For highlights of any tax changes for the current tax year please refer to the "What's Hot in Tax Forms and Publications", "What's New" section of the Form 1040 Instructions, the Form 1040A Instructions the Form 1040EZ Instructions; Publication 553 for Highlights of the Current Year Tax Changes, Publication 600 for State and Local General Sales Tax; and Topic 501 and Topic 503.
On December 20, 2006, the president extended several provisions under the Working Families Tax Relief Act of 2004, Gulf Opportunity Zone Act of 2005 and American Jobs Creation Act of 2005 by passing H.R. 6111, Tax Relief and Health Care Act of 2006 (referred to as Extenders Legislation).
Extenders Legislation: State and Local Sales Tax, Higher Education Tuition and Fees, and Educator Expense Deductions
The recent changes in the law mean the IRS will not be able to process a small percentage of individual tax returns until early February, primarily involving three tax deductions – the state and local sales tax, higher education tuition and fees, and educator expenses. IRS e-file and Free File tax software has been updated to include the three key tax provisions to ensure taxpayers receive their refunds faster than filing paper tax returns. IRS urges taxpayers to use e-file instead of the paper forms to minimize confusion over the late changes and reduce the chance of making extender-related errors on their returns.
Form 1040 Changes
The majority of taxpayers file electronically, but taxpayers using a paper Form 1040 will have to follow special instructions if they are claiming any of the three deductions. Form 1040 will not be updated. Instead, taxpayers should follow these steps:
State and Local General Sales Tax Deduction:
- The deduction for state and local general sales taxes will be claimed on Form 1040, Schedule A (PDF), line 5, "State and local income taxes." Enter "ST" on the dotted line to the left of line 5 to indicate you are claiming the general sales tax deduction instead of the deduction for state and local income tax.
- Refer to Publication 600 for 2006, which includes the state and local sales tax tables, a worksheet and instructions for figuring the deduction.
- This option is available to all taxpayers regardless of where they live, though it's primarily designed to benefit residents of the eight states without state and local income taxes.
Higher Education Tuition and Fees Deduction:
- Taxpayers must file Form 1040 (PDF) to take this deduction for up to $4,000 of tuition and fees paid to a post-secondary institution. It cannot be claimed on Form 1040A.
- The deduction for tuition and fees will be claimed on Form 1040, line 35, "Domestic production activities deduction." Enter "T" on the dotted line to the left of that line entry if claiming the tuition and fees deduction, or "B" if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering "B", taxpayers must attach a breakdown showing the amounts claimed for each deduction.
Educator Expense Adjustment to Income:
- Educators must file Form 1040 (PDF) in order to take the deduction for up to $250 of out-of-pocket classroom expenses. It cannot be claimed on Form 1040A.
- The deduction for educator expenses will be claimed on Form 1040, line 23, "Archer MSA Deduction." Enter "E" on the dotted line to the left of that line entry of claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering "B", taxpayers must attach a breakdown showing the amounts claimed for each deduction.
The new law also affects an even smaller number of business taxpayers who don't use the Form 1040 series. There could be minimal processing delays for some of these business filers in January and early February.