Tax breaks may be extended this week
Lawmakers consider a vote on extending expired tax breaks and making them retroactive for this tax year.
NEW YORK (CNNMoney.com) -- A host of popular tax breaks stand a good chance of being extended this week before the House and Senate close shop for the rest of the year.
The main component of the tax legislation is the research and development credit for businesses. But a number of the breaks likely to be included will benefit individual taxpayers, such as education and sales tax deductions.
The tax breaks under consideration 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.
If lawmakers do vote to extend the expired breaks this week, they likely will extend them for two years beginning retroactively on Jan. 1, 2006, said Clint Stretch, managing principal of tax policy at Deloitte Tax LLP.
"If I had to bet, I'd bet 3-to-1 in favor of a bill getting done this week," Stretch said, if only because administratively it will be much harder on everyone if Congress chooses to act in the first quarter of 2007. That's because a lot of taxpayers will have already filed their 2006 returns and would need to amend them if the breaks are made retroactive to the start of this year.
As it is, said CCH principal federal tax analyst Mark Luscombe, the IRS will need to issue supplemental instructions should the breaks pass this week, because it has already sent out its 1040 form and instruction booklet for 2006.
Here's a quick look at three tax breaks that might affect you:
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 on 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.