Legislation designed to fix some pension, healthcare and energy problems ushered in a host of minor tax breaks -- and a handful of tax traps -- that will affect 2006 returns.
That could make filing returns more rewarding, but even more bedeviling than usual this year.
"Sales taxes, college tuition and out-of-pocket expenses for teachers are all deductible again, but they're not on the tax return," said Mark Luscombe, principal tax analyst with CCH Inc. "You'll have to know the law and write them in."
New rules also affect those donating to charity, children with investment income and those who bought hybrid cars and energy-efficient windows.
What changes should individuals filing 2006 returns watch for?
* Tuition. An expired deduction for those paying college tuition was reinstated in late December. But, like many of today's tax breaks, this one is "means tested" -- if you make too much money, you may not qualify.
The tuition break allows singles earning less than $65,000 and couples earning less than $135,000 to write off as much as $4,000 in college bills.
A reduced deduction of $2,000 is allowed for singles earning more than $65,000 but less than $80,000, and for married couples earning more than $130,000 but less than $160,000.
Importantly, because this deduction is taken before the taxpayer's "adjusted gross income" is computed, it can help individuals get a bigger bang out of other means-tested deductions and credits, such as the child tax credit.
The bad news: Because this break was reinstated so late in the year, it doesn't show up on the 1040 form. The Internal Revenue Service suggests that taxpayers write it in on line 35 of the return, the space for "domestic production activities deduction," which is a rarely used deduction for certain businesses and partnerships that make products in the United States.
One other suggestion: If you want this deduction, don't file your return until mid-February. The IRS has to recode its computers to accept it and anticipates that tuition deduction claims will be rejected until that's done.
* Classroom supplies. Teachers can deduct as much as $250 in out-of-pocket costs for classroom supplies. This deduction was also set to expire in 2006, but got a last-minute revival.
To claim it, write it on line 23, where it says "Archer MSA deduction" -- another rarely used line that was dedicated to Archer Medical Savings Accounts, which are being phased out in favor of Health Savings Accounts.
