New Tax Law Has Many Tax Breaks
Before heading home for the holidays, Congress passed a long-awaited bill that retroactively extends several valuable tax breaks that expired last year. The law also includes a new deduction for certain taxpayers buying homes in 2007, and it contains several provisions that make Health Savings Accounts more attractive.
Why Some IRS Forms
Are Already Out of Date
For the 2006 Tax Year
The Tax Relief and Health Care Act of 2006 is filled with many provisions that can save taxpayers money. Unfortunately, it was passed after the IRS printed the tax forms and other materials it provides to taxpayers. In some cases, printed materials will not have a line for certain deductions, such as the one for state and local sales taxes.
The tax agency is now scrambling to print new mailings, update information on its Web site and launch a media campaign to inform taxpayers about the new and extended tax breaks. Professional assistance in the preparation of your 2006 returns will help assure you receive the eligible benefits intended with the Tax Relief and Health Care Act.
Background: Many of the provisions in the law are part of a package of tax breaks often called “the
extenders” because they are temporary and need to be renewed through legislation. These credits and deductions, which expired December 31, 2005, are not controversial and are periodically restored. However, passage of the extenders is often delayed because lawmakers attach other more controversial provisions to them, such as one earlier this year involving the federal estate tax. In 2006, Congress really waited until the last minute to act. The 109th Congress was set to adjourn on Friday, December 8 but finally turned off the lights on Saturday morning at 4:35 a.m. after passing the tax and trade bill.
Health Savings Accounts: The Basics
What Are HSAs? They allow participants to save tax-free dollars to pay for medical expenses expected soon and those they may incur in the future. Accounts are accompanied by an HSA-qualified insurance plan covering major medical expenses and preventive care. These plans have lower premiums and higher deductibles than traditional health insurance policies. Savings
from lower premiums can be put toward funding the HSA.
Who Is Eligible? Individuals must be covered by an HSA-qualified insurance policy. Those with government health benefits, such as Medicare and Medicaid, are generally ineligible.
How Do People Sign Up? People with HSA-qualified plans can open up accounts with banks, credit unions, insurance companies, and other approved companies. Employers can also set up plans for employees.
What Are HSA-Qualified Insurance Policies?
HSA-qualified insurance policies are more affordable insurance plans that protect individuals and families in the event of major medical illnesses. They generally provide the same benefits as traditional insurance policies, including prescription drugs, doctor and emergency room visits, and hospitalization. However, they require a higher deductible to be met before benefits are paid. The higher deductible allows the insurance company to charge significantly lower premiums.
Here is a rundown of six major tax breaks from the Tax Relief and Health Care Act of 2006, which President Bush is expected to sign soon:
State and Local Sales Tax Deduction – This write-off, which was originally only available to taxpayers who itemized in 2004 and 2005, is now applicable for 2006 and 2007 returns. It allows you to deduct state and local sales taxes from your federal return, rather than state and local income taxes. The tax break is especially important for taxpayers in states that have state or local sales tax but don't have state income tax — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. But it might also give a larger deduction to taxpayers who paid more in sales taxes than income taxes because they bought a new car or other expensive items.
The Research Credit – This important tax break generally allows businesses to claim a 20 percent credit for research expenses above a base amount, including:
In-house expenses for wages.
Supplies used to conduct the research.
A percentage of any contract costs.
Good news: In recent years, the IRS has relaxed some of the requirements for the tax break, sometimes referred to as the R&D credit. Even if your business didn't qualify in the past, you might be eligible now. In addition, many states grant their own special tax benefits to companies engaged in research and development.
The process to collect research tax benefits is complex. If your company has invested in developing new products or processes — or improving current ones — your tax adviser can help determine if you qualify for the credit. You might even be eligible for a refund if you engaged in qualified research in the past but never claimed a credit.
Health Savings Account Incentives. The new law makes major improvements to Health Savings Accounts (HSAs), which are described in the right-hand box.
HSA contributions are increased.
Participants are allowed to make a one-time transfer of the balance of a Flexible Spending Account or a Health Reimbursement Account to an HSA. They can also make a one-time rollover from an Individual Retirement Account to an HSA.
Qualified Tuition Deduction – You might be able to deduct qualified higher education expenses of up to $2,000 or $4,000 (depending on your income) paid on behalf of yourself, your spouse, or a dependent. The write-off is taken as an adjustment to income, which means taxpayers can claim it even if they do not itemize deductions. It can be advantageous for those who earn too much to claim the HOPE or Lifetime Learning tax credits because the income limits are higher. Under the new law, it is extended through December 31, 2007.
Deduction for Mortgage Insurance Premiums – This new tax break provides an itemized deduction for mortgage insurance premiums paid on qualified residences purchased in 2007. This insurance is typically required by lenders for those who buy homes with low or no down payments. To qualify, a taxpayer's adjusted income must be $100,000 or less to get a full deduction and $110,000 or less to get a partial deduction.
Employer Tax Credits – Under these provisions, businesses are encouraged to hire employees from certain targeted groups. The "Work Opportunity Credit" entitles a business to a tax break for hiring former felons and people from economically disadvantaged backgrounds. The "Welfare-to-Work Credit," allows businesses to collect a tax break for hiring long-term recipients of family assistance. There is also a credit for wages paid within designated "empowerment zones."
These tax credits can be worth thousands of dollars to your company. Unlike a tax deduction, which reduces your taxable income, a tax credit reduces your tax bill on a dollar-for-dollar basis. But there are strict requirements and deadlines to meet so call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856)665-2121 if you are interested in the credits. Under the new law, the credits are retroactively renewed for 2006 and will be combined into one credit for 2007. Eligible employees must begin work before January 1, 2008. Your tax adviser can help your business capture these credits.
These are only some of the tax breaks contained in the wide-ranging Tax Relief and Health Care Act of 2006. The law also includes:
An extension through 2008 of a credit for making qualified equity investments in economically distressed communities.
A deduction of up to $250 for the classroom expenses of teachers.
A renewal of several tax breaks enacted as part of the Energy Tax Incentive Act of 2005, such as a credit of up to $2,000 that can be claimed by eligible contractors for constructing new energy-efficient homes.
The law also contains a deduction through 2008 for eligible costs associated with energy-efficient enhancements made to commercial property.
An extension through 2010 of the deadline for taking a 50-percent bonus depreciation deduction for certain Gulf Opportunity (GO) Zone property.
An election for military personnel to include tax-free combat pay in income for purposes of computing the earned income credit.
An extension through 2007 of the 15-year recovery period for certain leasehold and restaurant improvements.
The authority for the IRS to impose an excise tax on a group health plan that fails to give parity to mental health benefits.
An extension through 2007 of the deduction for corporate contributions of scientific property that is used for research, as well as computer equipment and technology gifts made to schools and public libraries. In addition, the deduction is expanded to include equipment "assembled by" a corporate donor.
A tax break for taxpayers who have long-term unused AMT credits and AMT income from incentive stock options.
And much more.