House passes tax break renewal
Senate expected to vote next on legislation calling for a two-year extension of expired breaks and introducing a new mortgage insurance deduction.
NEW YORK (CNNMoney.com) -- In a 367-45 vote, the House on Friday afternoon passed tax legislation that would renew for two years a host of expired business tax credits and popular individual tax breaks, and introduce a new, one-year itemized deduction for mortgage insurance premiums.
The Senate is expected to vote on the legislation either Friday evening or sometime over the weekend.
The tax extenders have drawn broad bipartisan support, but they will be rolled into a larger bill with various trade provisions that are more contentious, and there is no guarantee that the bill will pass as is in the Senate. Should it be amended, it would need to return to the House for another vote.
Senate Budget Committee Chairman Judd Gregg (R-NH) said he will try to kill it because of a $40 billion five-year price tag, according to Reuters.
In addition to the tax breaks, the package would, among other things, allow for oil and gas drilling on more than 8.3 million acres in the eastern Gulf of Mexico near Florida.
"It has in it a large amount of items which have nothing to do with extending taxes and have a lot to do with personal interests of various groups around this country who have the capacity to get things in bills," Gregg said in a Senate speech according to a Reuters report.
But Greg Valliere, chief strategist of the Stanford Washington Research Group, thinks the bill will pass. "It's the ultimate Christmas tree. There's just too much stuff in there. Too many deals have been cut for things to fall apart at this point."
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 Senate pass the extenders as well, the legislation will be sent to President Bush for his signature. And the IRS - which has already mailed out its 1040 form and instructions - will then 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.
If the Senate doesn't pass the tax extenders the task will be punted to the next Congress (under Democratic rule).
But if the 110th Congress, which begins after the New Year, makes the tax breaks retroactive to January 1, 2006 - as the current legislation calls for in many instances - that could cause a lot of administrative hassle for taxpayers who file their 2006 federal tax returns in January and February of 2007.
Here's a quick look at the deductions in the legislation that would benefit 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, which was in effect for tax years 2004 and 2005, 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).