Earlier this week, the House and Senate gave taxpayers an early holiday gift by passing the Tax Relief and Health Care Act of 2006, which the President should sign into law soon. The bill primarily reinstates various tax provisions that had previously expired; it also makes various "technical corrections" to existing provisions, and includes different forms of new tax relief.
Provisions that may particularly interest the average taxpayer include:
Deduction for state and local sales tax: This provision expired in 2005, but will now apply to the 2006 and 2007 tax years. In essence, you can deduct whichever is greater: your state taxes paid or your sales taxes. This is a potentially significant benefit to taxpayers living in states that don't impose a state tax.
Higher education tuition deduction: This provision has also been extended through 2007. It allows for an "above the line" deduction of up to $4,000 in qualified education expenses paid. However, the AGI limitation amounts have been retained at 2004 levels, so it will not be available to so-called "higher-income" taxpayers.
Classroom expense deduction: This provision is also back, extended to 2007. It provides that an eligible educator (which is defined in the law more broadly than a "teacher") can qualify to claim an "above the line" deduction of up to $250 in classroom supplies and other qualified expenses that they purchase.
Earned income credit for combat pay: This provision is also extended through 2007 and allows military personnel to treat tax-free combat pay as income for purposes of computing the earned income credit, thereby generating a much larger credit.
Health savings account (HSA) improvements: The new law actually improves the already great deal offered by an HSA. These changes aren't simple extenders -- they've been made permanent. However, most of them don't take effect until 2007. Some of the new provisions include allowable transfers from a flexible savings account (FSA) or health reimbursement account (HRA) to a qualified HSA. There are also provisions to allow for a "once in a lifetime" rollover of funds from an IRA to an HSA, allowing employees faster access to their funds for medical expenses.
Extension of energy credits and deductions: The new law also extended many of the energy credits and deductions originally introduced in 2005. It doesn't cover the residential energy property credit, equal to $500 overall and $200 for thermal windows and doors. However, that provision doesn't expire until the end of 2007 anyway, so there's still time to take it in the upcoming year.
AMT credit relief: This new provision allows for a refundable credit worth as much as 20%. It applies to taxpayers with long-term unused AMT credits who also have AMT income from incentive stock options.
Itemized deduction for mortgage insurance: This new provision allows taxpayers to deduct mortgage insurance (commonly called private mortgage insurance, or PMI) for qualified residences. This deduction begins to phase out at an adjusted gross income of $100,000, so not everybody will be able to claim it.
These are just a few of the provisions included in the new law. If you'd like to read more about the details of the new tax act, check out the CCH Tax Briefing (PDF file) about this very issue.
Congress passed these laws after the IRS deadline for printing the 2006 tax materials. So while many of these provisions are back in the law, there are no corresponding forms or lines on the tax return in which to claim them. Tax simplification? Not so much. According to the IRS, they plan a "media blitz" to inform taxpayers that the extenders are back in play, and that they should not be overlooked when preparing your 2006 tax return. That's nice, but with no forms or line references available, expect considerable confusion among tax pros and the general public as to what to report on what line.
When he's not dealing with tax issues, Fool contributor Roy Lewis is a motivational speaker who lives in a trailer down by the river. He understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though.