The 2006 Tax Relief and Health Care Act may offer new tax breaks for you or your business:
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.
Tax provisions affecting individuals
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:
- 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.
- 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.
- 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 Jan. 1, 2013.
- The annual credit amount, subject to a phase-out, is the greater of (i) the lesser of $5,000 or the amount of the long-term unused AMT credit, or (ii) 20% of the amount of the long-term unused AMT credit. This provision is designed to help taxpayers who wound up with AMT problems because of their exercise of incentive stock options.
- 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.
- 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.
- 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 Dec. 31, 2008.
- 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.
- 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).
- 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.
Tax provisions affecting businesses
- Leasehold and restaurant improvement recovery.
The accelerated write-off for certain leasehold improvements and restaurant property (depreciation over 15 years instead of 39 years) is extended through 2007.
- Research tax credit.
The research and development (R&D) credit, which expired at the end of 2005 under prior law, is extended to qualified amounts paid or incurred during 2006 and 2007.
In addition, for tax years ending after 2006, the new law enhances the credit by
(i) increasing the rates of the alternative incremental credit and
(ii) creating a new alternative simplified credit that does not use gross receipts as a factor (so that newer businesses can access the credit).
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. It also contains a package of other energy provisions. The changes include:
- Credit for new energy efficient homes.
The tax credit for builders of new energy efficient homes is extended for one year through Dec. 31, 2008. The credit applies to manufactured homes meeting a 30% energy reduction standard and other homes meeting a 50% standard.
- Energy credit for certain business purchases.
The 30% business tax credit for the purchase of fuel cell power plants and solar equipment is extended through Dec. 31, 2008.
- Work opportunity and welfare-to-work tax credits.
The work opportunity tax credit (WOTC), which is a credit for wages paid by employers who hire individuals from certain targeted groups, and the welfare-to-work tax credit (WWTC), which is a credit for wages paid by employers who hire long-term family assistance recipients, are extended in their current form for 2006 and combined in 2007.
Modifications of the combined credit include expanded eligibility for the WOTC (raised age ceiling for food stamp recipients from 25 to 40), revised eligibility requirements for ex-felons, and extension of the paperwork filing deadline from 21 days to 28 days.
- Suspension of 100 percent-of-net income limitation on percentage depletion for oil and gas from marginal wells.
This tax break is extended through 2007.
Please keep in mind that we have described only the highlights of the most important changes in the new law. Give us a call at your earliest convenience for more details on how you may be affected by this important tax legislation or if you have any questions.
For additional information, please contact your CPA advisor at Goldstein Lewin & Co. Boca Raton 561.994.5050, Broward 954.429.8555, Dade 305.944.3582, Palm Beach 561.994.5050.
