Congress enacted two major tax laws in 2006. The Pension Protection Act, which was enacted in July, was addressed in the October edition of this newsletter. In the closing days of 2006 Congress enacted the Tax Relief and Health Care Act. While designed primarily to extend various popular tax benefits that were scheduled to expire at the end of 2005, the Act incorporated several additional changes. Those provisions of most relevance to church leaders include the following:
- The Act extends the state and local sales tax deduction through 2007.
- The Act extends the popular above-the-line deduction for higher education expenses through 2007. This provision allows taxpayers to deduct up to $4,000 (depending on their income) of higher education expenses in lieu of claiming the Hope or Lifetime Learning tax credits.
- The Act extends the above-the-line deduction for teacher classroom expenses through 2007. This provision allows teachers to deduct up to $250 of out-of-pocket costs incurred to purchase books, supplies and other classroom equipment.
- The Act allows taxpayers to make tax-deductible contributions to an Archer medical savings account to pay for health care expenses through 2007.
- The Act provides a one-year extension of the 30 percent tax credit for the purchase of residential solar water heating, solar electric equipment and fuel cell property through 2008.
- The Act includes several provisions designed to improve Health Savings Accounts (HSAs). For example, the Act (1) permits rollovers from “health flexible spending arrangements” (FSAs) and “health reimbursement arrangements” (HRAs) into an HSA; (2) repeals the annual plan deductible limitation on HSA contributions; (3) permits one-time rollovers from IRAs to HSAs.
- The Act increases the penalty for frivolous tax return submissions from $500 to $5,000 and expands the penalty to all taxpayers and all types of federal taxes.
The courts have found several taxpayer positions to be frivolous. The Tax Relief and Health Care Act of 2006 increases the penalty for claiming frivolous positions on a tax return from $500 to $5,000. There is also a $25,000 penalty for claiming a frivolous tax position before the Tax Court. Here are ten tax positions that the IRS and courts consider frivolous: (1) The 16th amendment (which permits a federal income tax) is invalid because it contradicts the Constitution. (2) Only income from a foreign source is taxable. (3) A taxpayer can escape income tax by putting assets in an offshore bank account. (4) Income received in the form of paper currency (Federal Reserve notes) is not “legal tender” since it is not redeemable in gold or silver, and is not taxable as income until paid in gold or silver. (5) A taxpayer can place all of his assets in a trust to escape income tax while still retaining control over those assets. (6) Nothing in the tax code imposes a requirement to file a return. (7) Filing a tax return is voluntary. (8) A taxpayer can refuse to pay taxes if the taxpayer disagrees with the government’s use of the taxes it collects. (9) A taxpayer can avoid tax by filing a return with an attachment that disclaims tax liability. (10) Income taxes violate the Constitution’s ban on involuntary servitude and self incrimination.
This article first appeared in Church Treasurer Alert, February 2007.