Did you Take an Early Distribution from Your Retirement Plan?

Tax laws encourages taxpayers to contribute to retirement plans whether it is a plan sponsored by their employer (typically a 401k) or an individual retirement arrangement (IRA). However, taking money out of these retirement accounts before age 59 ½ is considered an early distribution and can have some serious tax consequences in the form of an additional tax of 10% on the taxable part of the distribution.

The taxpayer will receive a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. If the distribution code in box 7 is a code 1 (early distribution), the taxpayer will need to report the 10% penalty on line 58 of Form 1040.

Do I Have To File a Tax Return?

Yes, you must file a federal income tax return if you are a U.S. citizen. However, there are certain instances where a taxpayer does not have to file a return based on three factors:

• Gross Income
• Filing Status
• Age

You must file a return if your gross income is at least the amount shown for your age and filing status.

It's not too late to take the First-Time Homebuyer's Credit

Taxpayers can still take advantage of the first-time homebuyer credit if an eligible buyer purchased a home as their primary resident in 2008, 2009, or 2010. Eligibility depends on the date of purchase. Those rules are listed below.

The IRS has been notifying taxpayers via mail who claimed the first-time homebuyer credit of repayment requirements. For example, those who purchased their homes between April 9, 2008 and Dec. 31, 2008 are required to repay the credit starting in 2010 by completing Part IV of Form 5405. If the home was purchased in 2009 or 2010, the letter from the IRS reminds the taxpayer that the credit must be repaid if the home is sold within three years or is no longer the main home.

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).

Recovery Act Recap

The Obama stimulus plan, also known as ARRA - the 2009 American Recovery and Reinvestment Act, is over a year old. Here's a summary of all the tax code changes:

March 3 Did you receive an Economic Recovery Payment?
Feb. 8 You could owe the IRS this year
Jan. 24 Don't forget to take the Making Work Pay Credit
Dec. 28 Make home improvements & lower your tax bill
Dec. 26 Tax break for the unemployed
Dec. 24 Bought a car? Don't forget Sales Taxes
Dec. 22 More Eligible for Child Tax Credit
Dec. 20 Earned Income Tax Credit going up
Dec. 19 Higher credit for college students
Dec. 17 I'm a First-Time Homebuyer. What can I claim on my taxes?

In addition, the ARRA included:

• Extension of AMT relief for 2009
• Increased Transportation Subsidy
• Health Coverage Tax Credit

I'm a First-Time Homebuyer. What can I claim on my taxes?

Congratulations on your major purchase.  Depending on when you purchase the home determines your tax benefit.

Nov. 7, 2009 to June 30, 2010 (H.R. 3548)

• The tax credit DOES NOT have to be repaid to the government providing the purchaser "live in the home" and not sell it for a minimum of 36 months
• The tax credit is equal to 10 percent of the home's purchase price (maximum of $8,000, $4,000 for married filing separate status). Credit can be claimed on the 2009 or 2010 return. 
• A copy of the properly executed settlement statement must be attached to the return. Therefore these returns can not be electronically filed.
  
• Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit. No credit is available if modified AGI is more than $145,000 ($245,000 for married filing jointly).
  
• Taxpayers who have lived in their home for five consecutive years during the eight years before closing on a new home may qualify for a reduced credit of $6,500 or $3,250 for married taxpayers filing separately.
• must purchase or be locked into a contract to close before midnight on April 30, 2010
• Military personnel, deployed overseas for a minimum of 90 days in 2009, would have until April 30, 2011 to claim the tax credit
• No credit is available if home purchase price exceeds $800,000 or if the home is purchased from a person related to the taxpayer (or taxpayer's spouse).
  

Jan. 1, 2009 to Nov. 6, 2009 (American Recovery and Reinvestment Act of 2009):

• The tax credit DOES NOT have to be repaid to the government providing the purchaser "live in the home" and not sell it for a minimum of 36 months
• The tax credit is equal to 10 percent of the home's purchase price (maximum of $8,000, $4,000 for married filing separate status). Credit can be claimed on the 2008 or 2009 return
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. No credit is available if modified AGI is more than $95,000 ($170,000 for married filing jointly).

April 9, 2008 to Dec. 31, 2008 (Housing and Economic Recovery Act of 2008):

• The tax credit DOES have to be repaid over a 15-year period in 15 equal installments starting the 2nd year after you claimed the credit (2010). If your home ceases to be your main home before the 15-year period is up, you must include the remainder of your credit as additional tax on your tax return for that year
• The tax credit is equal to 10 percent of the home's purchase price (maximum of $7,500, $3,750 for married filing separate status)
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. No credit is available if modified AGI is more than $95,000 ($170,000 for married filing jointly).

First-time home buyer is defined:

• Bought your main home in the US – can be a house, houseboat, condo, or mobile home
• You (and your spouse if married) did not own any other main home during the 3-year period ending on date of purchase

To take the credit, complete Form 5405 and include the credit on line 67 of the Form 1040.

Make sure you're eligible - the IRS has already started 107,000 examinations of returns claiming this credit.