The Tax Relief and Health Care Act of 2006 was signed into law by President Bush on on December 20th, 2006. The Act extends several tax provisions scheduled to expire, resurrects several tax provisions that had already expired, and contains several new provisions that include changes to the alternative minimum tax (AMT) and health savings accounts (HSAs). Key provisions include:
Extension and modification of existing tax provisions
- Above-the-line deduction for higher education expenses (expired December 31, 2005) is extended for two years, through December 31, 2007.
- Deduction of state and local general sales tax (expired December 31, 2005) is extended for two years, through December 31, 2007.
- Above-the-line deduction for certain expenses of elementary and secondary school teachers (expired December 31, 2005) is extended for two years, through December 31, 2007.
- New markets tax credit (scheduled to expire December 31, 2007) is extended through December 31, 2008.
- Research credit (expired December 31, 2005) is extended through December 31, 2007, and modified.
- Work opportunity tax credit and welfare-to-work tax credit (expired December 31, 2005) are extended for one year, through December 31, 2006, without modification. For the period beginning January 1, 2007 and ending December 31, 2007, the Act combines the two credits, and makes modifications.
- Election to treat combat pay as earned income for purposes of the earned income credit (expires December 31, 2006) is extended for one year through December 31, 2007.
- Archer medical savings accounts (Archer MSAs) (no new Archer MSAs could be established after 2005) are resurrected for a two year period-- Archer MSAs can be established through December 31, 2007.
- Placed-in-service deadline for certain Gulf Opportunity Zone property for purposes of additional first-year depreciation (generally December 31, 2007) is extended for specified property to December 31, 2010. The additional first-year depreciation deduction is also extended to certain specified personal property.
Extension of energy tax provisions
- Energy efficient commercial buildings deduction (previously available for property placed in service after December 31, 2005 and before January 1, 2008) is extended to property placed in service prior to January 1, 2009.
- Energy efficient new homes credit for builders (previously applied to homes substantially completed after December 31, 2005, and purchased after December 31, 2005 and before January 1, 2008) is extended to homes purchased after December 31, 2005 but prior to January 1, 2009.
- Credit for residential energy efficient property (previously available for property placed in service after December 31, 2005 and before January 1, 2008) is extended to property placed in service before January 1, 2009. The Act also clarifies the tax provision.
Health savings accounts (HSAs)
The Act makes the following specific changes to the rules governing health savings accounts (HSAs):
- Transferring funds from an existing flexible spending account (FSA) or a health reimbursement arrangement (HRA)--The Act allows a one-time direct rollover of a health FSA or HRA balance to an HSA. However, transfers will be limited to the balance of the FSA or HRA as of the transfer date or the balance as of September 21, 2006, whichever is less. This provision is effective for transfers made on or after the date of enactment, but before January 1, 2012
- Repeal of annual plan deductible limitation on HSA contributions--Existing rules limit annual HSA contributions to a certain dollar amount ($2,700 for individuals or $5,450 for families in 2006) or 100% of the high deductible health plan (HDHP) deductible, whichever is less. Effective for tax years beginning after December 31, 2006, the Act eliminates the HDHP deductible limitation, leaving only the dollar amount limitation on annual HSA contributions.
- Earlier publication of cost-of-living adjustment--Effective for tax years beginning after 2007, the Act requires the government to publish annual cost-of-living adjustments to HSA and HDHP dollar amounts earlier in the year. Adjusted amounts for a year must now be published no later than June 1 of the preceding calendar year.
- Expansion of contribution limits for part-year coverage--Under existing rules, individuals who enroll in a qualifying HSA/HDHP can contribute no more than one-twelfth of the annual limit for each month they are eligible. For tax years beginning after December 31, 2006, the Act provides that individuals will be able to make full deductible contributions to an HSA (up to the annual limit), even if they enroll in a qualifying HSA/HDHP partway through the year.
- Modification of requirements for comparable contributions made by employers to nonhighly compensated employees--Under existing rules, employers who make contributions to employee HSAs must make comparable contributions to the HSAs of all comparable participating employees. Effective for tax years beginning after December 31, 2006, the Act provides that employers may make larger HSA contributions for nonhighly compensated employees than for highly compensated employees.
- One-time rollovers from IRAs to HSAs--Effective for tax years beginning after December 31, 2006, the Act allows eligible individuals to roll over funds directly from an IRA to an HSA once during their lifetimes (the contribution can't exceed the HSA contribution limit for that year).
Alternative minimum tax (AMT) credit relief for individuals
- New AMT refundable credit amount--The Act creates a new refundable AMT credit amount, allowing individuals to partially recover unused minimum tax credits more than three years old. When calculating minimum tax credit, an individual may be able to claim an AMT refundable credit amount equal to the greater of (1) the lesser of $5,000 or the long-term unused minimum tax credit, or (2) 20 percent of the long-term unused minimum tax credit.
- Phase-out established for higher-income taxpayers--The AMT refundable credit amount is reduced for individuals with adjusted gross incomes (AGIs) that exceed certain threshold amounts (the phaseout thresholds that apply for 2007 are $234,600 for married individuals filing jointly, $195,500 for individuals filing as head of household, $156,400 for single individuals, and $117,300 for married individuals filing separate returns).
- Effective in tax years beginning before January 1, 2013.
Deduction for mortgage insurance premiums paid
- Itemized deduction allowed--The Act provides that premiums paid or accrued for qualified mortgage insurance in connection with acquisition indebtedness on a qualified residence are treated as interest that is qualified residence interest and thus deductible as an itemized deduction.
- Phase out for taxpayers with higher adjusted gross incomes--The amount otherwise allowable as a deduction is phased out for individuals with adjusted gross income exceeding $100,000 ($50,000 in the case of a married individual filing a separate return).
- Effective--The provision applies to amounts paid or accrued in 2007 only.
Other provisions worth noting
The Act also:
- Allows U.S. businesses operating as branches in Puerto Rico to claim the domestic manufacturing deduction (the provision is effective for two years)
- Increases the penalty for frivolous tax submissions from $500 to $5,000 and expands the application of the penalty to all taxpayers and all types of federal taxes, as well as to installment agreements, offers-in-compromise, and taxpayer assistance orders
- Makes permanent existing provisions relating to the qualified veterans' mortgage bond program, repealing the requirement that veterans must have served before 1977 and reducing the eligibility period from 30 years to 25 years
- Provides a one-time exception from the mortgage revenue bond first-time homebuyer requirement (applies to mortgage revenue bonds issued before January 1, 2008)
- Makes permanent the capital gain tax treatment of self-created music works sold by the artist
- Extends the provisions relating to the capital gain exclusion on the sale of a home that apply to active military personnel to non-military intelligence officers stationed abroad (sales of homes before January 1, 2011)
- Allows charitable remainder trusts that earn unrelated business income to maintain their tax-exempt status by imposing a 100% excise tax on such unrelated business income
- Makes permanent the provision in the Tax Increase Prevention and Reconciliation Act of 2005 that reforms the tax treatment of loans to qualified continuing care facilities
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