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:
