Congress Passes Year-End Tax Legislation

In the final hours of the 109th Congress, the House and Senate passed the Tax Relief and Health Care Act of 2006, the House on the tax portion of the legislation by a vote of 367 to 45 and the Senate by a vote of 79 to 9. The legislation includes over three dozen extensions of existing tax provisions, many of which had expired at the end of 2005 and would be retroactively extended. These include the state sales tax deduction, the above-the-line deduction for higher education tuition and fees, the above-the-line deduction for out-of-pocket teachers' expenses, the research and development credit, the welfare-to-work and work opportunity credits, and the15-year amortization of leasehold improvements. The 2006 tax forms issued by the IRS do not include these provisions, and the IRS will be required to create supplemental instructions explaining how these items are to be handled on the tax return. The legislation makes permanent several provisions of the Tax Increase Prevention and Reconciliation Act of 2005.

The legislation includes about three dozen provisions that make substantive changes to the tax law beyond simply extending existing provisions. These changes include several changes to the rules for health savings accounts including expanded funding options, expansion of the domestic manufacturing deduction to activities in Puerto Rico, changes in the alternative minimum tax calculation of the refundable credit amount, new reporting requirements with respect to the issuance of stock under incentive stock option plans, a mortgage interest deduction for mortgage insurance premiums, an excise tax on unrelated business taxable income of charitable remainder trusts, a variety of reforms to support whistleblowers, an increase in frivolous return penalties, and an expansion of qualified mortgage bonds for veterans. Several of the provisions extended include significant modifications, including the alternative incremental credit and new alternative simplified credit for the research credit, combining and modifying the welfare-to-work and work opportunity credits, and inclusion of computer technology and equipment in the special rules for charitable contributions of scientific property used in research.

The estimated ten-year cost of the proposals is approximately $45 billion. President Bush is expected to sign the legislation.