Retroactive beneficial tax legislation, such as the just-passed “Tax Relief and Health Care Act,” is always welcome.The legislation, which President Bush is expected to sign shortly, contains numerous tax provisions, including a slew of tax benefit extenders, energy tax incentives, health savings account changes, tax administration modifications and technical corrections to earlier tax legislation.
However, there is one wrinkle caused by the legislation that will complicate this tax season for preparers. Returns were already being printed when the law was being finalized, so changes effective in 2006 won’t be reflected on paper returns and their accompanying instructions. Practitioners will have to independently review the application of the legislation to taxpayers for 2006.
Besides the well-publicized extension of the research tax credit, and personal deduction for state and local sales taxes paid by people who live in states without income taxes, and for elementary and high school teachers who spend their own money on classroom supplies, here’s a summary of some of the important tax provisions:
• The 15-year straight-line cost recovery for qualified leasehold improvements and qualified restaurant property has a new later expiration date of Dec. 31, 2007.
• The work opportunity tax and welfare-to-work credits are extended for an additional two years to include wages paid or incurred for individuals beginning work after Dec. 31, 2005, and before Jan. 1, 2008.
• An enhanced deduction to encourage businesses to contribute computer equipment software to elementary, secondary, and post-secondary schools will now expire Dec. 31, 2007. Certain equipment “assembled by” the donor to will now also qualify for the deduction.
• The new markets’ tax credit for qualified equity investments on a credit allowance date is extended for one additional year through the end of 2008.
• The Act extends the placed-in-service deadline for certain Gulf Opportunity Zone property to qualify for bonus depreciation to Dec. 31, 2010, for nonresidential real property or residential rental property.
• The election to include combat pay in earned income for calculating the earned income tax credit is extended for one year to taxable years ending before Jan. 1, 2008.
• The Act allows another $400 million of issuing authority to state and local governments for 2006 and 2007 for qualified zone academy bonds, and adds new expenditures, arbitrage, and reporting requirements for those bonds.
• The expensing of certain environmental remediation costs associated with cleaning up hazardous waste is extended through the end of 2007.
• For tax years ending in 2006, but before date of enactment, taxpayers can change elections already made on their originally filed returns to take into account the extension of the provisions that expired at the end of 2005.
In addition to a slew of changes with a focus on energy taxes and health savings accounts, other interesting modifications include that:
• Certain taxpayers who have unused alternative minimum tax credits can claim a refundable credit at 20 percent of the long-term unused AMT credits per year (up to $5,000) for the next five years. The refundable credit, which phases out for higher income taxpayers, is effective for taxable years beginning after the date of enactment and sunsets on Dec. 31, 2012.
• The election to have the sale or exchange of musical compositions or copyrights in musical works created by the taxpayer's personal efforts (or having a basis determined by reference to the basis in the hands of the taxpayer whose personal efforts created the compositions or copyrights) to be treated as the sale or exchange of a capital asset was set to expire after 2010. The act removes the expiration date.
• Effective on or after the date of enactment, there are a number of whistleblower reforms, including the creation of a whistleblower office within the IRS.
• The act also increases the frivolous tax submissions penalty to $5,000 and applies it to all taxpayers and federal taxes. The submissions subject to the penalty and the actions the IRS can take with regard to the submissions are modified.
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