Important Tax Update for 2010 You Don’t Want To Miss

On my last post, I talked about the various 2009 tax benefits that were expanded in 2010. Some of these tax benefits have been extended and there are quite a few that were no longer valid for 2010. However, Congress have passed new tax provisions that have expanded additional tax benefits for the American people for tax year 2010.

Three Extra Days to File and Pay

Because the Emancipation Day, which is a holiday observed in the District of  Columbia, will be observed on Friday, April 15, 2011, the IRS is extending the due date to Monday, April 18, 2011 for taxpayers to file their 2010 returns and pay taxes. By law, D.C. holidays impact tax deadlines in the same way that federal holidays do. The April 18 deadline applies to any return or payment normally due on April 15. It also applies to the deadline for requesting a tax-filing extension and for making 2010 IRA contributions.

Exemptions and Itemized Deductions No Longer Phased Out

Before 2010, taxpayers who have income that are more than the limit (threshold) lost part or all of the personal exemptions, dependency exemptions, and itemized deductions. These overall income limits for personal and dependency exemptions and itemized deductions no longer apply in 2010. However, the limitations continue to apply to specific itemized deductions, such as medical and dental expenses (7.5% of AGI), certain miscellaneous itemized deductions (2% of AGI) and casualty and theft losses (10% of AGI).

Adoption Credit Expanded

In 2010, the adoption credit is  “refundable,” which means that taxpayers can receive the credit even if they don’t have a tax liability. In addition, the maximum credit is increased to $13,170 per child, up from $12,150 in 2009. In general, the credit is based on the qualified adoption expenses such as  adoption fees, travel expenses, attorney’s fees and court costs.

In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include an adoption order or decree or certain other documents with their tax return. Due to these documentation requirements, individuals who are claiming the adoption credit will have to file paper tax returns. Usually, it takes 6 to 8 weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached.

Health Insurance Deduction Reduces Self Employment Tax

Before 2010, eligible taxpayers claim the health insurance deduction on Form 1040 Line 29, which only reduces the federal tax but not the self-employment tax. In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their social security self-employment tax liability in addition to their income tax liability. This means that eligible self-employed taxpayers can now enter this amount on Schedule SE Line 3, and will therefore reduces the net earnings from self-employment subject to the 15.3 percent social security self-employment tax.

In addition, the 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 in the past, 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. Details, including a worksheet, are in the instructions to Form 1040.

First-Time Homebuyer Credit

Taxpayers who bought their homes in 2008 and claimed the first-time homebuyer credit must generally start repaying those credit on their 2010 tax return. In most cases, the credit must be repaid over a 15-year period. The IRS has sent reminders to the homeowners affected by this requirement.

In addition, taxpayers who also claimed the credit on their 2009 return must also repay those credit back to the IRS if they sold or stopped  using the home as their main home in 2010. Use Form 5405 to report the repayment.

Deduction for Corrosive Drywall

Taxpayers may claim a casualty loss deduction for amounts paid to repair damage to their homes and household appliances resulting from corrosive drywall. The deduction is smaller for taxpayers with a pending claim for reimbursement or those who plan to pursue reimbursement through property insurance, litigation or other means.

Standard Mileage Rates for 2010

The standard mileage rate for business use of a car, van, pick-up or panel truck is 50 cents for each mile driven. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 16.5 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

AMT Exemption Increased

For tax-year 2010, the alternative minimum tax exemption increases to the following levels:

  • $72,450 for a married couple filing a joint return and qualifying widows and widowers, up from $70,950 in 2009.
  • $36,225 for a married person filing separately, up from $35,475.
  • $47,450 for singles and heads of household, up from $46,700.

Special Charitable Contributions for Certain IRA Owners

This tax benefit offers older owners of individual retirement accounts (IRAs) a different way to give to charity.  An IRA owner age 70½ or over can directly transfer, tax-free, up to $100,000 per year to eligible charities. Known as a qualified charitable distribution (QCD), this option is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible to be treated as a qualified charitable distribution. For tax-year 2010 only, IRA owners can choose to treat QCDs made during January 2011 as if they occurred in 2010.

To qualify, the funds must be contributed directly by the IRA trustee to an eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

More People Qualify for Roth IRA Conversions

Income limits no longer apply to rollovers or conversions to Roth IRAs from other retirement plans. Before 2010, only taxpayers with modified adjusted gross income of $100,000 or less were eligible, and a married person filing a separate return who lived with his or her spouse at any time during the year was barred from Roth IRA rollovers or conversions, regardless of income.

For 2010 rollovers and conversions only, half of the resulting income must be included in income in tax year 2011 and the other half in 2012, unless the taxpayer chooses to include all of it in income in 2010. In all situations, taxpayers must report any 2010 conversion onForm 8606 for tax year 2010. These rules do not apply to rollovers from another Roth IRA or from a designated Roth account. See Form 8606 and its instructions for details.



  1. Ken says

    Tax Alert:

    For 2010 Tax Season, the itemized deduction “overall” limitation (or phaseout), is repealed altogether. Higher income taxpayers will not have to reduce their total itemized deductions based on their AGI.
    See 2010 tax update page:

    For 2011 and beyond tax season:
    The phaseout on itemized deduction will return and it will be 3% of the amount of your adjusted gross income (AGI) in excess of the applicable threshold (the threshold for tax year 2009 is $166,800 ($83,400 for married filing separately) increased for inflation. No more than 80% of these otherwise allowable deductions will be phased out.

    The itemized deductions Subject to Phase-out limitations
    – Home Mortgage Interest
    – Taxes paid
    – Charitable contributions,
    – Miscellaneous expenses.

    The phase-out limitations will be applied after you have used all other limitations such as the 2% limit for miscellaneous expenses or the AGI limitation for the charitable contributions, and the $1,000,000 acquisition debt or $100,000 limits on home equity loans.)

    Itemized Deductions Not Subject to the Phase-out Limitations:
    Medical expenses
    -gambling losses, investment interest expense, casualty and theft losses.

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