Last-Minute Tax Law Has Changes of Interest to Resisters

At the last minute, Congress has approved a bill that extends certain tax provisions and makes other tax law modifications. Dubya is expected to sign it into law. Among the parts of this bill that will be of interest to Picket Line readers are the following:

Tax Deductions
  • The above-the-line deduction for higher education expenses such as tuition and fees was extended through , with the same $4,000 maximum deduction.
  • The itemized deduction for state & local sales taxes was also extended through .
  • The above-the-line deduction for the out-of-pocket expenses of teachers for classroom supplies ($250 maximum) was extended through .

Since the IRS had already sent its tax forms to the printers before this bill was passed, the 1040 forms don’t have lines for things like the tuition/fees deduction or the deduction for teachers’ classroom expenses (which, until this bill passed, were not valid deductions for the tax year). I don’t know yet how you are expected to apply for these deductions.

HSA Changes
  • The ceiling for yearly HSA deposits used to be equal to your health insurance deductible. Now it’s the same ceiling for everybody, no matter what their deductible is (so long as it’s high enough to qualify).
  • You can now, under some circumstances anyway, transfer money from your FSA or HRA to your HSA.
  • You can also, once in your life, transfer money from an IRA to your HSA. You can make your yearly deposit this way, and can transfer no more than you are allowed to deposit normally. If you don’t need the extra deduction that you get from depositing money that would otherwise be taxable income, this might be a good idea, since HSAs have all the advantages of IRAs with more flexibility over how and when you can spend the money in them. I’m not sure as to the logic behind this provision, whom it is meant to benefit, and why it is limited to once-in-a-lifetime.

I’ve since learned the logic behind this, or a plausible story at any rate: This is to help employees whose employers are switching their health benefits from a low-deductible plan to a high-deductible plan with a health savings account. For those employees who are worried that in case of some sudden health expense they won’t have enough money to meet the deductible, and they also don’t have enough money lying aroung to pre-fund their HSA, they can instead fund their HSA by transferring money from their IRA. This way they don’t get caught without the ability to pay their medical bills during the switch-over.

Additional Changes

The frivolous filing penalty has been upped from $500 to $5000 and now applies to all federal taxes not just federal income tax. It also may now apply to things other than tax returns, such as “requests for a collection due process hearing, installment agreements, and offers-in-compromise.” The IRS is required to publish a list of what it considers to be frivolous arguments before applying these fines (this isn’t new).

This might affect those tax resisters who include marginal notes of protest with their tax forms, declare vast number of “dependents”, or try to use the tax courts to advance legal arguments about the Nuremberg Principles and other such long shots. It will certainly snag the folks in the Constitutionalist tax protester set, for whom these provisions were targeted.

When I wrote up this summary, I was working with a description of the bill as it was written on , before it passed. There’s a possibility that some of this changed before the bills made it through, so keep an eye on the news for verification.