With 2010 half way over, it is not too soon to start preparing your tax return for next year. There are tax deductions that stayed the same, those that changed, those that were eliminated and even those that could affect you. With 2009 having been a unique tax year, which included an abundance of new credits in hopes to help struggling Americans, there are some changes and tax laws in 2010 to be cognizant of this year with the potential of changes yet to come. Some of these tax changes may be reversed if the HR 4213 bill is passed.
- Home-Buyer Tax Credit Expiring
- Complete Repeal of Estate Tax in 2010
- Disappearance of Sales Tax Deduction
- Disappearance of Vehicle Sales Tax Deduction
- Energy Savings Tax Credit
- First $2400 in Unemployment Benefits Taxable Now
- Capital Gains Tax Rates and Dividends
- Disappearance of Teachers or Education Supplies Tax Deduction
- Additional Standard Deduction for Property Taxes
- Changes to Roth IRS Conversions
- Changes to the Alternative Minimum Tax 2010
Home-Buyer Tax Credit Expiring
One tax credit this year that expired was the homebuyer tax credit. If you purchased a home before April 30th, 2010 or had a contracted signed by then and you closed by September 30th, you can claim this tax credit on your 2010 tax return (if you did not claim it on your 2009 tax return). HR 5623 extended the closing deadline until September 30th, 2010 instead of the original June 30th deadline. Find the details here.
Complete Repeal of Estate Tax in 2010
The Economic Growth and Tax Relief Reconciliation Act of 2001, phased out the estate tax over 10 years, with 2010 being the year it is completely phased out. Some Congressman have stated they will address the issue, but we have not seen anything thus far. Some think Congress will retroactively impose 2009 estate tax rates for the 2010 tax year. In 2011, the estate tax is expected to go back to the 55% level for estates worth 1 million dollars or more.
Disappearance of Sales Tax Deduction
Last year and before, individual taxpayers itemizing deductions on Schedule A could claim a state sales tax deduction against Federal income taxes. Realize that when itemizing deductions, taxpayers have to select between declaring a deduction for state and local income taxes or state and local sales taxes–they cannot claim both (except in 2009). This tax deduction seems to be dead for 2010, as the senate recently failed to address it, but it could be extended. The disappearance of the sales tax deduction will not impact most taxpayers as typically state and local income taxes are much greater than sales taxes paid. However, for individuals in a state without any income taxes, this will truly affect them.
Disappearance of Vehicle Sales Tax Deduction
In 2009, taxpayers could deduct the sales tax paid on a brand new motor vehicle (purchased between 2/16/09 and 1/1/2010) which included new cars, light trucks, motorcycles, and mobile homes in addition to local and state income taxes. Moreover, taxpayers (below income thresholds) could claim the sales tax deduction on the first $49,500 paid for the vehicle regardless of whether they itemized or not. In any event, this tax deduction has not been extended for 2010 yet. Therefore, in 2010, taxpayers who itemize have to decide whether to take the state/local sales tax deduction or state/local income tax deduction.
Energy Savings Tax Credit
Even though this tax credit is a continuance from last year, it is important to be aware that 2010 is the last year (unless renewed) this will be in effect for existing homes (principal residence) making energy improvements as it pertains to windows, doors, insulation, HVAC equipment, water heaters and biomass stoves. The tax code allows a taxpayer to take a credit for 30% (up to $1500) of the cost of equipment, so long as it is an existing home and the principal residence (new construction and rentals do not qualify). Therefore, if you were thinking about making energy efficiency moves soon, do so before year end.
First $2400 in Unemployment Benefits Taxable Now
In 2009, the first $2400 in unemployment benefits were not taxable. This year, unfortunately, the first $2400 in unemployment compensation is taxable this year.
Capital Gains Tax Rates and Dividends
In 2010, the capital gains tax rates will remain at 0 for taxpayers in the 10% and 15% tax brackets. Furthermore, dividends for 2010 Long term capital gains will be 15% for those in higher tax brackets with rates expected to climb in 2011. Income tax bracket percentages are expected to climb as well in 2011 with the Bush tax cuts expiring.
Disappearance of Teachers or Education Supplies Tax Deduction
In 2010, teachers, professors, and others cannot deduct up to $250 dollars they spent to buy classroom supplies. This deduction was nice because it did not require a taxpayer to itemize. However, it could still be extended with the current legislation being considered.
Additional Standard Deduction for Property Taxes
In 2008, the Housing Assistance Tax Act of 2008 provided tax relief to homeowners by allowing them to deduct an additional $500 (if single) or $1000 (if filing jointly). Normally, if a taxpayer does not itemize, they are better off taking the standard deduction. This additional deduction allowed them to deduct property taxes in addition to the standard deduction. This tax deduction expired this year, unless Congress extends it.
Changes to Roth IRS Conversions
In 2010, there is no income restriction on converting a traditional IRA or 401k to a Roth IRA in 2010. In fact, if you make a conversion in 2010, you can elect to pay half the taxes in 2011 and the other half in 2012. This election to defer taxes is only possible if you convert this year. More importantly, high wage earners can now contribute to a simple IRA or 401k and then convert to a Roth IRA, effectively getting around contribution limits on Roth IRAs. If you are considering converting to a Roth IRA from a 401k for example, it is important to speak to a financial advisor or tax professional in order to avoid potential tax problems.
Changes to the Alternative Minimum Tax 2010
As part of the American Recovery and Investment act in 2009, congress raised the Alternative Minimum Tax exemption income levels for both single filers and married couples filing jointly and separately. Unless Congress makes changes, the AMT exemption levels will decrease substantially as follows: $33,750 from $46,700 for single filers; to $45,00 for married couples filing jointly from $70,950; and to $22,500 for married couples filing individually from $35,475.
Although this list is not all inclusive, it fairly covers important tax law changes including alterations to tax deductions and tax credits that may impact you. With any tax changes, it is important to consider speaking with a tax professional ahead of time in order to avoid any potential IRS tax problems.
Can you think of any other important changes coming down the pipe that we should all be aware of? Tell us in the comments!