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As lawmakers return to work after their August recess, Hurricane Harvey has increased expectations on Congress to quickly pass disaster-relief tax breaks. September is also expected to bring Congressional hearings on tax reform and possibly the unveiling of tax reform legislation. At the same time, lawmakers must address the federal government’s budget, including the IRS.

As lawmakers return to work after their August recess, Hurricane Harvey has increased expectations on Congress to quickly pass disaster-relief tax breaks. September is also expected to bring Congressional hearings on tax reform and possibly the unveiling of tax reform legislation. At the same time, lawmakers must address the federal government’s budget, including the IRS.

Disaster relief

After Hurricane Katrina, Congress passed an extensive disaster relief package, which included many tax provisions. Lawmakers took similar action after Hurricane Sandy a few years ago. Congress is expected to take up a Hurricane Harvey disaster relief plan in coming weeks.

If a Hurricane Harvey bill resembles past disaster relief acts, affected taxpayers could see relaxed casualty loss rules, expanded expensing and more generous depreciation. Past disaster relief laws have also enhanced some tax credits, such as the rehabilitation credit, the low-income housing credit and the Work Opportunity Tax Credit (WOTC) to encourage rebuilding and hiring. For individuals, Congress could waive the penalty for early distributions from IRAs and certain retirement plans for hurricane-related distributions. These were some of the incentives Congress passed after Hurricane Katrina. A Hurricane Harvey relief bill could include these and/or different incentives. Our office will keep you posted of developments.

Meanwhile, the IRS has announced help for affected taxpayers. The IRS postponed various tax filing and payment deadlines that occurred starting on August 23, 2017. As a result, affected individuals and businesses will have until January 31, 2018, to file returns and pay any taxes that were originally due during this period. In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after August 23, 2017 and before September 7, 2017 if the deposits are made by September 7, 2017.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. The IRS will also work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Please contact our office if you have any questions.

Tax reform

Before their August recess, GOP leaders in the House and Senate, along with senior administration officials, outlined their ideas for tax reform. The lawmakers and White House staff said that tax reform legislation would originate in the House and Senate tax writing committees (the House Ways and Means Committee and the Senate Finance Committee). They also predicted that tax reform would lower and consolidate the individual tax rates, reduce the corporate income tax, and repeal the federal estate tax. However, the lawmakers were short on details. More information is expected to be gleaned as the tax writing committees hold hearings.

Several lawmakers have called for a bipartisan approach to tax reform. “It is going to take Democrats and Republicans getting together, putting aside their differences,” Senate Finance Committee (SFC) Chair Orrin Hatch, R-Utah, said. Hatch’s comments were shared by SFC Ranking Member Ron Wyden, D-Oregon. “In 1986, Republicans worked with Democrats from the get-go and knew that a long-term, bipartisan solution was necessary to create jobs and grow the economy,” Wyden said.

IRS funding

The federal government’s current fiscal year (FY) ends September 30. In his FY 2018 budget, President Trump proposed to cut the IRS’s budget for FY 2018. In past years, the Senate has restored some of the proposed funding cuts and the same scenario could play out this year, especially with IRS funding for cybersecurity and customer service.

Further, a bill drafted by the House Appropriations Committee would prevent the IRS from using any appropriations to "implement or enforce" the Affordable Care Act’s individual mandate requiring minimum essential coverage. The ACA generally requires individuals to have minimum essential health coverage or make a shared responsibility payment, unless exempt.

Parents incur a variety of expenses associated with children. As a general rule, personal expenditures are not deductible. However, there are several deductions and credits that help defray some of the costs associated with raising children, including some costs related to education. Some of the most common deductions and credits related to minors are the dependency exemption, the child tax credit, and the dependent care credit. Also not to be overlooked are tax-sheltered savings plans used for education, such as the Coverdell Education Savings Accounts (ESAs).

Parents incur a variety of expenses associated with children. As a general rule, personal expenditures are not deductible. However, there are several deductions and credits that help defray some of the costs associated with raising children, including some costs related to education. Some of the most common deductions and credits related to minors are the dependency exemption, the child tax credit, and the dependent care credit. Also not to be overlooked are tax-sheltered savings plans used for education, such as the Coverdell Education Savings Accounts (ESAs).

Dependency exemption. The dependency exemption is a type of deduction that is available for children and other qualifying dependents, subject to phase out if the taxpayer's adjusted gross income (AGI) exceeds prescribed threshold amounts. The amount of the personal exemption, adjusted for inflation, is $4,050 for tax years beginning in 2016 and 2017. The dependency exemption is available for each qualifying child under the age of 19 (under the age of 24 if a full-time student) and with no age restriction for a qualifying individual who is permanently and totally disabled. For 2017, the personal exemption begins to phase out for joint filers starting at $313,800 AGI and completely phasing out at $436,300 AGI ($261,500 and $384,000, respectively for single filers).

Child credit. The child tax credit is available for parents of qualifying children under the age of 17. The credit amount is $1,000 per qualifying child, but once again is subject to phase out if the taxpayer's AGI exceeds prescribed threshold amounts. The phaseout of the child tax credit starts at $110,000 of modified AGI (for unmarried taxpayers, it starts at $75,000). These thresholds are not adjusted for inflation.

Dependent care credit. The dependent care credit may be available to working parents for qualifying children under the age of 13, or for dependents who are physically or mentally incapable of self care. This credit is available not only for direct employment-related expenses that take place at home, but also child-care expenses for tuition paid for pre-K programs, as well as fees paid for after-school activities that double as child care. The dependent care credit is a percentage of eligible work-related expenses. The percentage goes down as adjusted gross income (AGI) goes up. The maximum amount of eligible expenses is $3,000 for taxpayers with one qualifying individual, and $6,000 for taxpayers with two or more qualifying individuals.

The amount of the credit is further determined by multiplying work-related expenses by the “applicable percentage,” which is 35 percent reduced by one percentage point for each $2,000 by which AGI for the tax year exceeds $15,000. However, the applicable percentage cannot go below 20 percent (for those with AGI over $43,000). Thus, the maximum dependent care credit amount overall is $1,050 for one qualifying dependent and $2,100 for two or more qualifying dependents. For those with income above $43,000, the maximum credit for $3,000 of qualifying expenses is $600. Finally, the amount of the employment-related expenses taken into account in calculating the credit may not exceed the lesser of the taxpayer's earned income or the earned income of his spouse if the taxpayer is married at the end of the tax year.

Coverdell education savings accounts. Two education savings entities let individuals pay for education on a tax-favored basis: a Coverdell Education Savings Account (Coverdell ESA or ESA) and a qualified tuition program (QTP, also referred to as a Code Sec. 529 plan). In contrast to Sec. 529 plans, which can only be used to cover college expenses, ESAs can cover expenses from kindergarten through college.

Individuals may open a Coverdell ESA to help pay for the qualified education expenses of a designated beneficiary. Contributions to a Coverdell ESA must be made in cash and are not deductible. In addition, the maximum annual contribution that can be made is limited to $2,000 a year. The annual contribution is phased out for joint filers with modified adjusted gross income (MAGI) at or above $190,000 and less than $220,000 (at or above $95,000 and less than $110,000 for single filers).

Distributions from Coverdell ESAs are not included in the income of the donor or the beneficiary, as long as payouts do not exceed the beneficiary's adjusted qualified education expenses. For purposes of excludable distributions from an ESA, qualified elementary and secondary school expenses (kindergarten through grade 12), include the following costs:

• expenses for tuition, fees, academic tutoring, services for beneficiaries with special needs, books, supplies, and other equipment that are incurred in connection with the designated beneficiary's enrollment or attendance at a public, private or religious school;
• expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs) that are required or provided by the school in connection with enrollment or attendance; and
• expenses for the purchase of computer technology or equipment or internet access and related services that will be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school. This category does not include software designed for sports, games or hobbies unless it is predominantly educational in nature.

Medical expense deduction. For parents who itemize deductions, medical and dental costs paid for their children may be deductible.

If you have any questions regarding tax breaks associated with child care or education expenses, please contact our office.

Two recent court cases indicate that, although use of a conservation easement to gain a charitable deduction must continue to be arranged with care, some flexibility in determining ultimate deductibility may be beginning to be easier to come by. The IRS had been winning a string of cases that affirmed its strict interpretation of Internal Revenue Code Section 170 on conservation easement. The two latest judicial opinions, however, help give taxpayers some much-needed leeway in proving that the rules were followed, keeping in mind that Congress wanted to encourage conservation easements rather than have its rules interpreted so strictly that they thwart that purpose.

Two recent court cases indicate that, although use of a conservation easement to gain a charitable deduction must continue to be arranged with care, some flexibility in determining ultimate deductibility may be beginning to be easier to come by. The IRS had been winning a string of cases that affirmed its strict interpretation of Internal Revenue Code Section 170 on conservation easement. The two latest judicial opinions, however, help give taxpayers some much-needed leeway in proving that the rules were followed, keeping in mind that Congress wanted to encourage conservation easements rather than have its rules interpreted so strictly that they thwart that purpose.

In the first case, the Court of Appeals for the Fifth Circuit found that a homesite adjustment provision did not prevent a conservation easement from satisfying the perpetuity requirement of Code Sec. 170 that controls charitable deductions. Modifications (or "tweaks as the court characterized them) would not violate the perpetuity requirement.

In the second case, a taxpayer satisfied the substantiation requirements for a charitable contribution of an easement to a landmark preservation council. Although the taxpayer had not received from the donee organization a timely letter that could have acted as a contemporaneous written acknowledgment, the Tax Court considered the deed of easement a good enough de facto qualified acknowledgment.

Comment. The first decision potentially opens up many more vacation-type properties on large tracts of land to be more susceptible to a "win-win" in terms of a charitable tax deduction for the homeowner and preserved acreage for the community. The second decision gives some flexibility to the rules on “contemporaneous” substantiation.

What Happened?

In the first case (BC Ranch II, L.P., CA-5, August 11, 2017), the taxpayer owned some 1,800 acres of land in Texas. The taxpayer donated a conservation easement to a tax-exempt organization. The easement aimed to protect the habitat for certain birds and to preserve the watershed, scenic vistas, and mature forest. The easement gave the grantee, its successors and assigns, perpetual easements in gross over the conservation areas, subjecting the property to a series of covenants and restrictions that prohibited most residential, commercial, industrial, and agricultural uses. The easement also included a boundary modification provision, affecting certain five-acre homesite parcels. The IRS disallowed the purported charitable deduction for the conservation easement. The Tax Court had found that the conservation easement was not given in perpetuity because the five-acre homesite parcels could be changed to include property within the easement.

In the second case (310 Retail, LLC, TC Memo 2017-164), the taxpayer (an LLC) donated a façade easement (also considered a “conservation easement”) in connection with an historic building in downtown Chicago. On audit, the IRS disallowed a $26 million charitable deduction by the taxpayer on the grounds that a contemporaneous written acknowledgment within the meaning of Code Sec. 170 was not provided. Although the LLC did not receive from the donee organization a timely letter of the sort that normally acts as a “contemporaneous written acknowledgment,” the taxpayer claimed that it nevertheless satisfied the statutory substantiation requirements, pointing to the deed of easement that the donee organization executed contemporaneously with the gift.

Courts’ Analysis

Rearranging parcels. The Fifth Circuit found that the easement in this case was different from the easement in Belk, a prior Tax Court case upon which the IRS was relying. The easement in Belk could be moved to a tract or tracts of land entirely different and remote from the property originally covered by that easement. The easement in this case did not allow any change in the exterior boundaries or acreage. "Neither the exterior boundaries nor the total acreage of the instant easements will ever change: Only the lot lines of one or more of the five-acre homesite parcels are potentially subject to change and then only within the easements and with the grantee’s consent," the court found.

Contemporaneous acknowledgement. The Tax Court in its case found that the deed of easement constituted a contemporaneous written acknowledgment sufficient to substantiate the taxpayer’s gift because it was properly executed and recorded. The Court also found that the deed also sufficiently included what should be considered “an affirmative indication that the donee organization had supplied no goods or services to the taxpayer in exchange for its gift.” The deed explicitly stated that it represented the parties’ "entire agreement" and, thus, negated the provision or receipt of any consideration not stated in that deed.

A partnership is created when persons join together with the intent to conduct unincorporated venture and share profits. Intent is determined from facts and circumstances, including the division of profits and losses, the ownership of capital, the conduct of parties, and whether a written agreement exists. Despite such nuances in the process, however, distinguishing the existence of a partnership from other joint investments or ventures is often critical in determining tax liability and reporting obligations.

A partnership is created when persons join together with the intent to conduct unincorporated venture and share profits. Intent is determined from facts and circumstances, including the division of profits and losses, the ownership of capital, the conduct of parties, and whether a written agreement exists. Despite such nuances in the process, however, distinguishing the existence of a partnership from other joint investments or ventures is often critical in determining tax liability and reporting obligations.

The factors often considered in the determination of whether the participants in an enterprise intended to form a partnership include:

1. the existence of an oral or written agreement between the parties;
2. the contribution by the participants of capital, property or services;
3. the sharing of profits and/or losses;
4. any mutual control over the business;
5. the joint conduct of the business; and
6. the filing of partnership returns or representations to third parties that the participants are partners.

The presence or absence of these factors is weighed in distinguishing partners in a partnership from other business relationships. Thus, co-ownership of property may be a partnership depending on the owners' intent, the manner in which the property is held and the other facts and circumstances of the arrangement including a profit motive. Other arrangements may or may not be treated as partnerships depending upon whether the requisite intent and circumstances are present. These include:

• lessor-lessee relationships (normally, this does not make the lessor and lessee partners for tax purposes, unless the lessor also exercises control over the lessee's business beyond that necessary to protect his investment and assure the lessee's continuing ability to pay rent);
• employment or independent contractor relationships (an employment or independent contractor relationship might be characterized for tax purposes as a partnership when a person both provides services to and shares in the profits of the enterprise);
• debtor-creditor relationships (although a debtor-creditor relationship generally does not establish the existence of a partnership, an advance of funds may be treated as a contribution to the capital of, or an acquisition of an equity interest in, a partnership rather than as a loan);
• purchaser-seller relationships (a purported sale may be treated as a partnership between the seller and buyer if the terms of sale grant the seller a right to receive a share of the future profits generated by the business or asset being sold, and the seller has a continuing proprietary interest in the business or asset).

Gross income is taxed to the individual who earns it or to owner of property that generates the income. Under the so-called “assignment of income doctrine,” a taxpayer may not avoid tax by assigning the right to income to another.

Gross income is taxed to the individual who earns it or to owner of property that generates the income. Under the so-called “assignment of income doctrine,” a taxpayer may not avoid tax by assigning the right to income to another.

Specifically, the assignment of income doctrine holds that a taxpayer who earns income from services that the taxpayer performs or property that the taxpayer owns generally cannot avoid liability for tax on that income by assigning it to another person or entity. The doctrine is frequently applied to assignments to creditors, controlled entities, family trusts and charities.

A taxpayer cannot, for tax purposes, assign income that has already accrued from property the taxpayer owns. This aspect of the assignment of income doctrine is often applied to interest, dividends, rents, royalties, and trust income. And, under the same rationale, an assignment of an interest in a lottery ticket is effective only if it occurs before the ticket is ascertained to be a winning ticket.

However, a taxpayer can shift liability for capital gains on property not yet sold by making a bona fide gift of the underlying property. In that case, the donee of a gift of securities takes the “carryover” basis of the donor.  For example, shares now valued at $50 gifted to a donee in which the donor has a tax basis of $10, would yield a taxable gain to the donee of its eventual sale price less the $10 carryover basis. The donor escapes income tax on any of the appreciation.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of September 2017.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of September 2017.

September 1

Employers. Semi-weekly depositors must deposit employment taxes for Aug 26–Aug 29.

September 7

Employers. Semi-weekly depositors must deposit employment taxes for Aug 30–Sep 1.

September 8

Employers. Semi-weekly depositors must deposit employment taxes for Sep 2–Sep 5.

September 11

Employees who work for tips. Employees who received $20 or more in tips during August must report them to their employer using Form 4070.

September 13

Employers. Semi-weekly depositors must deposit employment taxes for Sep 6–Sep 8.

September 15

Employers. For those to whom the monthly deposit rule applies, deposit employment taxes and nonpayroll withholding for payments in August.

Corporations. Corporations deposit the third installment of estimated tax for 2017.

Individuals. Individuals deposit the third installment of 2017 estimated tax.

Corporations. S Corporations with 6-month extensions file 2016 1120S and pay tax due.

Partnerships. Partnerships with 5-month extensions file 2016 Form 1065.

Employers. Semi-weekly depositors must deposit employment taxes for Sep 9–Sep 12.

September 20

Employers. Semi-weekly depositors must deposit employment taxes for Sep 13–Sep 15.

September 22

Employers. Semi-weekly depositors must deposit employment taxes for Sep 16–Sep 19.

September 27

Employers. Semi-weekly depositors must deposit employment taxes for Sep 20–Sep 22.

September 29

Employers. Semi-weekly depositors must deposit employment taxes for Sep 23–Sep 26.

October 4

Employers. Semi-weekly depositors must deposit employment taxes for Sep 27–Sep 29.

October 6

Employers. Semi-weekly depositors must deposit employment taxes for Sep 30–Oct 3.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

IRS Recommended Action Steps

Specifically, the IRS advised the taxpayers take the following steps now to jump start a successful 2016 filing season for their 2015 tax year returns:

• Consider filing a new Form W-4, Employee's Withholding Allowance Certificate, with an employer if certain life circumstances have changed (such as a change in marital status or the birth of a child). A new child could mean an additional exemption and/or tax credits that might lower your tax liability. Therefore you might benefit from claiming an extra withholding allowance. Conversely, getting married (or divorced) could change your income, making it advantageous to readjust your withholding accordingly.
• Report any changes or projected changes in income to the Health Insurance Marketplace (if taxpayer obtained insurance through a marketplace). Income affects the calculation of subsidy payments. Recipients of the advance premium tax credit may owe tax for 2015 if their subsidy payments are too high.
• Maintain accurate and organized tax records, such as home loan documents or financial aid documents. Many deductions must be substantiated with evidence, and staying organized now could facilitate the tax return filing process in the future.
• Find a tax return preparer. Looking for a qualified tax return preparer may be easier in the off-season, when you are under no immediate pressure to select a person. This can provide taxpayers with more time to evaluate a preparer's credentials.
• Plan to increase itemized deductions. If a taxpayer plans to purchase a house, contribute to charity, or incur medical expenses that may not be reimbursed during 2015, it may be beneficial to consider whether itemizing deductions would be more beneficial than claiming the standard deduction for 2015.
• Stay informed of the latest tax law changes. Keeping on top of developments can reduce confusion in the long run.

A major repair to a business vehicle is usually deductible in the year of the repair as a "maintenance and repair" cost if your business uses the actual expense method of deducting vehicle expenses. If your business vehicle is written off under the standard mileage rate method, your repair and maintenance costs are assumed to be built into that standard rate and no further deduction is allowed.

Standard mileage rate

The standard mileage rate for business use of a vehicle is 48.5 cents per mile for 2007. The standard mileage rate replaces all actual expenses in determining the deductible operating business costs of a car, vans and/or trucks. If you want to use the standard mileage rate, you must use it in the first year that the vehicle is available for use in your business. If you use the standard mileage rate for the first year, you cannot deduct your repairs for that year. Then in the following years you can use the standard mileage rate or the actual expense method.

Actual cost

You can deduct the actual vehicle expenses for business purposes instead of using the standard mileage rate method. In order to use the actual expenses method, you must determine what it actually cost for the repairs attributable to the business. If you have fully depreciated your vehicle you can still claim your repair expenses.

Exceptions

Of course, the tax law is filled with exceptions and that includes issues relating to the deductibility of vehicle repairs and maintenance. Some ancillary points to consider:

• If you receive insurance or warranty reimbursement for a repair, you cannot "double dip" and also take a deduction;
• If you are rebuilding a vehicle virtually from the ground up, you may be considered to be adding to its capital value in a manner in which you might be required to deduct costs gradually as depreciation;
• If you use your car for both business and personal reasons, you must divide your expenses based upon the miles driven for each purpose.

You may want to calculate your deduction for both methods to determine which one will grant you the larger deduction. If you need assistance with this matter, please feel free to give our office a call and we will be glad to help.

In many cases, employees can elect to reduce their salary and contribute the amounts to a retirement plan. These plans include 401(k) cash or deferred arrangements, 403(b) tax-sheltered annuities, eligible Code Sec. 457 deferred compensation plans of state and local governments and tax-exempt entities, simple retirement accounts, and plans for self-employed persons such as a SEP individual retirement account (SEP IRA).

Each retirement plan limits the amount that can be contributed annually to the plan:

• IRAs - Contribution limits are $4,000 for 2006 and 2007; $5,000 for 2008.
• 401(k), 403(b), 457, SEP IRA - Contribution limits are $15,000 for 2006 and $15,500 for 2007. The contribution limits are indexed.
• Simple retirement accounts - The limit is $10,000 for 2006; $10,500 for 2007. The contribution limit is indexed.

Many retirement plans allow participants age 50 and older to make "catch-up" contributions. Participants can contribute an additional amount in excess of the normal limits. Making a catch-up contribution increases the amount available at retirement and is beneficial if the employee can afford it.

There is a separate limit for catch-up contributions. The limits are as follows:

• IRAs - $1,000 for 2007. This amount is not indexed.
• 401(k), 403(b), 457 and SEPs - $5,000 in 2006; indexed in $500 increments but unchanged for 2007.
• SIMPLE plans - $2,500 for 2006, indexed but unchanged for 2007.

Parents of a child under age 13 can take a tax credit for child care expenses to enable them to work. The credit can be taken for care of one or more children. Child care expenses are amounts you paid for someone to come to your home, for care at the home of a day care provider, and for care at a day care center.

The credit is a percentage of qualified child care costs. Qualified costs are limited to $3,000 for one child and $6,000 for two or more children. The credit is taken on the lowest of your earned income, your spouse's earned income, or your qualified costs. Generally, if the spouse is not working, no credit is allowed, unless the spouse is a student or is disabled.

The cost of child care includes incidental amounts for food and schooling, but not items with a separate cost. The cost of schooling does not qualify if the child is in kindergarten or above. The credit can also be claimed for the cost of taking care of a disabled spouse who cannot care for himself or herself, and for any other disabled person that you can claim as a dependent.

Married couples must file a joint return to claim the credit. You also qualify to claim the credit if you file as a single person, head of household, or qualifying widow(er).

To compute the amount of the credit, you multiply the amount determined from costs or earned income by a specified percentage. The percentage starts at 35 percent, if you have $15,000 or less of adjusted gross income. The percentage is reduced by one percentage point for every $2,000 of additional income for the next $23,000 in income above $15,000. You can use the minimum percentage of 20 percent if your income is $43,000 or more. Thus, the maximum credit is $1,050 (35 percent of $3,000) for one child and $2,100 for two or more children (35 percent of $6,000); and the minimum, no matter how much money you make, is $600 for one child and $1200 for more than one child.

The credit is taken on Form 2441. You must provide the name and address of the day care provider, the provider's taxpayer identification number, and the expenses paid to the provider. The day care provider cannot be your spouse, a parent of the child, or another person you claim as a dependent. However, payments to your child age 19 or older will qualify for the credit. You must also provide the names of your children and a social security number for each child.

If you are enrolled in a flexible spending account (FSA) with your employer, you may have elected to pay for child care expenses with funds from the FSA. These amounts are tax-free. To prevent a double benefit, you must reduce the child care credit by amounts used from the FSA to pay for child care.

In a final session, Congress approved a $45.1 billion package of tax extenders and other tax breaks during the night of December 8-9. The Tax Relief and Health Care Act of 2006 (H.R. 6111) renews many valuable - but temporary - tax breaks for individuals and businesses, including the state and local sales tax deduction, the higher education tuition deduction and employer tax incentives. The new law also extends some energy tax breaks, makes Health Savings Accounts (HSAs) more attractive and creates new tax incentives.

Temporary versus permanent tax cuts

Tax cuts come in two types: permanent and temporary. In recent years, Congress has favored temporary tax cuts over permanent ones largely because of how they are reflected in the federal budget. Temporary tax cuts appear to cost less over one, two or three years than permanent tax cuts.

The drawback is that they are temporary. They ultimately expire unless Congress extends them.

That's exactly what happened with the extenders. Nearly all of them expired at the end of 2005. The new law extends them through 2007.

Here's a rundown of the tax incentives that are extended through 2007:

--Deduction for state and local taxes;

--Higher education tuition deduction;

--Work Opportunity and Welfare-to-Work tax credits;

--Teacher's classroom expense deduction;

--Research tax credit;

--Archer Medical Savings Accounts;

--Indian employment tax credit;

--Accelerated depreciation for business property on a Native American reservation;

--15-year recovery period for some leasehold and restaurant improvements;

--Tax incentives for the District of Columbia;

--Brownfields remediation expensing;

--Cover over of tax on distilled spirits;

--Parity in application of mental health benefits; and

--Zone academy bonds.

State and local sales tax deduction

The new law allows taxpayers to deduct either state and local income taxes or state and local sales taxes as an itemized deduction. You have two options. You can calculate your deduction either by saving receipts or using the IRS' Optional State Sales Tax Tables. Be careful, the deduction phases-out for higher-income taxpayers. Even if you think the state and local income tax deduction would be larger, it's worthwhile to calculate both, especially if you may be liable for AMT. Our office can help you with all the calculations.

Teacher's classroom expense deduction

Teachers, aides and other education workers often pay for classroom expenses out of their own funds. The classroom expense deduction permits education workers to deduct some out-of-pocket classroom expenses up to $250. Many classroom purchases qualified for the deduction, such as paper and pens, books, computer software, and so on. However, you cannot take the deduction if your employer reimburses you for the classroom supplies.

Higher education tuition deduction

This deduction is often confused with the deduction for interest paid on a student loan. That's a separate tax break. The higher education tuition deduction is an above-the-line deduction for qualifying tuition and related expenses. However, you cannot deduct housing, transportation, food, insurance, and some other expenses. Taxpayers claiming the higher education tuition deduction also cannot take the HOPE and Lifetime Learning tax credits. Because this deduction has so many rules, it's important that our office carefully review your tax situation.

Welfare-to-Work and Work Opportunity tax credits

These credits are designed to encourage employers to hire economically-disadvantaged individuals. The credits are very similar and are equally complex. Only individuals in "targeted" groups qualify. Wages also cannot exceed certain thresholds. The new law extends them and consolidates them making tax planning very important.

Archer Medical Savings Accounts

If you own a small business, you know that health care costs are a huge drain on profits. Over the years, Congress has tried several "fixes." Archer Medical Savings Accounts were created to help workers save for health care expenses. They weren't very popular and today seem to be eclipsed by Health Savings Accounts. However, every employer is different. Archer Medical Savings Accounts may a good fit for you and your employees. The new law extends them through 2007.

New tax incentives

The Tax Relief and Health Care Act of 2006 creates two new tax breaks that could be very valuable: a temporary refundable credit for certain taxpayers with long-term unused AMT credits who have AMT income from incentive stock options and a new deduction for premiums paid for qualified mortgage insurance. Both of these tax breaks have some very important limitations. Our office can help decipher them for you.

Energy tax breaks

A surprise last-minute addition to the new law was a package of energy tax extenders. The big news here is what was not extended. Congress did not extend the tax break for individuals who make energy-efficiency improvements to their homes, such as energy-efficient windows and doors. Instead, Congress extended energy tax breaks targeted mostly to businesses and authorized more tax credits for research into alternative energy production. 

Health Savings Accounts

HSAs are similar to IRAs. Your contributions are deductible and are tax-free if used for qualified health care expenditures. With proper planning, HSAs can be a great asset.

The new law makes HSAs even more attractive by allowing a one-time transfer of IRA savings to an HSA. You can also make a one-time transfer of savings in a health flexible spending account (FSA) or a health reimbursement arrangement (HRA) to an HSA. These are valuable tools if you plan correctly. Give our office a call if you have any questions about HSAs.

Important planning steps

The lateness of the new law makes tax planning very important for these last few weeks of 2006.

Give our office a call. We can schedule an appointment to sit down and discuss the new law in detail. There are a lot more tax breaks than we covered in this short article. Don't miss out on some potentially very valuable tax savings.

Only 50 percent of the cost of meals is generally deductible. A meal deduction is customarily allowed when the meal is business related and incurred in one of two instances:

(1) while traveling away from home (a circumstance in which business duties require you to be away from the general area of your tax home for longer than an ordinary day's work); and

(2) while entertaining during which a discussion directly related to business takes place.

Entertainment expenses generally do not meet the "directly related test" when the taxpayer is not present at the activity or event. Both your meal and the meal provided to your business guest(s)' is restricted to 50 percent of the cost.

Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. However, allowable deductions for transportation costs to and from a business meal are not reduced.

The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. It doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses. "Supper money" paid when an employee works late similarly may be tax free to the employee but only one-half may be deducted by the employer. The same principle applies to meals provided at an employees-only business luncheon, dinner, etc.

A special exception to the 50 percent rule applies to workers who are away from home while working under Department of Transportation regulations. For these workers, meals are 75 percent deductible in 2006 and 2007.

When a per diem allowance is paid for lodging, meal, and incidental expenses, the entire amount of the federal meals and incidental expense (M&IE) rate is treated as an expense for food or beverages subject to the percentage limitation on deducting meal and entertainment expenses. When a per diem allowance for lodging, meal, and incidental expenses for a full day of travel is less than the federal per diem rate for the locality of travel, the payer may treat 40 percent of the per diem allowance as the federal M&IE rate.

"Lavish" meals out of proportion to customary business practice are generally not deductible to the extent they are lavish. Generally, meals taken alone whentraveling generally have a lower threshold for lavishness than meals considered an entertainment expense for which a client or other business contact is "wined and dined."