electric equipment and
fuel cell property through
Health savings account provisions.
The new law
includes many changes for health savings accounts (HSAs), including: allowing
one-time rollovers from health flexible spending accounts (FSAs) and health
reimbursement arrangements (HRAs) into HSAs (after the enactment date and
before 2012); repeal of the annual plan deductible limit on HSA contributions
(after 2006); expanded contributions limit for part year coverage (after 2006);
and allowing one-time rollovers from IRAs into HSAs (after 2006).
Other tax relief provisions.
The new law
also contains a package of other tax provisions designed to provide additional
tax relief and certainty to taxpayers. These include:
Incentive
stock option AMT provisions.
For tax years
beginning after the enactment date, a new law change allows individuals to take
advantage of a refundable credit with respect to certain long-term unused
alternative minimum tax (AMT) credits existing before
Self-created
musical works.
The tax break
that was enacted on a temporary basis in 2005 providing capital gains treatment
for self-created musical works when these works are sold by the artist is made
permanent.
The new law
gives non-military intelligence officers stationed abroad the same liberalized
home sale exclusion rules available to active military personnel. This change
applies to sales of homes after the enactment date of the new law and before
Premiums
for mortgage insurance.
A new itemized
deduction for the cost of premiums for mortgage insurance on a qualified
personal residence is established. The deduction is phased-out ratably by 10% for
each $1,000 by which the taxpayer's adjusted gross income exceeds $100,000. The
new deduction applies for 2007 only.
Loans to
qualified continuing care facilities.
The new law
makes permanent a provision contained in the Tax Increase Prevention and Reconciliation
Act of 2005 that reforms the tax treatment of loans to qualified continuing
care facilities.
Frivolous
submissions.
The new law
increases the penalty for frivolous tax return submissions from $500 to $5,000
and expands the penalty to all taxpayers and all types of federal taxes. This
increased penalty also applies to frivolous submissions for lien and levy
collection due process, installment agreements, offers-in-compromise, and
taxpayer assistance orders.
This covers
only the highlights of the new law. If
you would like more information, please contact us.