NJSEA

Legislative Affairs Update

Date 12/18/06 Number 2006-10

(The provisions are more fully described in JCX-50-06, December 7, 2006, prepared by the staff of the Joint Committee on Taxation. All references to the “Code” refer to provisions of the Internal Revenue Code of 1986, as amended. All references to the “Secretary” refer to the Secretary of Treasury.)

OVERVIEW OF H.R. 6111, TAX RELIEF AND

HEALTH CARE ACT OF 2006

DIVISION A – EXTENSION AND EXPANSION OF CERTAIN TAX

RELIEF PROVISIONS AND OTHER TAX PROVISIONS

TITLE I – EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

Extends through 2007 certain tax provisions that would otherwise have expired at the end of 2005 or 2006, including:

The $4,000 above-the-line deduction for higher education expenses in lieu of claiming the Hope or Lifetime Learning tax credits;
The alternative deduction of State and local sales taxes rather than State and local income taxes;
The Research and Development Credit. The Act also increases the value of the alternative incremental credit and adds a new alternative simplified credit, effective for portions of tax years that are in 2007;
The Work Opportunity Tax Credit (“WOTC”) for taxpayers who hire individuals from certain groups who are considered to face barriers to employment. The maximum credit of $2,400, which may be claimed during the employee’s first year of employment, is extended through 2006. For 2007, the WOTC will be combined with the Welfare-to-Work Credit (“WTWC”), raising the age ceiling for food stamps under the WOTC from 25 to 40, revising eligibility requirements for ex-felons, and modifying the filing deadline for WOTC claimants from 21 to 28 days;
The inclusion of combat pay in the earned income credit calculation;
Qualified Zone Academy Bonds (“QZABs”) issued by States and local governments to help repair schools, purchase school equipment, and train teachers in economically distressed areas. The Act also imposes a new requirement that the issuer reasonably expects to, and actually spends, 95% of the proceeds from the sale of QZABs on QZAB property within 5 years of the date of issuance;
The $250 above-the-line deduction of out-of-pockets costs incurred by teachers to purchase books, supplies, and other classroom equipment;
The Brownfields’ deduction for costs incurred in cleaning up certain contaminated sites. The Act expands the definition of an eligible site to include sites contaminated by petroleum products;
The 4 special tax incentives available in the D.C. Enterprise Zone (i.e., 20% wage credit, $35,000 of additional small business expensing, tax-exempt bonds, and zero capital gains rates for property held 5 years), and the $5,000 credit for first-time homebuyers in D.C.;
The 20% Indian employer tax credit on the first $20,000 of wages and employee health insurance costs paid to individuals who live in, or near, Indian reservations to the extent these costs exceed the employer’s costs in the baseline year of 1993;
Accelerated depreciation for property that is primarily used to conduct business on an Indian reservation;
The reduced 15-year depreciation period for qualified leasehold and restaurant improvements;
The transfer to Puerto Rico and the Virgin Islands of $13.25 per-proof-gallon of the $13.50 per-proof-gallon excise tax on imported rum;
The $100 per-day excise tax penalty imposed on employers whose health plans are not in compliance with the requirement that dollar limits on mental health benefits must be the same as those on medical benefits;
The enhanced deduction for certain donations of scientific property and computer equipment to elementary, secondary, and post-secondary schools;
Deductions for contributions made to an Archer Medical Savings Account for health care expenses;
Waiver of the limitation on the 15% deduction allowance of a marginal oil or gas well’s yearly gross income that caps the deduction at 100% of the well’s net income in any year;
The economic development credit for certain domestic corporations operating in American Samoa;
The authority of the IRS to use income earned by an undercover operation to pay additional expenses incurred in the operation; and
The authority of the IRS to share certain tax information with certain other Federal and/or State authorities for the purpose of facilitating combined employment tax reporting, investigating terrorist activities, or facilitating the repayment of student loans that are contingent on income.

Extends the New Markets Tax Credit, which provides a tax credit to taxpayers who invest in businesses that are located in qualified low-income neighborhoods, through 2008. Also requires the Secretary to prescribe regulations to ensure that non-metropolitan counties receive a proportional allocation of qualified equity investments.

Extends the placed-in-service deadline related to the bonus depreciation for certain property used in certain highly damaged areas within the Gulf Opportunity Zone (through 2010).

Gives fiscal year taxpayers with tax years ending in 2006, but before the date of enactment, the opportunity to change elections already made to take into account the Act’s tax extender provisions that expired at the end of 2005.

TITLE II – ENERGY TAX PROVISIONS

Extends through 2008 certain expiring energy tax provisions, including:

The period during which certain facilities may be placed in service as qualified facilities for purposes of the renewable energy credit;

The authority to issue Clean Renewable Energy Bonds. Raises the caps on the amount of bonds that may be issued (from $800 million to $1.2 billion) and the amount that may be used to finance projects of governmental bodies (from $500 million to $750 million);

The deduction for energy-efficient commercial buildings that reduce annual energy and power consumption by 50% compared to the American Society of Heating, Refrigerating, and Air Conditioning Engineers standard. Equals the cost of energy-efficient property installed during construction, with a maximum deduction of $1.80 per square foot of the building (and includes a partial deduction of 60 cents per square foot for building subsystems);

The credit for new energy-efficient homes, which applies to manufactured homes meeting Energy Star Standards and other homes meeting a 50% standard;

The credit for residential energy-efficient property, which is equal to 30% of qualifying expenditures. Replaces the term “qualified photovoltaic property expenditures” with “qualified solar electric property expenditures;”

The energy credit, which provides a 30% business energy credit for the purchase of qualified fuel cell power plants for businesses, a 30% credit for the purchase of qualifying solar energy property, and a 10% credit for the purchase of qualifying stationary microturbine power plants; and

A reduced excise tax rate on qualified methanol and ethanol fuel produced from coal.

Provides an additional first-year depreciation deduction equal to 50% of the taxpayer’s adjusted basis in a new cellulosic biomass ethanol facility placed in service prior to January 1, 2013.

Expands the types of expenditures that may be made from the Leaking Undergound Storage Tank Trust Fund on protective and corrective measures for the national water supply.

Provides that petroleum coke is not a qualifying product for purposes of the nonconventional production tax credit, and eliminates the phase-out of the credit for facilities producing coke or coke gas.

TITLE III – HEALTH SAVINGS ACCOUNTS

Permits an employer to make a one-time balance transfer of the balance in an employee’s Health Reimbursement Account (“HRA”) or Flexible Spending Account (“FSA”) to a Health Savings Account (“HSA”). The maximum transfer is the lesser of the HRA or FSA balance on the date of transfer or September 21, 2006. Transfers must be made prior to January 1, 2012. The transferred amount is taxable as ordinary income and subject to a 10% excise tax if a high deductible health plan (“HDHP”) is not maintained for at least 12 months following the transfer.

Repeals the annual deductible limitation on HSA contributions, allowing individuals and families to contribute up to the maximum annual limitation ($2,250 for individuals and $4,500 for families), even if their annual insurance deductible is less than the maximum.

Requires that cost-of-living adjustments to HSA limits for a year be made by June 1 of the preceding calendar year.

Allows individuals who become covered under a HDHP in a month other than January to make the full deductible HSA contribution for the year, provided the individual maintains the HDHP for at least 12 months (otherwise, the deduction is lost and a 10% penalty is imposed).

Provides an exception to the comparable contribution requirements by allowing employers to make larger HSA contributions to lower-paid employees than to highly compensated employees.

Permits those who cannot afford to fully fund an HSA with direct contributions to make a one-time contribution from an individual retirement accountto an HSA for the payment of medical expenses. The amount of the transfer is limited to the otherwise maximum deductible contribution amount to the HSA.

TITLE IV – OTHER PROVISIONS

Allows U.S. businesses operating as branches in Puerto Rico to claim the domestic manufacturing deduction through 2007.

Allows individuals to take advantage of a refundable credit with respect to certain long-term unused AMT credits existing prior to 2013. The annual credit amount, subject to a phase-out, is 20% of the amount of the long-term unused credit (up to $5,000).

Requires corporations involved in a transfer of stock options to an individual to file an information return with the IRS.

Allows a 50% deduction for certain qualified mine safety equipment expendituresthrough 2008.

Provides an employer tax credit for certain mine rescue team training programs through 2008.

Establishes a reward range for whistleblowers of 15-30% of the proceeds collected by the IRS where the amount in dispute exceeds $2 million (with certain exceptions). Also requires the Secretary to establish a Whistleblower Office within the IRS to administer the reward program and to conduct a study and submit a report yearly on the program.

Increases the penalty for submitting frivolous tax returns from $500 to $5,000 and expands the penalty to all taxpayers and all types of Federal taxes, as well as submissions for lien and levy collection due process, installment agreements, offers-in-compromise, and taxpayer assistance orders.

Adds the meningococcal and human papillomavirus vaccines to the list of vaccines that are subject to an excise tax of 75 cents per dose.

Makes permanent certain provisions that were enacted on a temporary basis in the Tax Increase and Reconciliation Act of 2005 (“TIPRA”) including:

The exemption from income tax for qualified hazardous waste site cleanup settlement funds;
Simplification of the application of the active trade or business test to certain corporate distributions by applying this test on an affiliated group basis;
The increased limit of qualified veterans’ mortgage bonds issuable by Alaska, Oregon, and Wisconsin ($25 million for each state);
The capital gains treatment for certain self-created musical works;
The lowered deadweight ton limitation (6,000 from 10,000 until 2011), under which U.S. flagged vessels are allowed to use the alternative tonnage tax regime, and the relaxed rules regarding notice and the 30-day limit for qualifying vessels operating in the Great Lakes Waterway and St. Lawrence Seaway;

The exclusion of a portion of the Texas Permanent University Fund, which is used to finance capacity-enhancing infrastructure at certain public universities, from the tax-exempt bond arbitrage rules; and

The rule that exempts loans made pursuant to a continuing care

contract toqualified continuing care facilities from the below-market interest rate rules.

Provides veterans with a one-time exception from the mortgage revenue bond first-time homebuyer requirement, applicable to mortgage revenue bonds issued prior to 2008.

Gives non-military intelligence officers parity with active military personnel for the capital gains exclusion on sales of homes prior to 2011, provided such officers are stationed abroad.

Extends to judicial officers the rule allowing executive branch officers and employees who must sell property to comply with conflict-of-interest requirements to defer tax by reinvesting the gain in certain investments.

Establishes an itemized deduction for the cost of premiums for mortgage insurance on a qualified personal residence for taxpayers with adjusted gross income below $110,000. Effective for 2007 only.

Modifies the refund rules with respect to kerosene used for certain exempt aviation purposes.

Amends Code section 6103 to allow the IRS to provide tax information to regional income tax agencies that are formed by municipalities, impose income taxes as authorized by state law, and collectively have a population that exceeds 250,000 (for certain limited purposes).

Amends the rules relating to alcohol excise taxes that provide for the designation of wines by semi-generic names.

Amends the credit for railroad track maintenance expenditures to provide that they are calculated using a taxpayer’s gross expenditures for maintaining railroad track owned or leased by a Class II or Class III railroad, regardless of any consideration for the expenditures given by the railroad that made the assignment of the track.

Imposes an excise tax on charitable remainder trusts that have unrelated business taxable income equal to the amount of such income.

Contains certain technical corrections to TIPRA and to the American Jobs Creations Act of 2004.

DIVISION C – OTHER PROVISIONS

TITLE IV – OTHER PROVISIONS

Excludes from gross income 25% of any long-term capital gain from a conservation sale of a qualifying mineral or geothermal interest in order to provide a tax incentive for the sale of existing mineral and geothermal rights to tax-exempt entities.

Grants the TaxCourt the authority to review innocent spouse relief claims.