The close of 2010 ended an era of major changes in federal tax legislation. Last year witnessed at least four pieces of legislation that made significant changes to the tax rules for individuals and businesses. And just when we thought taxes couldn’t get more complicated, Congress slipped the Tax Hike Prevention Act of 2010 into the IRS’s mail slot as it left Washington for Christmas vacation. The law, previously named The Relief Unemployment Insurance Reauthorization Act of 2010, extends the basic framework of the “Bush era” tax structure through 2012.
The Tax Hike Prevention Act also includes a number of retroactive changes for the 2010 tax year – changes that have forced the IRS to reprogram their computers and delayed filing for many individual and business filers. Today I’ll review a few of the changes that may impact your 2010 personal return:
State and Local Sales Tax Deduction: Taxpayers who itemize deductions will be able to deduct the greater of state income tax or state and local sales tax paid during the year. This deduction corrects an inequity affecting taxpayers living in states that do not have an income tax. Although most West Virginian’s and citizens of neighboring states obtain the greatest tax benefit by deducting their state’s income tax, special circumstances such as paying sales tax on big ticket items such as a car, a boat, building materials, or even a home (including mobile and prefabricated homes) can make claiming sales tax more advantageous.
Mortgage Insurance Deduction: Homeowners who pay qualified mortgage insurance premiums will be able to deduct these premiums on schedule A of their tax return. Qualified mortgage insurance is insurance that secures a mortgage used to acquire a new home. The policy must be issued by the Department of Veteran Affairs, the Federal Housing Administration, Rural Housing Service or a private mortgage insurer. Note that the amount of this deduction may be limited or eliminated if your adjusted gross income exceeds $100,000.
Qualified Conversation Contribution (QCC) Deduction: The maximum charitable deduction a real property owner can take for making a QCC was increased from 30% to 50% of their adjusted gross income (farmers and ranchers can deduct up to 100%). The carry-forward period for the unused deduction was extended from 5 to 15 years (plus the year the donation was made). A (QCC) is a contribution of a qualified real property interest to a qualified organization for conservation purposes. A qualified real property interest includes a donor’s entire interest in real property, a remainder interest, and certain easements in that property.
Higher Education Tuition Deduction: Students or those who claim them as dependants will continue to be able to deduct qualified education expenses as an above the line deduction on the front of form 1040. This deduction will be available for 2010 and 2011.
Classroom Teacher Expenses: Teachers will be able to deduct up to $250 “above the line” on the front of form 1040 in 2010 and 2011. The deduction applies to out-of-pocket expenses incurred by teachers for certain books, equipment, and supplies used in the classroom.
Alternative Minimum Tax (AMT): The AMT exemption “patch” was increased for 2010 and 2011. The AMT is a parallel tax structure in which many exemptions and deductions are replaced with a single exemption amount. The AMT is calculated during the tax return preparation process. The taxpayer must pay the higher of the normal income tax or the AMT. The AMT was originally created to keep high income taxpayers from taking “unfair” advantage of the tax code. Unfortunately, the AMT exemption amount does not automatically adjust for inflation. Although many members of the middle class must now pay the AMT, the increased exemption will keep an estimated 20 million more taxpayers from being subject to it.
These last minute changes affect 2010 personal income tax rules and should be kept in mind as you organize your 2010 taxes information for your preparer. Since the Tax Hike Prevention Act also created many last minute changes that will affect 2010’s businesses and corporate filings, the next “Let Talk Tax” column will discuss these changes. If you have any questions regarding your personal or business taxes or need assistance preparing your 2010 income tax return, please contact our office to speak with a tax professional.
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