Tax Relief and Health Care Act of 2006
The Tax Relief and Health Care Act of 2006 was passed into law this week, extending the State and Local Sales Tax Deduction, the Higher Education Tuition and Fees Deduction, and the Educator Expense Adjustment. See this IRS news release for details, or see below for how to deal with the extended tax breaks on the 2006 Form 1040.
Form 1040 Changes
The IRS also announced details today on how taxpayers can use existing lines on the current Form 1040 and other tax documents to claim the three major extenders provisions. The key forms (Forms 1040, 1040A, Schedule A&B, and instructions) went to print in early November and reflected the law in effect at that time. The instructions contain a cautionary note to taxpayers that the legislation was pending at the time of printing.
The majority of taxpayers file electronically, but taxpayers using a paper Form 1040 will have to follow special instructions if they are claiming any of the three deductions. Form 1040 will not be updated. Instead, taxpayers should follow these steps:
State and Local General Sales Tax Deduction:
The deduction for state and local general sales taxes will be claimed on Schedule A (Form 1040), line 5, “State and local income taxes.” Enter “ST” on the dotted line to the left of line 5 to indicate you are claiming the general sales tax deduction instead of the deduction for state and local income tax.
The IRS also will issue Publication 600 for 2006, which includes the state and local sales tax tables, a worksheet and instructions for figuring the deduction.
This option is available to all taxpayers regardless of where they live, though it’s primarily designed to benefit residents of the eight states without state and local income taxes.
Higher Education Tuition and Fees Deduction:
Taxpayers must file Form 1040 to take this deduction for up to $4,000 of tuition and fees paid to a post-secondary institution. It cannot be claimed on Form 1040A.
The deduction for tuition and fees will be claimed on Form 1040, line 35, “Domestic production activities deduction.” Enter “T” on the dotted line to the left of that line entry if claiming the tuition and fees deduction, or “B” if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering “B,” taxpayers must attach a breakdown showing the amounts claimed for each deduction.
Educator Expense Adjustment to Income:
Educators must file Form 1040 in order to take the deduction for up to $250 of out-of-pocket classroom expenses. It cannot be claimed on Form 1040A.
The deduction for educator expenses will be claimed on Form 1040, line 23, “Archer MSA Deduction.” Enter “E” on the dotted line to the left of that line entry if claiming educator expenses, or “B” if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering “B,” taxpayers must attach a breakdown showing the amounts claimed for each deduction.
The new law also affects an even smaller number of business taxpayers who don’t use the Form 1040 series. There could be minimal processing delays for some of these business filers in January and early February.
