The tax filing season opens January 14, 2011, which is the first day individuals can transmit e-filed tax returns. However because of the late date that Congress passed the Tax Relief Act of 2010, the filing season will be delayed for many taxpayers. That delay will affect anyone who itemizes their deductions on Schedule A and/or has higher education tuition and fees deductions, educator expense deductions. The IRS hopes to have the forms and processing systems ready by mid to late February. Here are the highlights and changes for individual taxpayers we will encounter most often:
Dividends and long-term capital gains will continue to be taxed at 15%, and at 0% for low income taxpayers with taxable income below $34,000 for single and $68,000 for married filing jointly; California does not conform, so dividends and long-term capital gains are taxed at ordinary income tax rates
If you own a business, bonus depreciation is increased from 50% to 100% for qualifying assets purchased between September 8, 2010 and January 1, 2012. This increase in bonus depreciation will only be for new assets, and the depreciation deduction can create a loss.
Alternative Minimum Tax relief will continue to provide higher exemption amounts for middle income taxpayers for 2010: $47,450 for single, $72,450 for married
The individual income tax rates of 10%, 25%, 28%, 33% and 35% brackets will be extended
The Personal Exemption Phase-out has been repealed for 2010 and through 2012
The itemized deduction limitation has been repealed for 2010 and through 2012
The Child Tax Credit will continue to be modified from $500 to $1,000 per child under the age of 17, and the new law will expand the refundability beyond the taxpayer’s tax liability.
Marriage Penalty Relief has been extended for the standard deducation, the 15% bracket and the Earned Income Tax Credit for 2010 and through 2012
Dependent Care Credit has been expanded for child care expenses for children under 13 and disabled dependents from $2,400 to $3,000 for one child; from $4,800 to $6,000 for two or more qualified children for 2010 and through 2012
Earned Income Tax Credit has been extended and increased from 40% to 45% of the family’s first $12,570 of earned income for families with three or more children, in addition to increasing the beginning point of the phase-out range for all married couples filing a joint return
Coverdell Education Savings Accounts will continue through 2012 to allow annual contributions up to $2,000 as well as using for elementary and secondary school expenses
Student loan interest deduction expansion will be extended through 2012
American Opportunity Tax Credit for up to $2,500 of the cost of tuition and related expenses has been extended through 2012
Estate tax rate for 2010 is zero percent rate, with a $5 million exemption
$250 deduction for out-of-pocket classroom expenses by teachers will be continued
Sales tax deduction in lieu of state and local income tax itemized deduction has been continued
Mortgage insurance premiums deductible as qualified residence interest has been extended
Unemployment benefits have been extended through 2011, however these benefits will all be taxable in 2010 and 2011
The Hire Act, signed March 18, 2010, gave employers a tax break on hiring previously unemployed workers between March 18 and December 31, 2010.
The Personal Exemption remains at $3,650 for 2010
Health Care Reform Act was passed March 23, 2010, but most of the tax consequences don’t take effect until later years; exception is that young adults under 27 can stay on parents’ medical insurance plan, and a deduction can be taken by parents even when child is not a dependent for tax purposes. Self-employed taxpayers can also take deduction for self-employed health insurance for this same rule
Military Spouses Residence Relief Act passed which changes many rules for military spouses
Taxpayers who have total of $10,000 or more at any time during the calendar year in foreign investment accounts must file a separate Form TD F 90-22.1, which is due June 30 of the following year
The Standard Deduction for all filing statuses remains the same for 2010 as it was for 2009
Additional Standard Deduction for Real Property Taxes is not allowed for 2010
Mileage allowance for business miles driven will be 50 cents per mile; medical and moving mileage will be deducted at 16.5 cents per mile; miles driven for charitable organizations will stay at 14 cents per mile
Mortgage interest deduction is limited to $1 Million of acquisition debt and $100,000 home equity debt
Continuing education expenses cannot be deducted if they are required to meet the minimum education requirements for qualification in taxpayer’s profession or if they are to qualify the taxpayer for a new trade or business
AMT – although there are almost thirty different preference or adjustment items that contribute to the calculation of alternative minimum taxable income, only three of these now amount to over 100% of all AMT adjustments: state and local tax deductions (71%), personal exemptions (18%) and miscellaneous deductions (12%)
Kiddie Tax applies to child under 19 (or full-time student between 19-24) whose unearned income exceeds $1,900; parent can include child’s income on parent’s return if child’s income is over $950 and the parents have a higher tax rate
Residential Energy Efficient Property Credit is a tax credit still available for 2010 for taxpayers making energy efficient improvements to principal residence; the credit is 30% of the cost of the improvements with a maximum credit limit of $1,500 total between 2009 and 2010
Required Minimum Distributions began again in 2010; taxpayers who paid 2010 estimated tax payments based upon 2009 tax liability (the year there were no RMD’s required) may owe more tax on April 15, 2011
Penalties for failing to provide 1099 Forms for service providers have doubled starting in 2010
Cancellation of Debt is generally taxable income, unless it occurs in bankruptcy or to an insolvent borrower or with qualified principal residence indebtedness
