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VITA/TCE Supplemental Training

Tax Relief & Health Care Act of 2006

The “Extender Bill”

This Act reinstates retroactively certain tax provisions that expired at the end of 2005.

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Objectives

The Tax Relief & Health Care Act of 2006 extended several tax provisions which may impact VITA & TCE customers:

Three key issues include the extended deductibility of – Tuition & Fees– Educator Expenses– Option to deduct State & Local General Sales Taxes

• Calculate and accurately report these three tax benefits

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Objectives (Continued)

• Awareness of Other “Extender” Provisions– Election to include Combat Pay in the EITC

calculation extended through 2007– Certain Tax Incentives for 1st time home buyers

in the District of Columbia extended through 2007– Credits for purchase of Residential Energy

Efficiency Products extended through 2008– Cutoff date for adding new Archer Medical

Savings Account (MSA) participants extended through 2007

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Effect on Return Processing and Tax Forms• E-File Returns:

• E-filing will not be available for “2006 Extenders” until February 3, 2007

• Paper Returns:• Key Tax Forms went to print in November 2006• Form 1040 will not be updated• Special instructions for claiming extender

provisions• Processing returns with extender deductions will

be delayed until early February

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Adjustments to Income

• Educator Expenses extended through 2007

• Tuition and Fees Deduction extended through 2007

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Educator Expenses

• Who is an eligible educator?

• Maximum income adjustment is $250 per eligible educator.

• What are qualified expenses?

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Educator Expenses (Continued)

Example

Joe and Mary will file a joint return for 2006.

Joe is a high school math teacher and incurred $500 in qualified unreimbursed expenses. Mary is a grade school principal and incurred $200 in qualified unreimbursed expenses.

Both Joe and Mary meet the definition of eligible educators. They will claim $450 ($250 for Joe and $200 for Mary) on Form 1040.

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Tuition and Fees Deduction

• Tuition and related expenses can be taken as an adjustment to income

• The maximum deduction for 2006 is $4,000

• AGI limits apply

• Not available to taxpayers using the Married Filing Separate filing status

• No Double Benefit Allowed

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Tuition and Fees Deduction (Continued)

To claim the Tuition and Fees Deduction the taxpayer must:

• Have incurred qualified expenses • For an eligible student • To attend an eligible educational institution

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Itemized Deductions

State and Local Income Taxes

vs

State and Local General Sales Taxes

Election extended through 2007

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TaxWise® Hints Review

• Worksheets are completed as data is entered on the Form 1040.

• Returns with “extender” adjustments or deductions must use Form 1040 ONLY.

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Summary

• Three (3) key tax benefits for individuals “extended” by the Tax Relief & Health Care Act of 2006:

- Educator Expenses

- Tuition and Fees Deduction

- State and Local General Sales Tax Deduction

• All Extended through December 31, 2007

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For More Information

References• IRS.gov• Pub 17, Your Federal Income Tax (for

Preparing 2005 Returns)• Pub 600, State and Local General Sales

Taxes • Pub 553, Highlights of 2006 Tax Changes• Pub 970, Tax Benefits for Education