Monday, January 31, 2011

What's New for your 2010 Income Tax Return

Due Date
Even though April 15 falls on a Friday this year, the deadline for your 2010 Form 1040 is Monday April 18. Emancipation Day is a District of Columbia holiday that falls on April 15 so the tax filing deadline for the whole nation is deferred to April 18 . If your return won't be ready by then, you can extend the deadline all the way out to October 17 by filing Form 4868 on or before April 18.

Personal exemption: $3,650 ($3,800 in 2012, $3,700 in 2011)

Standard deduction:
MFJ/QW $11,400 ($11,900 in 2012, $11,600 in 2011)
HH $8,400 ($8,700 in 2012, $8,500 in 2011, $8,350 in 2009)
Single / MFS $5,700 ($5,950 in 2012, $5,800 in 2011)

Maximum Earned Income Credit
$5,666 if 3 or more qualifying children ($5,891 in 2012, $5,751 in 2011, $5,657 in 2009)
$5,036 if 2 qualifying children (from $5,028 in 2009)
$3,050 if 1 qualifying child (from $3,043 in 2009)
$457 if no qualifying child (same)

Income Limits for Earned Income Credit
  • Three or more qualifying children and earn less than $43,352 ($48,362 if MFJ)
  • Two qualifying children and earn less than $40,363 ($45,373 if MFJ)
  • One qualifying child and earn less than $35,535 ($40,545 if MFJ)
  • No qualifying child and earn less than $13,460 ($18,470 if MFJ)
Wages Limit
The maximum amount of wages subject to social security tax is $106,800 (same as 2009).

Standard Mileage Rates
  • 50 cents per mile for business miles driven (51 cents in 2011, 55 cents in 2009)
  • 16.5 cents per mile driven for medical or moving purposes (19 in 2011, 24 in 2009)
  • 14 cents per mile driven in service of charitable organizations (14 from 2009-2011)
Gift tax increase. You now do not have to claim any gift of $13,000 or less, up from $10,000.

Health Savings Accounts (HSAs)
  • The maximum HSA deduction has increased to $3,050; $6,150 for family coverage ($3,100 and $6,250 in 2012; $3,050 and $6,150 in 2011; $3,000 and $5,950 in 2009).
  • The maximum additional deduction for individuals age 55 or older remains at $1,000. 
  • The minimum annual deductible of a high deductible plan is $1,200, $2,400 for family coverage ($1,200 and $2,400 in 2012; $1,200 and $2,400 in 2011; $1,150 and $2,300 in 2009).
  • Report HSA contributions and distributions on Form 8889
Alternative Minimum Tax (AMT) exemption amounts have increased:
  • Single or Head of Household: $47,450 ($48,450 in 2011, $46,700 in 2009)
  • Married Filing Jointly: $72,450 ($74,450 in 2011, $69,950 in 2009)
  • Married Filing Separately: $36,225 ($37,225 in 2011, $34,975 in 2009)

Say Good-bye
Limit on Itemized Deductions
The overall amount of itemized deductions is no longer limited by the Adjusted Gross Income (AGI). In the past, the itemized deductions limit was imposed when AGI exceeded $166,800 (or $83,400 if MFS).

Phaseout of Exemptions
Taxpayers with an AGI over a certain amount will no longer lose part of their personal exemptions. Previously, exemptions phased out levels were $125,000 (MFS), $166,800 (single), $208,500 (HH), and $250,000 (MFJ and QW).

All unemployment compensation is included in taxable income on line 19 of Form 1040 in 2010. If 2009, the first $2,400 in unemployment was excluded from a taxpayer's income.

There is no $250 economic recovery payment or Government Retiree Credit.

Additional Standard Deduction
  • Taxpayers who pay real estate taxes and do not itemize, can no longer increase their standard deduction by $500 ($1,000 if MFJ). The amount was limited by the real property tax paid in that year.
  • Taxpayers who paid state and local sales taxes on new vehicles purchased between 2/17/09 and 12/31/09 AND did not claim the additional standard deduction in 2009 and complete Schedule L and claim the deduction in 2010. New vehicles purchased 1/1/10 and later can no longer claim additional deductions for state and local sales taxes.
Say Hello
New Forms:
  • Form 8941 - Credit for Small Employer Health Insurance Premiums
  • Form 8948 - Preparer Explanation for Not Filing Electronically
    Must be included with a paper filing, if the taxpayer indicates that they do not wish to e-file or the return cannot be e-filed for whatever reason.
Schedule SE
The amount of self-employed health insurance deducted on Form 1040, line 29 can now be used to reduce the amount of income subject to Self-Employment tax. For 2010 only, you can deduct health insurance premiums on line 3 of Schedule SE. Those premiums will reduce both your income tax bill and your Self-Employment tax bill.

Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer's dependent.

As before, the insurance plan must be set up under the taxpayer's business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

Conversions to a Roth IRA
There is no modified AGI and filing status requirement for conversions from a qualified retirement plan to a Roth IRA. For conversions in 2010, any amounts that would be included in income will be included in equal amounts in 2011 and 2012. The taxpayer can choose to include all of the income in 2010.

Complete Part II of Form 8606 to report your Roth conversion on your 2010 return (or to calculate what you'll have to report on your 2011 and 2012 returns). And you have until October 17, 2011 -- the due date of the tax-filing extension for 2010 returns -- to change your mind and undo, or "re-characterize," a 2010 Roth conversion without paying any tax.

Repayment of the First-Time Homebuyer's Credit
No repayment for those who purchased homes after December 31, 2008. Taxpayers who purchased their home on or before December 31, 2008 and took the credit must begin to repay the credit in 2010.

The credit is recaptured over 15 years. If disposed of or ceases to be the principal residence, the remaining credit is recaptured in that year, not to exceed the gain on the disposition. The taxpayer will complete page 2 of Form 5405 (First-Time Homebuyer Credit and Repayment of the Credit), and the repayment amount will appear as an additional tax on line 59 of Form 1040.

Welcome Back
Retirement Plan Distributions
The required minimum distribution (RMD) from IRAs and most retirement plans does have to made in 2010 (RMD were waived for 2009).

Remains the same
Educator Expenses
An eligible educator can deduct up to $250 of qualified expenses. If filing MFJ and both are eligible educators, the maximum deduction is $500. Note: these taxpayers need to wait until February 14, 2011 to file these returns.

Capital Gains Rate
The capital gains rate remains at 0% and 15%

Taxpayers in the 10% and 15% tax brackets will pay no taxes on their long-term gains and qualified dividends again this year. That means if you held an investment, such as a stock or mutual fund, for more than a year and you sold it at a profit in 2010, you will owe no tax on your gains if your taxable income doesn't exceed $34,000 if you are single or $68,000 if you are married filing jointly. (This provision does not apply to investments held in retirement accounts.) Any gains that lift your income above that level would be taxed at the maximum 15% capital-gains rate. Use the Qualified Dividends and Capital Gain Tax Worksheet to compute your capital-gains tax.

No Stepped-up Basis
For property inherited in 2010 the basis will be the lower of the decedent's tax basis or the Fair Market Value (FMV) at the date of death. However the basis can be increased up to 1.3 million or up to $3 million for a surviving spouse.

"Kiddie Tax"
  • Investment income over $1,900 of a child age 18 or younger will be taxed at the parent's rate on Form 8615. This also applies to a full-time student over age 18 but under age 24 who does not provide more than half of his/her own support with the earned income or the child files a joint return.
  • Parents may be able to include on their own return the child's gross income in excess of $1,900 on Form 8814.

Form 1040 | Form 1040 Instructions

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