Congress Passes the Tax Relief and Health Care Act of 2006

The Tax Relief and Health Care Act of 2006 (H.R. 6408) extends a number of tax breaks that had expired at the end of 2005. The bill now goes to the President for signature.

HR 6408 re-instates the following tax benefits retroactively to the beginning of 2006. These tax breaks will expire at the end of 2007.

• Tuition Deduction
• Classroom Expenses Deduction
• State and Local Sales Tax as an itemized deduction
• Earned Income Credit for Combat Pay

Taxpayers may claim these deductions on their 2006 tax return, although the IRS will need to either revise the tax forms or issue special instructions for claiming these deductions. The IRS has already printed the final version of the 2006 tax forms.

Both the tuition deduction and the classroom expense deduction can be claimed directly on Form 1040 with the need to itemize those deductions. The sales tax deduction is claimed as an itemized deduction on Schedule A; taxpayers can choose the higher of state income taxes paid or sales taxes paid. Taxpayers who might not be eligible for other tax breaks. For example, taxpayers living in states with no income tax will benefit by claiming the sales tax deduction. The tax bill results in tax savings of $99.33 per person, according to WashingtonWatch.com. Overall, HR 6408 is expected to cost the government $45 billion over the next ten years, according to the revenue estimates provided by the Joint Committee on Taxation.

The Tax Relief and Health Care Act provides a number of other tax breaks.

The Residential Energy Tax Credit, which was scheduled to expire at the end of 2007, is extended until 2008.

The bill also provides a significant boost to Health Savings Accounts. Contributions to HSAs are currently limited to the policy's annual deductible, up to $2,850 for individual coverage or $5,650 for family coverage. The new bill removes this limitation, allowing taxpayers to fund their HSAs up to the full limit, without regard to the policy's deductible. Taxpayers may also make a one-time rollover from an IRA to fund an HSA. According to a press release from HSA for America: "The bill allows individuals with HSA-qualified policies to contribute up to the annual contribution limit ($2,850 for individual coverage and $5,650 for family coverage in 2007), even if their deductible is less than this amount. Until now, policyholders with smaller deductibles were penalized because they were not allowed the same tax benefits as those with larger deductibles."

The bill also increases the penalty for filing a frivilous tax return from $500 to $5,000.

Congress also passed H.R. 6111 which will grant the Tax Court jurisdiction to review claims for innocent spouse relief.

More information:

• Congress's Last Acts Include Tax Breaks (Washington Post)
• Congress Winds Down Session by Approving Tax-Cut and Trade Bills (Wall Street Journal)
• Tax relief from 8.25% (Don't Mess With Taxes)
• Tax Watch (RIA)
• Tax Newsletter (CCH)
• Full text of the Tax Relief and Health Care Act of 2006 (Library of Congress)

Update 12/12/2006. More News and Resources:

• CCH Tax Briefing (PDF)
• Workers Whose Stock Options Left Them in Debt to Get a Break (Bloomberg)
• Tax Refund Delays Ahead (Motley Fool)
• Tax Extenders Roundup (TaxProf Blog)

Update 12/13/2006 to correct the paragraph about Health Savings Accounts. (Tip: Harry Hayes, JD.)