Godwin & Associates, CPA: Tax Relief and Health Care Act of 2006

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Tax Relief and Health Care Act of 2006

On December 20, 2006, President Bush signed the Tax Relief and Health Care Act of 2006. This long awaited legislation extends several tax breaks that expired on December 31, 2005. In addition to these extensions, the new law contains some new provisions for relaxing the rules for Health Savings Accounts (HSAs), a way to minimize the alternative minimum tax (AMT) consequences for those who exercised incentive stock options, and a one-year itemized deduction for private mortgage insurance on qualified personal residences.

Below some of the key issues addressed in this act are summarized.

Extension and Modification of Certain Provisions

Qualified Tuition and Related Expenses

The $4,000 above-the-line deduction for qualified tuition and related expenses is extended until December 31, 2007.

The following applicable dollar amount limits on the higher-education expense deduction apply

$4,000, for a taxpayer whose modified AGI for the tax year doesn’t exceed
$65,000 ($130,000 for a joint return);
$2,000, for a taxpayer whose modified AGI for the tax year doesn’t exceed
$80,000 ($160,000 for a joint return); and
Zero, for any other taxpayer

Optional Itemized Deduction for State and Local Sales Tax

Taxpayers can elect to take an itemized deduction for state and local general sales taxes instead of an itemized deduction for state and local income taxes withheld. The provision is extended for two years.

Educator Expense Deduction

Eligible educators are permitted a $250 above-the-line deduction for two more years for costs incurred for unreimbursed out-of-pocket classroom supplies. Eligible educators include kindergarten through 12th grade teachers, instructors, counselors, principals, or aides in any elementary or secondary school. Eligible expenses include costs for books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment, other equipment, and supplementary materials used in the classroom.

Mortgage Insurance Premiums

Mortgage insurance premiums paid or accrued during 2007 by a taxpayer for qualified mortgage insurance in connection with acquisition indebtedness with respect to the taxpayer’s qualified residence are treated as qualified residence interest.

Effective for amounts paid or accrued after December 31, 2006, and apply only if the amounts satisfy the following conditions:

The amounts must be paid or accrued before January 1, 2008;
The amounts may not be properly allocable to any period after December 31, 2007; and
The amounts must be paid or accrued with respect to a mortgage insurance contract issued after December 31, 2006.

Changes Relating to Health Savings Accounts (HSAs)

Rollover from IRA to Health Savings Accounts (HSAs)

Individuals will be permitted to make a one-time transfer from a IRA to an HSA from which to pay future medical expenses.
The amount that can be distributed from the IRA and contributed to an HSA is limited to the otherwise maximum deductible contribution amount to the HSA computed on the basis of the type of coverage under the high deductible health plan at the time of the contribution.
Only one distribution and contribution may be made during the lifetime of the individual.

Effective for tax years beginning after December 31, 2006.

Amendments for Certain Cost Recovery Property

Energy Efficient Commercial Building Property

The deduction for qualified energy efficient building property is extended for one more year through 2008.

A deduction is allowed in an amount equal to the cost of energy efficient commercial building property placed in service during the tax year. The maximum deduction for any building for any tax year is the excess (if any) of $1.80 multiplied by the building’s square footage, over the aggregate amount of the deduction for the building for all earlier tax years.

Qualified Leasehold Property

The treatment of qualified leasehold improvement property as 15-year MACRS property is extended for two years to property placed in service before January 1, 2008.

Qualified Restaurant Property

The treatment of qualified restaurant property as 15-year MACRS property is extended for two years to property placed in service before January 1, 2008.

Energy Related Credits

Residential Energy Efficient Property Credit

The residential energy efficient property credit for homeowners is extended for one year. It is now available for property placed in service before January 1, 2009.

The new law also provides that the 30 percent of the amount paid for qualified solar energy property expenditures is eligible for the credit. The maximum credit for qualified solar energy property expenditures in a tax year is $2,000.

Energy Efficient Home Builders Credit

An eligible contractor may claim a business credit for each qualified new energy efficient home that the contractor constructs and which is acquired by a person from the contractor of use as a residence. The credit is either $2,000 for a 50 percent energy reduction in energy usage, or $1,000 for a 30 percent energy reduction in energy usage.