LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

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Note:  Any tax advice contained on this website is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Tax Law Changes Affecting Individuals

Here's a summary of the most widely applicable tax breaks for individuals that have been restored and/or extended by the Tax Relief and Health Care Act of 2006, and for how long:

• The tax deduction for qualified higher education expenses is restored for 2006 and extended through 2007. It allows individuals to deduct up to $4,000 (depending on their income) of higher education expenses instead of claiming the Hope or Lifetime Learning tax credits. The deduction is taken "above-the-line" (that is, it is subtracted to arrive at adjusted gross income), so it may be claimed by all individuals regardless of whether they itemize their deductions.
  
  
• The tax break allowing individual taxpayers to elect to take an itemized deduction for state and local general sales taxes instead of the itemized deduction permitted for state and local income taxes is restored for 2006 and extended through 2007. You have two options for determining deductible sales tax: (1) actual sales tax paid if receipts are maintained for IRS verification; or (2) approximate sales tax paid as estimated in tables provided by the IRS plus sales tax on certain additional items (such as a boat or car) that may be added to the table amount. The IRS said it will be issuing a separate publication carrying optional sales tax tables for the 2006 tax year; these tables will not be in the Form 1040 instructions.
  
  
• The tax break permitting elementary and secondary school teachers and certain other school professionals to deduct up to $250 of out-of-pocket costs incurred to purchase books, supplies and other classroom equipment is restored for 2006 and extended through 2007. This deduction is claimed "above the line."
  
  
• The 30% tax credit for the purchase of residential solar water heating, solar electric equipment and fuel cell property is extended through Dec. 31, 2008. The maximum credit depends on the type of energy efficient property that you buy.
  
  
• The election to have excluded combat pay counted as income for purposes of calculating the earned income tax credit (EIC) is extended through 2007. This election could result in an otherwise eligible taxpayer claiming the EIC, a refundable credit, even if he or she doesn't have any other earned income.
  
  
• The tax break allowing first-time homebuyers in the District of Columbia to claim a tax credit of up to $5,000 on the purchase price of the home is restored for 2006 and extended through 2007.
  
  
• New contributions to Archer medical savings accounts (Archer MSAs) may be made through 2007. New contributions may be made after 2007 only by or for individuals who previously had Archer MSAs, and employees who are employed by a participating employer. Individuals may make tax-deductible contributions to an Archer MSA to pay for health care expenses. The distributions are tax-free if used to pay for eligible medical expenses.

The Tax Relief and Health Care Act of 2006 also includes these new tax breaks for individuals:

• For the 2007 tax year only, there's a new itemized deduction for the cost of premiums for mortgage insurance on a qualified residence. The deduction is phased-out for taxpayers whose adjusted gross income exceeds $100,000.
  
  
• After 2006, a limited relief provision helps individuals who wound up with AMT (alternative minimum tax) problems because of their exercise of incentive stock options. The relief provision, which is complex, allows individuals to take advantage of a refundable credit with respect to certain long-term unused alternative minimum tax (AMT) credits existing before Jan. 1, 2013.
  
  
• The new law includes many changes for health savings accounts (HSAs), including: allowing one-time rollovers from health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) into HSAs (after the enactment date of the new law and before 2012); repeal of the annual plan deductible limit on HSA contributions (after 2006); expanded contributions limit for part year coverage (after 2006); and allowing one-time rollovers from IRAs into HSAs (after 2006).

Please keep in mind that this article described only the highlights of the most important changes in the new law. Please contact us for details on how you are affected by these changes, and whether you are affected by any of the more highly specialized new law changes not covered in this article.

(12/14/06)

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Last modified: July 30, 2009