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2010 Tax Law Changes

January 21, 2010 - Howard Nemenoff
Well, Tax Season is now upon us. People have started receiving W-2s and various other tax documents needed to file their returns this year. As of Friday January 15, 2010, the IRS has started accepting returns and the first refunds should be direct deposited Friday January 29, 2010. It's hard to believe that we are in 2010 already. There are quite a few tax law changes for 2009 taxes and I would like to summarize them for you. Many of these were covered in my American Recovery and Reinvest Act of 2009 blog, but now that the rules are affecting your tax returns, they bear repeating. I am only including the key changes that will affect most of us for our personal Income Taxes. The changes are as follows:

Inflation Adjusted Amounts

Every year our exemption and standard deduction amounts get raised. For 2009, each exemption taken is now worth $3,650 up from $3,500. Standard deductions for each filing status have been raised as follows:

Single from $5,450 to $5,700 Head of Household from $8,000 to $8,350 Qualifying Widow(er) from $10,900 to $11,400 Married Filing Jointly from $10,900 to $11,400 Married Filing Separately from $10,900 to $11,400

Additionally if you are Age 65 or older (before 1/2/2010) add $1,400 or if you are blind add $1,400 if you file Single, Head of Household, or Qualifying Widow(er). If you file Married Filing Jointly or Separately, add $1,100 for each person for each category.

Child Tax Credit and Additional Child Tax Credit (ACTC)

If you have Qualifying Child(ren) under the age of 17 at the end of 2009, you are entitled to a $1,000 Child Tax Credit per child. On your tax return, this credit is first used to pay down your taxes owed (Line 46 1040). If the taxes owed are less than total Child Tax Credit you may be entitled to Additional Child Tax Credit in which the IRS will send you the difference. This year more Taxpayers will be entitled to Additional Child Tax Credit as the threshold has been reduced from $8,500 to $3,000. The ACTC is calculated as (Earned Income - $3,000)*15%. Use the lessor of the previous calculation or $1,000 * # of Qualifying Children under the age of 17. Subtract from that, the any of the Child Tax Credit used to pay down taxes and the result will be refundable.

Earned Income Tax Credit (EITC)

If you receive EITC, this year you may receive more. Families with three or more children will now receive additional credit for the third child. The maximum amounts are as follows:

$3,043 if you have one Qualifying Child $5,028 if you have two Qualifying Children $5,657 if you have thre Qualifying Children $457 if you have no Qualifying Children

Also, the maximum amount of earned income you can have and still get the credit has increased.

Making Work Pay Credit (MWPC) and Government Retiree Credits

Adult recipients of social security benefits, SSI cash payments, railroad retirement benefits, or disability or pension benefits from the Department of Veteran Affairs who received qualifying benefits in November or December of 2008 or January 2009 should have received a $250 payment. This payment is not includible in income for federal tax purposes. If you receive a government pension and were not eligible for any of the above mentioned credits, you will receive a $250 credit on your tax return.

If you are working, you are eligible to receive the MWPC of 6.2% of your earned income up to $400 ($800 Married Filing Jointly). The credit is not available for dependents, nonresident aliens, illegal aliens and individuals must have a valid Social Security Number. WMPC is available for tax years 2009 and 2010.

If you are retired and working, you cannot combine the credits and get $650. Any individual will receive a maximum combined credit of $400 ($800 Married Filing Jointly). There are phaseouts which will apply.

First-Time Homebuyer Credit

If you are a First-Time Homebuyer (i.e. have not owned a home for 36 months) and purchased a home anytime between January 1, 2009 and on or before April 30, 2010 or enter into a contract on or before April 30, 2010 and close before July 1, 2010 you are eligible for the credit. This refundable credit is 10% of the purchase price of the home up to a maximum credit of $8,000.

If you are not a First-Time Homebuyer, but you have owned and used the same residence as a principal residence for five consecutive years out of the last 8 years and purchased a new principal residence after November 6, 2009 and within the 2010 limits above are eligible for a credit. This refundable credit is 10% of the purchase price of the home up to a maximum credit of $6,500.

If you file for one of these credits, you cannot file electronically. Additionally, the IRS is requiring that you send in a signed HUD statement with your return. The new form for the credit is the 5405 and the IRS is advising that it will take 8 - 10 weeks to process your return. You can electronically file your return without the credit and then do an amendment for the credit. My experience is that the processing time for the amendments is around 6 months.

Unemployment compensation

For those taxpayers who received unemployment compensation, there will be no tax on the first $2,400 of unemployment benefits. All other benefits are taxable income. When you file your 2009 tax return, make sure you reduce reported unemployment benefits by $2,400 (but not below $0).

Nonbusiness Energy Property Credit (windows, doors, etc)

This is a tax credit of up to $1,500 for qualifying residential energy improvements (windows, doors, etc) and is available to taxpayers who invest in such energy improvements to their residential property. When you file your 2009 and 2010 tax returns, make sure you claim the maximum benefit under this provision and be sure to reduce your credit by any nonbusiness energy property credit claimed in a prior year.

Residential Energy Efficient Property Credit (solar water heaters, etc)

This is an increased tax credit for larger residential energy efficient improvements (e.g., solar heating, geothermal heat pumps). When you file your 2009-2016 tax returns, make sure you claim the maximum benefit under this provision.

American Opportunity Tax Credit

This education credit is an enhanced Hope credit that can be applied to first four years of qualified higher education expenses. The credit Increases the Hope Scholarship Credit to 100 percent qualified tuition, fees and course materials paid by the taxpayer during the taxable year not to exceed $2,000, plus 25 percent of the next $2000 in qualified tuition, fees and course materials. The total credit cannot exceed $2500 and 40% of the credit is refundable. Phase outs start at $80k/$160k and ends at $90k/$180k. This credit is available for your 2009 and 2010 tax returns.

Section 529 plan distributions

This provision expands the definition of qualified higher education expenses to include the purchase of computer and related equipment for the student who is attending college. The provision is available for tax years 2009 and 2010.

Vehicle purchase

Individuals who purchase new vehicles after 2/16/09 and before 2010 will qualify for a tax deduction for the state and local sales taxes paid on the purchase of a new vehicle costing up to $49,500. This benefit starts to phase out for individuals with MAGI of $125k/$250k. You may claim this deduction even if you don’t itemize.

Plug-in electric vehicles credit

Individuals who purchase a qualified plug-in electric motor vehicle after 2009 are eligible for a credit up to $7,500. The credit begins to phase out after the manufacturer sells its 200,000th plug-in vehicle. This credit is available in tax years 2010 thru 2014.

As always, for details about these or any other income tax related matters you should contact a qualified tax professional. If you leave comments and/or questions, I will do my best to answer in a very timely fashion. If there are specific topics that you would like to hear about, please feel free to email me or leave suggestions in your comments. If you would like to contact me directly, my contact information is located in my bio.


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