| January 2007 |
|
TaxAdvisor
|
 |
2006 Tax Relief and Health Care Act - General Alert
Tax planning just got a little more simple and a lot more complicated. You've
probably heard that Congress has passed another tax cut package. Just before
adjourning, Congress approved the $45 billion Tax Relief and Health Care Act
of 2006 . Like so many recent tax laws, the new law is huge. It includes tax
breaks for individuals and a myriad of different businesses.
The new law simplifies tax planning because it renews a batch of temporary
tax incentives, commonly known as tax extenders. These are temporary tax breaks
that Congress has been extending every year or so instead of making them
permanent. It's budget gimmickry to make the tax cuts seem less expensive over
one or two year than if they were permanent.
The extenders passed Congress literally at the last-minute. The House voted
to approve the tax bill on December 8 and the Senate on December 9. After that,
Congress adjourned.
The temporary nature of the extenders caused a lot of problems this year.
Even though Congress extended them, it did so after the IRS printed most of the
2006 tax forms. The IRS is expected to release a special publication about the
extenders and, of course, our office is here to answer all your questions about
the extenders and the new law at any time.
Tax incentives for individuals
For individuals, the state and local sales tax deduction is one of the most
important extensions. Two years ago, Congress changed the tax laws to permit you
to deduct either state or local income taxes or state and local general sales
taxes as an itemized deduction. That was good news for people in states without
a state income tax. However, the deduction was temporary and expired at the end
of 2005. The new law extends it through 2007.
Other extenders for individuals are more targeted. If you paid tuition for
post-secondary education, you may be eligible for the extended higher education
tuition deduction. Teachers and other education workers can deduct up to $250
for some out-of-pocket classroom expenses. First-time homeowners in the District
of Columbia get a tax break. All of these tax cuts are extended through 2007.
Congress also created some new tax breaks for individuals. You may be able to
deduct premiums for mortgage insurance on your home. If you had incentive stock
options and pay AMT, you could be eligible for a refundable credit. The rules
for both of these incentives are very complicated. We can help you decipher
them.
The news about energy tax breaks for homeowners is mixed. Congress did not
extend the tax credit for installing energy-efficient windows, doors and other
common items. Instead, it extended the credit for "alternative" energy
expenditures. These are more exotic items, such as solar water heaters and fuel
cells.
At the last minute, Congress made some important changes to Health Savings
Accounts in the new law. These accounts are similar to IRAs. You can save money
for future health care expenses. The new law facilitates transfers between
health flexible spending accounts (FSAs) or health reimbursement accounts (HRAs)
and HSAs. It also allows a one-time rollover of IRA savings into an HSA for
qualifying taxpayers. If you don't have an HSA, give our office a call and we'll
explore the benefits of these accounts with you. The new law could make them
even more valuable for you.
Business tax breaks
The bulk of the tax incentives in the new law are targeted to businesses --
businesses of every type and variety. Employers large and small all benefit from
some of the provisions.
Many employers have been clamoring for extension of three temporary tax
breaks: the research tax credit, the Welfare-to-Work credit and the Work
Opportunity credit. The research credit is designed to encourage U.S. companies
to conduct scientific and technical research at home. The Welfare-to-Work and
Work Opportunity credits reward employers who hire new employees from
economically-challenged groups. These credits have been extended but not made
permanent.
Businesses also are eligible for some extended energy tax breaks. Like the
energy tax incentive for individuals, these reward very specific energy
improvements. The new law also extends incentives to boost domestic production
of alternative fuels, such as ethanol, and to encourage renewable energy
projects.
Businesses also are eligible for a host of other tax breaks. Employers who
hire Native Americans may qualify for a tax break. The new law extends the
domestic production activities deduction to U.S. businesses with manufacturing
activities in Puerto Rico. Mining companies get a tax break for investing in
mine safety equipment and mine safety training. Merchant vessels on the Great
Lakes qualify for a tax break. The list goes on and on.
Crackdown on tax protesters
Congress has given the IRS enhanced authority to penalize taxpayers who file
frivolous returns and other bogus submissions. These tax protesters claim, for
example, that the federal income tax is unconstitutional or that wages are not
taxable. The IRS has heard - and rejected - all of these arguments for years.
Now, it can impose a penalty of up to $5,000 on individuals who make these false
claims.
The new law also permits the IRS to continue to share information with law
enforcement agencies to combat terrorism. Individuals who contact the IRS about
tax cheaters may be eligible for higher rewards under the new law.
Technical corrections
The new law makes technical corrections to some existing tax laws. These are
not substantive changes; that is, they don't create new tax breaks. Rather, they
are meant to clarify what Congress intended. The technical corrections in the
new law impact tax shelter regulations and controlled foreign corporations.
Looking ahead
The Tax Relief and Health Care Act of 2006 was the last tax bill of
the 109th Congress. When the new Congress convenes in January, Democrats and not
Republicans will be in charge. New leaders will bring new priorities. One thing
that is certain not to change is lawmakers' interest in tax policy. Many
individuals are concerned about the alternative minimum tax. Congress could
tackle that issue next year. Businesses are struggling with health care costs.
Some tax-related proposals could be introduced to help businesses. Our office
will keep monitoring developments in Congress as they unfold and keep you
posted.
If you have any questions about the new tax law, give us a call today. We can
schedule an appointment to sit down and review the new law in person. You could
be eligible for some valuable tax incentives.
|
