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President Bush Signs the Tax Relief and Health Care Act of 2006December 21, 2006On December 20, 2006, President Bush signed into law the Tax Relief and Health Care Act of 2006. This new legislation extends for two additional years many income tax provisions that expired on December 31, 2005 and includes several new income tax provisions. The following is a summary of selected provisions of the Act. ITEMS EXTENDED The Tax Relief and Health Care Act extended many income tax provisions that had expired on December 31, 2005 including the following: 1. Maximum $250 Deduction for Certain Expenses of Elementary and Secondary School Teachers (§62(a)(2)(D)). Kindergarten through 12th grade teachers, instructors, counselors, principals, or aides in any elementary or secondary school may continue to deduct up to $250 for out-of-pocket expenses paid in connection with books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials used in the classroom through 2007! 2. Archer Medical Savings Accounts ("MSA") (§220(i)(2)). New Archer MSAs may be established before 2008! 3. Election to Treat Combat Pay as Earned Income for EIC Purposes (§32(c)(2)(B)(vi)). Taxpayers may elect to treat combat pay that is excluded from income under §112 as earned income in calculating the earned income credit. This election is available for tax years ending before 2008. 4. Deduction of State and Local General Sales Taxes (§164(b)(5)). For taxable years beginning after December 31, 2003 and prior to 2008, taxpayers may elect to take an itemized deduction for either: a) state and local income taxes, or b) state and local sales or use taxes. 5. Deduction for Qualified Higher Education Expenses (§222(e)). The Act extends the for AGI deduction (of up to $4,000) for qualified higher education expenses for two years. Thus, the deduction will apply for expenses paid in tax years beginning before 2008. 6. 15-Year Recovery Period for Qualified Leasehold Improvements (§168(e)(3)(E)(iv)). A 15-year recovery period and the straight-line depreciation method is allowed for "qualified" leasehold improvement property placed-in-service after October 22, 2004 and before 2008. Note! These are the same type of leasehold improvements that qualified for the 30% and 50% §168(k) deduction. "Qualified leasehold improvement property" means any improvement to the interior portion of a building that is nonresidential real property, provided: 1) the improvement is made under or pursuant to a lease; 2) the improvement is made to the interior portion of a building; 3) the building is occupied exclusively by the lessee or sublessee; 4) the improvement is not an enlargement of the building; 5) the improvement is placed in service more than 3 years after the date the building was first placed in service; and 6) the lease must not be between related persons (e.g., a corporation and 80% or more owners). 7. 15-Year Recovery Period for Depreciation of Qualified Restaurant Property (§168(e)(3)(E)(v)). A 15-year recovery period and the straight-line depreciation method is allowed for "qualified" restaurant property placed-in-service after October 22, 2004 and before 2008. Qualified restaurant property is generally improvements to commercial buildings where the building is more than three years old and where more than 50% of the square footage of the building is devoted to the preparation of, and seating for the on-premises consumption of meals. 8. Work Opportunity Tax Credit (§51(c)(4)(B)). The work opportunity tax credit now applies for individuals beginning work before 2008. However, for individuals beginning work after 12/31/06, the credit is modified and combined with the welfare to work tax credit. 9. Welfare to Work Tax Credit (§51A). The welfare to work tax credit now applies for individuals beginning work before 2008. However, for individuals beginning work after 12/31/06, the credit is modified and combined with the work opportunity tax credit. 10. Suspension of 100 Percent-of-Taxable-Income Limitation on Percentage Depletion for Oil and Gas from Marginal Wells (§613A(c)(6)). The suspension of the 100% of taxable-income limitation on percentage depletion for oil and gas produced from marginal wells continues for tax years beginning before 2008. 11. Tax Incentives for Investment in the District of Columbia. There are several incentives to encourage redevelopment, capital investment, and home ownership by targeting certain portions of D.C. characterized by high level of poverty, unemployment, and other indicators of financial distress. The incentives are: a) designation of D.C. enterprise zone, employment tax credit, and additional expensing (§1400); b) tax-exempt D.C. empowerment zone bonds (§1400A); c) zero-percent capital gains rate for investment in D.C. for property acquired by 12/31/07, for gains through 12/31/12 (§1400B); and d) tax credit for first-time D.C. home buyers (§1400C). These incentives are extended through 12/31/07. 12. Enhanced Deduction for Corporate Contributions of Computer Equipment for Educational Purposes (§170(e)(6)). A C corporation (other than a personal holding company or "service organization") that makes a "qualified computer contribution" of computer software, a computer, peripheral equipment, or fiber optic cable to educational organizations or public libraries for use in the U.S. for educational purposes related to the donee's purpose or function may claim a deduction equal to the lesser of a) basis plus half of the property's appreciation, or b) twice the property's basis. These rules continue through tax years beginning before 2008. In addition, the Act provides that property assembled by the taxpayer is made eligible for the enhanced deductions for qualified research contributions and qualified computer contributions. However, old or used components assembled by the taxpayer into scientific property or computer technology or equipment aren't eligible for the enhanced deductions. 13. Expensing of "Brownfields" Environmental Remediation Costs (§198(d)(1)). Expensing is allowed for amounts paid or incurred before 2008 in connection with the abatement or control of hazardous substances at a "qualified contaminated site." 14. Research & Experimentation Credit (§41(h)(1)(B)). The 20% R&E credit is allowed for qualifying expenditures through 12/31/07. In addition, the Act increases the credit rates applicable under the alternative incremental research credit effective for qualifying expenditures after 12/31/06. Also, for tax years ending after 12/31/06, the Act adds a new "alternative simplified credit" for qualified research expenses. A taxpayer can elect an alternative credit (in lieu of the regular credit) equal to 12% of the excess of the qualified research expenses for the tax year over 50% of the average qualified research expenses for the three tax years preceding the tax year for which the credit is being determined. 15. Native American Employment Tax Credit (§45A(f)). The Native American Employment Tax Credit is allowed for qualifying wages paid in tax years beginning before 2008. 16. Accelerated Depreciation for Business Property on Indian Reservations (§168(j)). The Act extends the expiration date of the shortened depreciation recovery periods for qualified Indian reservation property for property placed-in-service before 2008. NEW REFUNDABLE AMT CREDIT FOR INDIVIDUALS AFTER 2006 (§53(e)) Effective for years beginning in 2007 and before 2013 the Tax Relief and Health Care Act of 2006 provides for a refundable AMT credit equal to the greater of: 1) the lesser of: a) $5,000 or, b) the total long-term unused AMT credit, or 2) 20% of the long-term unused AMT credit. Therefore, if an individual has a long-term unused minimum tax credit for any tax year beginning before January 1, 2013, the amount determined under the §53(c) limitation on the minimum tax credit for the tax year can't be less than the AMT refundable credit amount for that tax year. In other words, the minimum tax credit allowable for the tax year is the greater of the AMT refundable credit amount or the amount of the credit otherwise allowable. Long term unused AMT credit: The long-term unused AMT credit is the sum of the credits generated more than three years prior to the current year. For 2007, the unused AMT credit will equal the sum of the unused AMT credits from years prior to 2004. Phase-out: The refundable credit phases out using the AGI levels for the phase out of personal exemptions (e.g., $234,600 - $357,100 for 2007 for individuals filing joint returns). Therefore, there is no refundable credit for 2007 for individuals filing jointly where AGI exceeds $357,100. HSA CHANGES EFFECTIVE FOR TAX YEARS BEGINNING AFTER 2006 1) For 2006, the maximum deduction for a contribution to an HSA was the lesser of a) the amount of the deductible for taxpayer's qualified high-deductible policy or b) $2,700 for self-only coverage or $5,450 for family coverage. For years beginning after 2006, the contribution is no longer limited by the amount of the qualifying deductible. Therefore, for 2007 the maximum contribution to an HSA is $2,850 for self-only coverage and $5,650 for family coverage even if the qualified deductible is less (§223(b)(2)). 2) The Act allows one lifetime trustee-to-trustee transfer from an IRA (other than an SEP or a SIMPLE IRA) to an HSA without triggering income or the 10% §72(t) penalty on the transfer. The amount of the transfer is limited to the maximum HSA contribution for the year. Where an individual has a tax basis in the IRA, any distribution is deemed to be made first from the income portion of the IRA. If the individual making the transfer is not an eligible HSA participant for the 12-month period beginning with the date of the transfer, the amounts transferred are included in the individual's income and subject to a 10% penalty. See §408(d)(9) for additional requirements (§408(d)(9)). 3) The Act permits a full HSA contribution for individuals who first become covered under a high deductible plan in a month other than January. Previously, the contribution limitation was reduced where an individual was not a participant in a qualifying high-deductible health plan during each month of the year (§223(b)(8)). 4) The Act carves out an exception to the comparability rule enabling employers to make larger HSA contributions for nonhighly compensated employees (non-HCEs) than for highly compensated employees (HCEs) (§4980G(d)). HSA CHANGES EFFECTIVE AFTER DECEMBER 20, 2006 (§106(e) & §223(c)(1)(B)(iii)) The Act allows direct transfers of unused amounts from FSAs and HRAs by employers directly into an employee's HSA. The transfer must be made before 2012. Only one transfer is allowed. In addition, the amount of the transfer may not exceed the amount in the FSA or the HRA on 9/21/06. This provision seems designed for situations where employers terminate an FSA or an HRA and transfer the balance in the employee's account to an HSA. If the employee is not an eligible HSA participant for the 12-month period beginning with the date of the transfer, the amounts transferred are included in the employee's income and subject to a 10% penalty. QUALIFYING INDIVIDUALS MAY DEDUCT HOME MORTGAGE INSURANCE PREMIUMS FOR 2007 (§163(h)) The Act provides that home mortgage insurance premiums paid during 2007 in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer are treated as qualified residence interest. Except for married taxpayers filing separate returns, the amount otherwise treated as interest under the new rule must be reduced (but not below zero) by 10% for each $1,000 (or fraction thereof) that the taxpayer's adjusted gross income (AGI) for the tax year exceeds $100,000. Therefore, the deduction is completely phased out if AGI equals or exceeds $110,000. For married taxpayers filing separate returns, the reduction equals 10% of the amount of qualified mortgage insurance for each $500 (or fraction thereof) that the taxpayer's AGI for the tax year exceeds $50,000. This rule applies to 1) mortgage insurance provided by the VA, the FHA, or the RHA and 2) qualifying private mortgage insurance. The deduction is only available where: 1) the amounts are paid during 2007, 2) the amounts are properly allocable to periods before 2008, and 3) the mortgage insurance contract is issued after 2006. |
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