The Tax Relief and Health Care Act of 2006 was signed by President Bush on Dec. 20. The Act temporarily extends some tax provisions that were set to expire, or, in some cases had already expired. The extended tax breaks include deductions for business research and development and for hiring people from the welfare rolls, a partial college tuition deduction and energy-conservation incentives.

The extended deductions of most interest to individual taxpayers are the qualified tuition deduction, classroom expense deduction, sales tax deduction and the combat pay election. Taxpayers may claim these deductions on their 2006 tax return, but the IRS will need to issue special instructions for claiming these deductions.

Qualified tuition deduction

The deduction for qualified tuition available to parents and students is extended for an additional two years, through the end of 2007. The maximum amount of tuition and fees deduction you can claim is $4,000 per year.

If your income is over $65,000 but under $80,000 (unmarried), then the maximum amount you can deduct is $2,000. For married couples filing a joint return, the phase-out range is over $130,000 but under $160,000.

Classroom expense

If you are a teacher and you paid for classroom supplies and other materials out of your own pocket, then you can claim up to $250 of those expenses as a tax deduction. If both you and your spouse are teachers, you can each claim up to $250 of expenses for $500 total on a joint return. This deduction is extended through 2007.

Sales tax deduction

Taxpayers can elect to deduct their state and local sales tax as an itemized deduction instead of an itemized deduction for state and local income taxes. This election is extended through the end of 2007. Taxpayers living in states with no income tax benefit the most from this deduction.

Combat pay

The election to treat combat pay as earned income for the purposes of the earned-income credit is extended through the end of 2007. The earned-income credit is a refundable federal income tax credit for low-income working individuals and families.

This extended election will make the credit available to military personnel earning combat pay, even though that pay is generally nontaxable.

Health Savings Accounts

The bill also makes changes to Health Savings Accounts. HSAs were created in 2003 and are designed to help individuals save for future medical and retiree health expenses on a tax-free basis.

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 law allows taxpayers to fund their HSAs up to the full limit, without regard to the policy's deductible. Taxpayers also may make a one-time rollover from an IRA to fund an HSA.

The new law raises the penalty for filing a frivolous tax return from $500 to $5,000.


Patti Spencer, Esq., can be reached at 320 Race Ave., Lancaster, PA 17603; 394-1131; or Patti@spencerlawfirm.com. Her recently published book, "Your Estate Matters," is available at Borders Book Shop and amazon.com. It can also be ordered by calling (888) 280-7715. blog comments powered by Disqus