Homeowners tax benefits on the line

• PMI deduction lives on – extended to 2011
• higher standard deduction for real estate taxes doesn't – 2010 the last year

Several tax benefits were at stake when Congress and President Obama passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 on December 17, 2010. The most publicized were the Bush tax cuts of 2001 and 2003 that were originally scheduled to expire in 2010. Here are two more tax benefits that were set to go away in 2010.

Mortgage Insurance Premiums - extended
Taxpayers who did not make a large down payment on their house (typically 20 percent) are required to purchase an insurance policy for their mortgage. The premiums paid for qualified mortgage insurance is treated as deductible mortgage interest if the loan originated after January 1, 2007. Box 4 of Form 1098 will show the amount and would be reported on Schedule A, line 13. If the taxpayer’s adjusted gross income (AGI) is more than $100,000 ($50,000 if married filing separately) the amount of the deduction is reduced and if their AGI is more than $109,000 ($54,000 if married filing separately) the deduction is eliminated completely.

The deduction as part of the Tax Relief and Health Care Act of 2006 was set to expire on December 31, 2010 and was given a one year extension to December 31, 2011.

Higher Standard Deduction for Real Estate Taxes – no action
Taxpayers have the option of deducting the full amount of their property taxes on line 6 of Schedule A if they itemize their deductions. The real estate taxes must be based on the value of non-business property and are deductible when paid.

Thanks to the Housing Assistance Tax Act of 2008, starting in 2009 taxpayers who are unable to itemize their deductions can increase their standard deduction for state and local real estate taxes paid up to $500 ($1,000 if married filing jointly) on line 7 of Schedule L. This provision is scheduled to expire on December 31, 2010 and it was left unchanged by the recent tax bill.

Taxpayers have to wait to receive their income tax refund

Taxpayers who claim certain deductions for will have to wait until middle to late February to file their 2010 returns. The Internal Revenue Service will need extra time to put processing systems in place as a result of the changes in the tax law from the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 which was made official on December 17, 2010.

The biggest on the list is the Schedule A which is used for taxpayers who wish to itemize their deductions which covers an estimated one-third of all filers. Typically, these taxpayers do not file their returns early in the season.

Taxpayers who wish use the following tax benefits are affected:

• home-mortgage interest, property taxes, excess medical expenses, gifts to charity and including state and local taxes – Schedule A
• college tuition and fees – Form 8917
• Educator Expense Deduction claimed on Form 1040, Line 23, and Form 1040A, Line 16

In addition to the above deductions, the tax bill also extended into 2010 an Alternative minimum tax (AMT) patch and the IRA direct charitable donation rollover (extended through December 31, 2011).

The delay will affect both paper filers and electronic filers so the IRS urges taxpayers to use e-file to minimize confusion over the recent tax changes and ensure accurate tax returns. All tax returns claiming these credits or deductions should not be filed until the IRS is ready to start processing these returns in mid - to late February.

Income Tax Benefits increase in 2011.

The IRS announced last week the increases to deductions and limits for the 2011 year. These amounts are revised every year due to inflation. Typically, the IRS announces these increases in October but waited until after the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 became law on December 17, 2010.

Increased personal exemption is $3,700 ($3,800 in 2012, $3,650 in 2010 and 2009, $3,500 in 2008).

Increased Standard Deduction:

• Married filing Joint / Qualifying Widower: $11,600 ($11,900 in 2012, $11,400 in 2010 and 2009)
• Head of Household: $8,500 ($8,700 in 2012, $8,400 in 2010, $8,350 in 2009)
  
• Single / Married filing Separate: $5,800 ($5,950 in 2012, $5,700 in 2010 and 2009)
• The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50.

Tax bracket thresholds have increased. For example, a married couple filing a joint return reaches the 25% bracket with $69,000 ($70,700 in 2012) in taxable income compared to $68,000 in 2010.

Earned Income Tax Credit amounts have increased. The maximum credit for taxpayers with three eligible children rises to $5,751, up from $5,666 in 2010 and $5,657 in 2009. The maximum income limit rises to $49,078, up from $48,362 in 2010 and $48,279 in 2009. The ability to claim three qualifying children for Earned Income Tax Credit was originally only available for 2009 and 2010 tax years under the 2009 American Recovery and Reinvestment Act (ARRA). Last week's tax bill extended this provision for the 2011 and 2012 tax years.

Modified Gross Income for the lifetime learning credit increases to $102,000 for joint filers, up from $100,000 and $51,000 for singles and heads of household filing statuses, up from $50,000.

Please note the following for the 2011 tax year:

• The $400 ($800 if married filing jointly) Making Work Pay Credit will expire,
• The Social Security payroll tax rate will decrease by 2%, as will Self-Employment Tax for self-employed taxpayers, and
• The estate tax will return with a rate of 35% and a lifetime exclusion of $5 million for 2011 and 2012.

Pay your January Mortgage Payment now

Increase your mortgage interest deduction in 2010 by paying your January mortgage before December 31. This will give you 13 payments in the calendar year than the usual 12 payments. The additional interest paid will be reported on Form 1098 which is then reported on line 10 of Schedule A.

Let's put it this way: in the 25% bracket for 2010 on a $1,000 interest payment, that saves you an immediate $250 on April 15, 2011. By doing that each year, you have created an interest-free loan of that $250 every year until the loan is paid off.

Next you need to do the following:

• Make it habit to make an early payment every year. Otherwise, 2011 will only have 11 mortgage payments.
• Make sure your mortgage lender calculates interest based on payment date and calculates interest up to that date. If you read your monthly mortgage statement and the interest applied to your principal is the same amount every month, that is a red flag.

Are you a tax cheat?

Take the quiz to find out if you are a cheat or not. Video courtesy of the CBS morning show.

1. You win $100 in the office pool and you don't claim your winnings when file your tax return.
2. Your friend gives you season tickets to a local theater in exchange you give her your vintage 8-track collection. You don't claim the $500 the tickets would have cost.
3. You hire a college student to watch your children during the summer while you work. You paid her a total of $2,000. You don't pay Social Security or Medicare taxes.
4. I work for XYZ company and one day a week my employer allows me to work out of my home office. I used that home office exclusively for that purpose. I declare that as a deduction.
5. You run a Day Care business out of your home primarily in the family room. You claim the family room as part of the home office deduction.

2010 IRA and Tax Planning Reference Guide

Excellent resource document courtesy of OppenheimerFunds Retirement Services.

Among the topics include:
Page 1

• IRA Deductibility, Contribution and Eligibility Limits
• IRA Contribution Limits
• Roth IRA Eligibility for 2009–2010

Page 2

• Federal Income Tax Rate Schedules

Page 3

• Retirement Plan Limits and Distribution Rules
• Long-term Capital Gains and Dividends Tax Rates

Page 4

• Federal Estate and Gift Tax Schedules
• Retirement Saver’s Credit
• Health Savings Accounts (HSAs)
• Eligible Long-term Care Deductions

Page 5

• Common IRA-related Tax Forms

Page 6

• Education Savings Tax Incentives
• Social Security Schedules

Mortgage Interest Deduction on the hot seat?

The national debt is now $13 trillion and is expected to reach $20 trillion by 2020. The concern is so great that the National Commission on Fiscal Responsibility and Reform released suggestions to raise taxes and/or reduce spending.

One of the ideas of raising taxes is re-examining the biggest tax deduction in the U.S. tax code: the $130 billion per year home-mortgage interest deduction.

The threat of removing is the deduction is so big, the National Association of Home Builders (NAHB) created a website to provide information to concerned taxpayers. A recent Time Magazine article summarizes the national debt issue.

Currently, home mortgage interest is any interest paid on a loan secured by your main home or a second home. This includes a taxpayer's primary mortgage, 2nd mortgage, home equity line of credit, or a home equity loan with a limit of $1,000,000 ($500,000 if married filing separately).

This information can be pulled from box 1 of Form 1098 (pdf) and reported on line 10 of Schedule A (pdf).

The fact is the Mortgage Interest Deduction is the biggest reason middle-class taxpayers file Schedule A with their tax return and itemize as opposed to taking the standard deduction – a tax benefit that eliminates the need to itemize actual deductions covered on Schedule A. Currently, the standard deduction for most taxpayers is:

• Married filing Joint / Qualifying Widower: $11,400
• Head of Household: $8,400
• Single / Married filing Separate: $5,700

By eliminating the mortgage interest deduction, middle-class taxpayers will simply skip the Schedule A and use the Standard Deduction instead. Debt-ridden taxpayers may be encouraged to take on less debt when making home purchases. Wealthy taxpayers will still itemize their tax deductions and the wealthy will own homes with or without the mortgage interest deduction.

Sounds like a slam dunk move. Eliminate a tax deduction for the wealthy, increase government revenue, reduce the national deficit. Don't bet on it. The National Association of Realtors (NAR) spent more than $20 million lobbying Congress so expect a fight.

Stay tuned.

Stephen Colbert's Year-End Estate Planning Tips

There was no estate tax in 2010 but it returns in 2011. Mr. Colbert has some suggestions for taxpayers most affected.

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
Return of the Estate Tax
www.colbertnation.com
Colbert Report Full Episodes 2010 Election March to Keep Fear Alive

2011 Mileage Rates

Beginning on Jan. 1, 2011, the standard mileage rates are the following:

• 51 cents per mile for business miles driven (50 cents in 2010, 55 cents in 2009)
• 19 cents per mile driven for medical or moving purposes (16.5 in 2010, 24 in 2009)
• 14 cents per mile driven in service of charitable organizations (14 in both 2010 and 2009)

To calculate use of personal vehicle for tax purposes, you can use one of two methods: standard mileage rate or actual expenses. If you qualify for both, calculate the deduction under both methods to see which gives you a larger deduction.

Actual expenses consist of the following costs:

• Depreciation
• Lease payments
• Tires
• Insurance
• Registration fees
• Garage rent
• Parking fees
• Licenses
• Tags
• Repairs
• Gas and oil

The car expenses can also include parking fees and tolls under either method. Note: this does not include commuting expenses, these are never deductible.

Once you elect to claim actual expenses when you first begin using the car for business you cannot change to the standard rate deduction later.