Wednesday, December 27, 2006

SPECIAL RULES FOR PAPER FORM 1040 FILERS

Under the recently enacted Tax Relief and Health Care Act of 2006, Congress revived and extended the income tax deductions for state and local sales tax, higher education tuition and fees, and educator expenses. Since these deductions were not in the law when the 2006 Forms 1040 were prepared, taxpayers who use paper forms must be diligent to avail themselves of these deductions since there will not be lines on the forms to remind them. Presumably, computer return preparation programs will be updated in a timely manner to assist their users in properly filing for these deductions.

For paper filers, the IRS is advising taxpayers to make the following modifications to their returns to properly file for these deductions:

STATE AND LOCAL GENERAL SALES TAX DEDUCTION. The deduction for state and local general sales taxes will be claimed on Schedule A (Form 1040), 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.

HIGHER EDUCATION TUITION AND FEES DEDUCTION. Taxpayers must file Form 1040 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 DEDUCTION. Educators must file Form 1040 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 if 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.

IR News Release 2006-195 12/22/2006
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