There are many important new tax breaks for U.S. individuals on the 2010 Form 1040, and several more have been eliminated, noted one tax expert.
“Some of the new tax breaks are straightforward, others are complex, and some present choices,” said William E. Massey, senior tax analyst for the Tax & Accounting business of Thomson Reuters. “But they all provide an opportunity to save money.”
The 15 main new items for individuals are:
1. Roth IRA rollovers no longer restricted. You can now make a qualified rollover contribution to a Roth IRA, regardless of the amount of your modified AGI.
2. Income from Roth rollover can be spread out. Half of any income that results from a rollover or conversion to a Roth IRA from another retirement plan in 2010 is included in income in 2011, and the other half in 2012, unless you elect to include all of it in 2010. Normally, deferral is the better choice. However, if you have deductions or losses that could offset the income, or credits that could wipe out the tax on it, including it on your 2010 return may be the better choice.
3. Limits on personal exemptions and itemized deductions ended. For 2010, you will no longer lose part of your deduction for personal exemptions and itemized deductions, regardless of the amount of your adjusted gross income.
4. Personal casualty and theft loss limit reduced. Each personal casualty or theft loss is limited to the excess of the loss over $100 (instead of the $500 limit that applied for 2009). This yields larger deductions and thus greater tax savings for affected individuals.
5. Corrosive drywall damage. A taxpayer who paid for repairs to his personal residence or household appliances because of corrosive drywall that was installed between 2001 and 2008 may be able to deduct those amounts as casualty losses under a special safe harbor from the IRS. Without the safe harbor, a casualty loss might not be allowed because long-standing rules bar deductions for damage resulting from progressive deterioration of property through a steadily operating cause. The safe harbor treats the corrosive drywall damage as a casualty loss and includes a formula for determining the amount of the loss.
6. Homebuyer credit. An eligible first-time homebuyer (and a long-term resident treated as a first time homebuyer) may be able to claim a first time homebuyer credit for a home that was purchased in 2010. To qualify, the home must have cost $800,000 or less. You generally cannot claim the credit for a home you bought after April 30, 2010. However, you may be able to claim the credit if you entered into a written binding contract before May 1, 2010, to buy the home before July 1, 2010, and actually bought the home before October 1, 2010.
7. Adoption credit. For tax years beginning after December 31, 2009, the maximum adoption credit is increased to $13,170 per eligible child for both non-special needs adoptions and special needs adoptions. In addition, the adoption credit is refundable, i.e., you get the credit even if it exceeds your taxes.
8. Gifts to charity. The provision that excludes up to $100,000 of qualified charitable distributions (distributions to a charity from an Individual Retirement Account) has been extended. If you elect, a qualified charitable distribution made in January 2011 will be treated as made in 2010.
1. Luxury auto limits. First-year luxury auto limits for vehicles first placed in service in 2010 are $11,060 for autos and $11,160 for light trucks or vans (for vehicles ineligible for bonus depreciation, or if taxpayer elects out, $3,060 and $3,160, respectively).
2. Self-employed health insurance deduction. Effective March 30, 2010, a self-employed person who paid for health insurance may be able to include in his self-employed health insurance deduction any premiums he paid to cover his child who was under age 27 at the end of 2010, even if the child was not his dependent. Also, health insurance costs for a taxpayer and his family are deductible in computing 2010 self-employment tax.
3. Small business health insurance credit. For tax years beginning after December 31, 2009, there is a new tax credit for an eligible small business employer who makes qualifying contributions to buy health insurance for his employees. This credit is very complex but it can yield substantial tax savings. In general, the credit is 35 percent of premiums paid and can be taken against regular and alternative minimum tax.
4. Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under legislation enacted in the fall of 2010, for tax years beginning in 2010 (and 2011), the $250,000 limit is increased to $500,000 and the investment limit is increased to $2,000,000. The $500,000 amount can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).
5. Special depreciation allowance. Businesses that acquire and place qualified property into service after September 8, 2010, can now claim a depreciation allowance in the placed-in-service year equal to 100 percent of the cost of the property. Businesses that acquired qualified property during 2010 on or before September. 8, 2010, can claim a bonus first-year depreciation allowance of 50 percent of the cost of the property.
6. Cellular telephones. For tax years beginning after Dec. 31, 2009, cellular telephones (cell phones) and other similar telecommunications equipment are removed from the categories of “listed property.” This means that cell phones can be deducted or depreciated like other business property, without onerous record keeping requirements.
7. Carryback of general business credits. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. However, for the taxpayer’s first tax year beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of one.
Tax breaks that no longer apply for 2010 include the following five items:
1. Motor vehicle taxes. The itemized deduction or increased standard deduction for state or local sales or excise taxes on the purchase of a new motor vehicle no longer applies (unless you bought the vehicle in 2009 after February 16 and paid the tax in 2010).
2. Real property taxes. The additional standard deduction for state and local real property taxes does not apply for tax years beginning after 2009.
3. Disaster losses. The additional standard deduction for disaster losses does not apply for tax years beginning after 2009.
4. IRA deduction. The extra $3,000 IRA deduction for employees of bankrupt companies does not apply for tax years beginning after 2009.
5. IRA and qualified retirement plan distributions. Required minimum distributions (RMDs) must be made for calendar year 2010. For 2009, RMDs were waived.
“Whether you are doing your own taxes or having them done by a professional preparer, make sure you gather all pertinent information that may impact your eligibility for any of the new tax breaks as well as those that have been around for years,” said Massey. “The effort spent doing this can translate into substantial tax savings.”
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