When Benjamin Franklin coined the phrase “…in this world nothing is certain but death and taxes,” he should have added “and constant changes to the tax code.” Once again, some important rules and regulations are changing for the 2010 tax year. Look for Kentucky Living’s 2011 Financial Planning Guide in the January issue. In the meantime, here are some IRS guidelines to help you prepare. Congress is notorious for making last-minute changes in the tax code, so consult your tax preparer or the IRS before completing your tax returns, and be aware that any of the guidelines below are subject to change.
All good things must come to an end—maybe. In figuring adjusted gross income, you may have to say goodbye to deductions for educator expenses and tuition and fees. They are slated for removal, although Congress could still restore them.
And while previously the first $2,400 of unemployment compensation was not taxable, this provision is slated to expire, along with the government retiree credit and the exclusion from income of qualified charitable distributions made from an IRA account.
For taxpayers who took the first-time homebuyers credit ($7,500 at the time) before January 1, 2009, then 2010 will be the first year of recapture. This means taxpayers will have to begin repaying the credit to the IRS.
Get ’em while you can
Beginning in 2010, anyone can convert a traditional IRA to a Roth, regardless of adjusted gross income. For 2010 only, taxes on the conversion may be spread out over a period of two years. Additionally, qualifications for IRA deductions have increased. If you are covered by a retirement plan at work and your adjusted gross income is less than $66,000 for 2010 ($109,000 married filing jointly), you may be able to take an IRA deduction.
Changes have been made to the Hope credit for post-secondary education that was effective in 2009. The modified credit is now referred to as the American opportunity tax credit (AOC). The AOC is still in effect for the 2010 tax year. Previously the Hope credit could be claimed only for the first two years of post-secondary education, but the modified AOC can now be claimed for the first four years. Also, up to $1,000 of the credit is now a refundable—rather than nonrefundable—credit. Related changes are expanding what constitutes “higher education expenses” from a qualified tuition plan such as a 529 college savings plan. The definition now includes purchasing software equipment and Internet access used by the enrolled student.
Due to the popularity of e-filing (and in an aim to be more fiscally reasonable), the IRS will no longer be sending taxpayers the traditional tax package via regular mail. Also, the 2010 tax year marks the first time that taxpayers can use part of their refund to purchase U.S. savings bonds directly.
Earned income credit rises
For the 2010 tax year, the amount of the earned
income credit has been increased to the following: $457 with no qualifying child, $3,050 with one qualifying child, $5,036 with two qualifying children, and $5,666 with three or more qualifying children. The maximum amount of earned income to qualify for the credit has also increased. Advanced payment of the credit maxes out at $1,830.