On December 8, Congress approved The Tax Relief and Health Care Act of 2006 (the Bill). The Bill includes provisions that would extend expiring, or already expired, tax provisions, including the sales tax deduction. The measure extends and/or modifies other tax relief, including energy tax and health savings account provisions, and other miscellaneous tax and non-tax provisions.
A special rule is provided for elections under expired provisions. For any tax year that ends after 2005 and before the date of the Bill’s enactment (i.e., the date President Bush signs the Bill), an election under an expired provision that is extended by the Bill is treated as timely if made not later than April 15, 2007, or such other time, and in such other manner, as provided by the IRS.
Extension and Modification of Certain Provisions
Extension of the above-the-line deduction for higher education expenses
The Bill allows parents and students to deduct qualified tuition and related expenses for an additional two years, through December 31, 2007.
Extension of the state and local sales tax deduction
The provision that allows taxpayers to elect to deduct their state and local sales taxes as an itemized deduction in lieu of an itemized deduction for state and local income taxes is extended through December 31, 2007.
Extension of election to treat combat pay as earned income for purposes of the earned income credit
The Bill extends for one year (through December 31, 2007) the availability of the election to treat combat pay that is otherwise excluded from gross income under Code Section 112 as earned income for purposes of the earned income credit.
Extension and modification of the research credit
The research credit is extended through 2007. Effective for tax years ending after December 31, 2006, the rate of the alternative incremental credit is increased. Also, the taxpayer may elect an alternative simplified credit for qualified research expenses. A transition rule permits a taxpayer to elect to use the alternative simplified credit in lieu of the alternative incremental credit if the election is made during the tax year that includes January 1, 2007.
Extension of work opportunity tax credit and welfare-to-work tax credit
The work opportunity and welfare to work tax credits are extended through 2006. After 2006, the two tax credit programs will be combined and modified. The combined, modified credit is available for 2007.
Extension of the above-the-line deduction for certain expenses of elementary and secondary school teachers
The above-the-line deduction of as much as $250 for personal funds spent by teachers to buy classroom supplies is extended through December 31, 2007.
Extension and modification of the new markets credit
The new markets tax credit, intended to boost investment in community development especially in rural areas, is extended through 2008.
Extension and expansion to petroleum products of expensing for environmental remediation costs
The provision that allows taxpayers to elect treat certain environmental remediation expenditures that would otherwise be chargeable to a capital account as deductible in the year paid or incurred is extended through December 31, 2007. In addition, the definition of hazardous substance is expanded to generally include petroleum products, including crude oil, crude oil condensates, and natural gasoline. The provision applies to expenditures paid or incurred after December 31, 2005, and before January 1, 2008.
Qualified leasehold improvements and qualified restaurant property
Special 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant property is extended through December 31, 2007.
Extension of computer technology charitable contribution and charitable contribution for scientific property used for research
The enhanced deduction for qualified computer contributions is extended to apply to contributions made during tax years beginning before January 1, 2008.
Under the Bill, property assembled by the taxpayer, in addition to property constructed by the taxpayer, is eligible for either the enhanced deduction related to computer technology and equipment or to scientific property used for research. The provision is effective for tax years beginning after December 31, 2005.
Extension of placed-in-service deadline for certain Gulf Opportunity Zone property
The placed-in-service deadline for specified Gulf Opportunity Zone property to qualify for the additional first-year depreciation deduction is extended. Specified Gulf Opportunity Zone extension property is defined as property substantially all the use of which is in one or more specified portions of the Gulf Opportunity Zone and which is either: (1) non-residential real property or residential rental property which is placed in service by the taxpayer on or before December 31, 2010, or (2) in the case of a taxpayer who places in service a building described in (1), property described in Code Section 168(k)(2)(A)(i), if substantially all the use of such property is in such building and such property is placed in service within 90 days of the date the building is placed in service. However, for non-residential real property or residential rental property, only the adjusted basis of such property attributable to manufacture, construction, or production before January 1, 2010 (progress expenditures) is eligible for the additional first-year depreciation.
Extension of Archer medical savings accounts
The provision extends for two years the present-law Archer MSA provisions (through December 31, 2007).
Extension of taxable income limit on percentage depletion for oil and natural gas produced from marginal properties
The Bill extends for two years the present-law taxable income limitation suspension provision for marginal production (through tax years beginning on or before December 31, 2007).
Extension of tax incentives for investment in the District of Columbia
The Bill extends the designation of certain economically depressed census tracts in the District of Columbia as the “District of Columbia Enterprise Zone” through December 31, 2007, allowing zone businesses and residents continued eligibility for special tax incentives.
Additional provisions
The Indian employment tax credit is extended through tax years beginning on or before December 31, 2007;current incentives related to depreciation of qualified Indian reservation property are extended to apply to property placed in service through December 31, 2007;present-law provisions for qualified zone academy bonds are extended through December 31, 2007, and new arbitrage, spending, and reporting requirements are imposed for obligations issued after the date of enactment concerning allocations of the annual aggregate bond cap for calendar years after 2005.
Energy Tax Provisions
Extension of placed-in-service date for tax credit for electricity produced at wind, closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, landfill gas, trash combustion, or qualified hydropower facilities
The Bill extends through December 31, 2008, the period during which certain facilities may be placed in service as qualified facilities for the electricity production credit. The provision is effective for facilities placed in service after December 31, 2007. The placed-in-service date extension applies for all qualified facilities, except for qualified solar, refined coal, and Indian coal facilities.
Extension of energy efficient commercial buildings deduction
The Bill extends the deduction to property placed in service before January 1, 2009.
Extension of energy efficient new homes credit
The Bill extends the credit to homes whose construction is substantially completed after December 31, 2005, and that are purchased after December 31, 2005, and before January 1, 2009.
Extension of credit for residential energy efficient property
The Bill extends the credit for residential energy efficient property to property placed in service after December 31, 2005, and before January 1, 2009. The provision also clarifies that all property, not just photovoltaic property, that uses solar energy to generate electricity for use in a dwelling unit is qualifying property. The provision is effective on the date of enactment.
Additional provisions
Additional provisions extend the present law business solar and fuel cell energy credit at current credit rates through December 31, 2008;extend the reduced rates for qualified methanol or ethanol fuel through December 31, 2008;authorize an additional $400 million of clean renewable energy bonds that may be issued and extend the authority to issue such bonds through December 31, 2008;modify the advanced coal credit for sub-bituminous coal effective for advanced coal project certification applications submitted after October 2, 2006; add a special depreciation allowance for cellulosic biomass ethanol plant property for property placed in service before January 1, 2013, and after the date of enactment, in tax years ending after such date; authorize expenditures from the Leaking Underground Storage Tank Trust Fund; and repeal the phase-out limitation for coke and coke gas otherwise eligible for a credit under Code Section 45K(g), while clarifying that qualifying facilities producing coke and coke gas under Code Section 45K(g) do not include facilities that produce petroleum-based coke or coke gas.
Health Savings Accounts
Rollovers from health FSAs and HRAs into HSAs
The Bill allows certain amounts in health flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs) to be distributed from the health FSA or HRA and contributed through a direct transfer to a health savings account (HSA) without violating the otherwise applicable requirements for such arrangements. The provision is effective for distributions and contributions on or after the date of enactment and before January 1, 2012.
Certain FSA coverage treated as disregarded coverage
The Bill provides that, for tax years beginning after 2006, in certain cases, coverage under a health FSA during the period immediately following the end of a plan year during which unused benefits or contributions remaining at the end of the plan year may be paid or reimbursed to plan participants for qualified expenses is disregarded coverage. The provision disregarding certain FSA coverage is effective after the date of enactment for coverage for tax years beginning after December 31, 2006.
One-time rollovers from IRAs into HSAs
The provision allows a one-time contribution to an HSA of certain amounts distributed from an individual retirement arrangement (IRA). The contribution must be made in a direct trustee-to-trustee transfer. Amounts distributed from an IRA under the provision are not includible in income to the extent that the distribution would otherwise be includible in income. In addition, such distributions are not subject to the 10-percent additional tax on early distributions. The provision is effective for tax years beginning after 2006. It does not apply to simplified employee pensions (SEPs) or to SIMPLE retirement accounts.
Additional provisions
Additional provisions repeal the annual plan limitation on the HSA contribution limitation effective for tax years beginning after 2006; modify employer comparable contribution requirements for HSA contributions made to non-highly compensated employees effective for tax years beginning after 2006;provide for earlier indexing of cost-of-living adjustments effective for adjustments made for tax years beginning after 2007; and allow contributions for months preceding the month that the taxpayer is an eligible individual effective for tax years beginning after 2006.
Other Provisions
Alternative minimum tax credit relief for individuals:
Under the Bill, an individual’s minimum tax credit allowable for any tax year beginning before 2013, is not less than the “AMT refundable credit amount.” The “AMT refundable credit amount” is 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. The long-term unused minimum tax credit for any tax year means the portion of the minimum tax credit attributable to the adjusted net minimum tax for tax years before the third tax year immediately preceding the tax year (assuming the credits are used on a first-in, first-out basis). The additional credit allowed as a result of this provision is refundable. However, the credit is phased out if an individual’s income exceeds a certain amount.
Exclusion of gain on sale of a principal residence by a member of the intelligence community:
Under the Bill, specified employees of the intelligence community may elect to suspend the running of the five-year test period for purposes of excluding gain on the sale of a personal residence during any period in which they are serving on extended duty. The provision applies to sales and exchanges after the date of enactment and before 2011.
Modification of tax on unrelated business taxable income of charitable remainder trusts:
The Bill imposes a 100-percent excise tax on the unrelated business taxable income of a charitable remainder trust effective for tax years beginning after December 31, 2006 (replacing the present-law rule that takes away the income tax exemption of a charitable remainder trust for any year in which the trust has any unrelated business taxable income).
Deduction allowable for income attributable to domestic production activities in Puerto Rico:
Code Section 199 is amended to include Puerto Rico within the definition of the United States for determining eligible taxpayers’ domestic production gross receipts, but only if all of the taxpayer’s gross receipts from sources within Puerto Rico are currently taxable for U.S. federal income tax purposes. Also, any such taxpayer is allowed to take into account wages paid to bona fide Puerto Rico residents in calculating the 50-percent wage limitation. The provision is effective for the first two tax years beginning after December 31, 2005, and before January 1, 2008.
Partial expensing for advanced mine safety equipment:
A taxpayer may elect to treat 50 percent of the cost of any qualified advanced mine safety equipment property as a deduction in the tax year in which the equipment is placed in service. The provision applies to costs paid or incurred after the date of enactment, for property placed in service on or before December 31, 2008.
Mine rescue team training credit:
A taxpayer that is an eligible employer may claim a credit for each qualified mine rescue team employee. The provision is effective for tax years beginning after 2005, and before 2009.
Certain settlement funds:
The provision permanently extends to funds and accounts established after 2010, the treatment of certain settlement funds as beneficially owned by the United States government and therefore, not subject to federal income tax.
Capital gains treatment for certain self-created musical works:
The provision makes permanent the availability of the Code Section 1221(b)(3) election to treat certain sales of musical compositions or copyrights in musical works as being sales of capital assets (and therefore as generating capital gain). The provision also makes permanent the accompanying rule limiting to adjusted basis the amount of a charitable contribution deduction allowed for musical compositions or copyrights in musical works to which a taxpayer has elected the application of Code Section 1221(b)(3).
Qualified mortgage bonds:
Modifications to qualified veterans’ mortgage bonds are made permanent and the qualified mortgage bond program is expanded to provide veterans a one-time exception to the first-time homebuyer requirement effective as of the enactment date and before 2008.
Premiums for mortgage insurance:
Certain premiums paid or accrued for qualified mortgage insurance by a taxpayer during the tax year in connection with acquisition debt on a taxpayer’s qualified residence are treated as interest that is qualified residence interest and thus deductible. The provision does not apply to mortgage insurance contracts issued before 2007 and terminates for any amount paid or accrued after December 21, 2007, or properly allocable to any period after that date.
Additional provisions:
The Bill increases the IRS-imposed penalty and modifies provisions concerning frivolous tax submissions;modifies the definition of qualified railroad track expenditures for the railroad track maintenance credit effective for expenditures paid or incurred during tax years beginning after December 31, 2004, and before January 1, 2008;makes permanent the special rule regarding treatment of below-market loans to qualified continuing care facilities;makes permanent the decrease in minimum vessel tonnage limit to 6,000 deadweight tons and Great Lakes domestic shipping to not disqualify vessel from tonnage tax effective for tax years beginning after date of enactment;and makes permanent the active business rules related to taxation of distributions of stock and securities of a controlled corporation.
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