Congress mulling tax break renewal
House, Senate expected to vote soon on legislation calling for a two-year extension of expired breaks and introducing a new mortgage insurance deduction.
NEW YORK (CNNMoney.com) -- The House was expected to vote late Thursday on legislation that renewed a host of expired business tax credits and popular individual tax breaks, and which also introduced a new itemized deduction for mortgage insurance premiums.
The bill was expected to pass and then be voted on by the Senate either later Thursday or Friday.
The main component of the tax legislation is the research and development credit for businesses. But a number of the breaks included benefit individual taxpayers, such as education and sales tax deductions.
The tax breaks expired at the end of 2005 and were tossed out of a $70 billion tax relief bill that passed last May to allow for the cost of extending the reduced tax rate on capital gains and dividends.
Should the House and Senate pass the bill and send it to President Bush, the IRS - which has already mailed out its 1040 form and instructions - would need to issue supplemental instructions regarding how and where taxpayers should include the extended and new deductions on their 2006 federal tax return, said CCH principal federal tax analyst Mark Luscombe.
Here's a quick look at the deductions in the legislation of benefit to individuals:
State and local sales tax deduction
The extension would give taxpayers the option on their federal return of deducting either what they paid in state and local income tax or what they paid in state and local sales taxes, whichever is higher.
This provision has been of greatest advantage to taxpayers who live in the handful of states that don't impose an income tax and to those who live in states with high sales taxes and relatively low income taxes.
There are nine states without personal income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
The tuition deduction is an above-the-line deduction for qualified higher education expenses, meaning it can be taken even if you don't itemize deductions on your federal return.
The deduction may be taken up to a maximum of $4,000 in tuition and fees for taxpayers with adjusted gross income (AGI) of $65,000 or less ($130,000 for married couples) or $2,000 for taxpayers with AGIs of $80,000 or less ($160,000 for married couples).
The tuition deduction may not be taken for expenses for which you are claiming an education credit (e.g., the HOPE or lifetime learning credits). You must choose one or the other if you qualify for both.
Teachers' classroom deduction
The provision allows teachers to continue to deduct their out-of-pocket costs - up to $250 - for buying classroom supplies. As with the tuition break, it can be taken even if you don't itemize deductions on your federal return.
Mortgage insurance premium deduction
The legislation allows taxpayers who itemize their deductions to deduct premiums paid for mortgage insurance - which typically is required when home buyers purchase their homes with less than 20 percent down. Currently, only the interest paid on one's mortgage is deductible if the taxpayer itemizes deductions.
The new insurance premiums deduction will only apply to mortgage insurance contracts issued in 2007 and is only available to taxpayers whose adjusted gross incomes do not exceed $110,000 ($55,000 for married taxpayers filing separately).