Tax Changes for 2010

Starting January 1, 2010 there are many tax changes to deal with. Many tax breaks are phased out. The changes below are the current state of the law. It is always possibly for Congress to act to extend or replace disappearing provisions. The House passed a bill that extended many of these provisions, but the Senate was unable to schedule a vote on it. The Senate has been tied in knots over the health care bill.

Roth IRA Conversions

Starting in 2010 the income cap for converting a traditional IRA to a Roth IRA is eliminated. Now anyone can do a Roth conversion. If the conversion is done in 2010, taxpayers can spread the income tax attributable to it over two years: 2011 and 2012. Note that while the income cap is removed for purposes of qualifying for the conversion of a traditional IRA to a Roth IRA, there remains an income cap on regular contributions to a Roth IRA. The income phase-out begins at $167,000 for joint filers.

New Vehicle Sales Tax

Individuals will no longer be able to take an itemized deduction or increase the standard deduction for the sales tax on the purchase of a new motor vehicle. Vehicles had to be purchased after February 16, 2009 and before January 1, 2010 to qualify for the deduction.

No More Sales Tax Deduction

The choice to deduct state sales tax payments instead of deducting state and local income taxes is gone. This provision was very important for taxpayers in states like Florida where there is no income tax.

No Phase-outs for Personal Exemptions and Itemized Deductions

In 2010 there will be no phase out of deductions and exemptions for higher income taxpayers. This will greatly benefit high earners.

Teachers’ Deduction

The $250 deduction for teachers who buy classroom supplies with their own money is eliminated.

Tuition and Fees

The $4,000 deduction for college tuition and fees expires after 2009. This deduction was permitted “above the line”, meaning it could be taken even if the taxpayers didn’t itemize.

Contribution to Charity from IRAs

IRA owners older than 70½ who make contributions from their IRAs directly to charity will no longer be able to exclude these withdrawals from income.

No More Property Tax Deduction

Non-itemizers will no longer be able to deduct up to $1000 in property taxes paid. This provision had been a help to home-owners who had no mortgage so that there was no interest deduction to help make itemization worthwhile.

Alternative Minimum Tax Exemptions Reduced

The Alterative Minimum Tax exemption levels fall back to $45,000 for married filing jointly and $33,750 for singles an heads of household. (In 2009 the exemption was $70,950 for married filing jointly and 46,700 for singles and heads of household.) Some commentators say that as many as 1 in 5 taxpayers will be subject to the AMT in 2010.

No Exclusion for Unemployment

The first $2400 of unemployment benefits will no longer be tax-free.

Energy Credit Reduced

The 30% tax credit for the cost of energy-saving home improvements is reduced to 19% and is capped at $500.

Section 179 Expensing

The maximum amount of equipment that can be expensed (instead of depreciated) is reduced to $135,000 to $250,000. Businesses can no longer claim 50% bonus depreciation on assets placed in service in 2010.

Income Tax on Dividends

For taxpayers in brackets higher than 15%, qualified dividends are taxed at a maximum rate of 15% through December 31, 2010. For taxpayers in the 10% and 15% brackets, qualified dividends are taxed at 0% through December 31, 2010. The provisions sunsets on December 31, 2010, and dividend taxation reverts to former 2002 rates.

Mileage Reimbursement

The mileage rates effective January 1, 2010 are 50 cents for business, 16½ cents for medical and 14 cents for charitable purposes.

Home Buyers Credit

If you used the Home Buyers Credit in 2008, you must start paying it back in 2010. The qualification period for first-time home buyers to purchase a home and qualify for the credit continues through May 1, 2010.

Contributions to Retirement Accounts

Remember you have until April 15, 2010 to contribute to a traditional or a Roth IRA. If you have Keogh or SEP and you get a filing extension for your 2009 return until October 5, 2010, you have until that date to make contributions.

No Estate Tax

The federal estate tax is repealed for individuals who die in 2010.

Wild Cards

If the Senate and House eventually hammer out a health care bill that becomes law, there are various provisions in the current legislation on how to pay for it. The House bill includes a 5.4% surtax on high earners and would curtail flexible spending accounts. The Senate bill includes a 40% surtax on high-end employer-sponsored health plans – that provide health coverage valued at more than $8,500 for individuals and $23,000 for families (they call them “Cadillac plans”) and increases the Medicare payroll tax. Hold onto your wallet.