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This new credit helps small businesses and a small tax-exempt organization afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
For 2010, the adoption credit is refundable, meaning that you may claim it even if you owe no tax. The maximum adoption credit has increased to $13,170. Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased to $13,170. These amounts are phased out if your modified AGI is between $182,520 and $222,520. You cannot claim the credit or exclusion if your modified AGI is $222,520 or more.
You can deduct state or local sales or excise taxes (or certain other taxes or fees in a state without a sales tax) paid in 2010 for the purchase of any new motor vehicle(s) after February 16, 2009, and before January 1, 2010.
An individual who redeems qualified U.S. saving Bonds to pay for higher education expenses may be able to exclude interest income from gross income.
For 2010, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (AGI) is between $105,100 and $135,100. You cannot take the exclusion if your modified AGI is $135,100 or more.
For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $70,100 and $85,100. You cannot take the exclusion if your modified AGI is $85,100 or more.
The definition of qualified higher education expenses for tax-free distributions from a qualified tuition program is expanded to include amounts paid in 2009 or 2010 for the purchase of computer software, any computer or related peripheral equipment, fiber optic cable related to computer use, and Internet access (including related services) that are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.
For tax year 2010, the following changes have been made to the Hope and American opportunity credits.
- The Hope credit is not available for 2010.
- The American opportunity credit is available for 2010 and is unchanged from 2009.
Final Year for Claiming the Credit
For most taxpayers, 2010 is the final year to claim the first-time homebuyer credit. In order to claim the credit for a main home purchased in 2010, taxpayers must have purchased their home:
- Before May 1, 2010, or
- After April 30, 2010, and before September 1, 2010, and entered into a binding contract before May 1, 2010, to purchase the property before July 1, 2010.
Additional Time to Purchase for Members of the Uniformed Services or Foreign Service and Employees of the Intelligence Community
Members of the uniformed services or Foreign Service and employees of the intelligence community serving outside the United States may have additional time to purchase a home and qualify for the credit. They may claim the credit for a main home purchased in the United States:
- Before May 1, 2011, or
- After April 30, 2011, and before July 1, 2011, and they entered into a binding contract before May 1, 2011, to purchase the property before July 1, 2011.
Gain from the sale or exchange of the main home is no longer excludable from income if allocable to periods of nonqualified use.
Generally, nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home (with certain exceptions).
A period of nonqualified use does not include:
- Any portion of the 5-year period ending on the date of the sale or exchange that is after the last date you (or your spouse) use the property as a main home;
- Any period (not to exceed an aggregate period of 10 years) during which you or your spouse is serving on qualified official extended duty:
- As a member of the uniformed services,
- As a member of the Foreign Service of the United States, or
- As an employee of the intelligence community; and
- Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.
If you or your spouse is an employee, enrolled volunteer or volunteer leader of the Peace Corp and you sell your main home, you may be able to exclude the gain from income even if you did not live in it for 2 years during the 5-year period ending on the date of sale. Generally, you can elect to have the 5-year test period for ownership and use suspended for up to 10 years during any period you or your spouse serve outside the United States (on qualified official extended duty if an employee). Similar benefits apply to members of the uniformed services, Foreign Service, or employees of the intelligence community.
The limit on itemized deductions expired in 2010. However, under current law, the limit on itemized deductions will resume in 2011 at pre-2006 levels.
The amount you can deduct for each exemption has not changed for 2010. It is still $3,650. But unlike 2009, when you would lose part of your deduction for personal exemptions if your adjusted gross income (AGI) was more than a certain amount, in 2010 you will not lose any part of your deduction for personal exemptions, regardless of the amount of your AGI.
Non-business energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a non-business energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2010. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.
Limitation. The total amount of credit you can claim in 2009 and 2010 is limited to $1,500.
Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.
The Small Business Jobs Act of 2010 was enacted on September 27, 2010. The SBJA contains some tax provisions that take effect this year. Other tax provisions will be implemented during the next several years.
Several of the provisions are designed to encourage investment and provide access to capital for businesses. The following is a list of those specific tax provisions now in effect:
Sect. 2011: Temporary exclusion of 100% of gain on certain small business stock
Expanding on the provisions of Internal Revenue Code Section 1202 and the American Recovery and Reinvestment Act, the Small Business Jobs Act provides an additional incentive for investment in qualified small businesses. Under this Act, investors in qualified small business stock can exclude 100% of the capital gain upon sale of the stock. The exclusion under this provision is not an item of tax preference for purposes of the alternative minimum tax.
In order to claim the capital gain exclusion, the qualified small business stock must be:
- Acquired after September 27, 2010, and before Jan. 1, 2011, and
- Held for at least five years before the stock is sold.
Under current law, the earliest tax year for which this 100% capital gain exclusion can be claimed is 2015. Additional limitations, qualifications and requirements may apply.
The new law allows an eligible small business to carry back general business credits five years. Previously, the credits could only be carried back one year. The carry-back is for credits determined in the first taxable year beginning after December 31, 2009.
An “eligible small business” in general is defined as follows:
- A corporation whose stock is not publicly traded, a partnership, or a sole proprietorship, and
- The taxpayer must have $50,000,000 or less in average annual gross receipts over the three preceding tax years.
The new law allows general business credits to offset both regular income tax and alternative minimum tax of eligible small businesses as described in Section 2012 of the Small Business Jobs Act (see above). The provision is effective for any general business credits determined in the first taxable year beginning after December 31, 2009, and to any carry-back of such credits.
Under the Small Business Jobs Act, if the fifth year of an S Corporation’s recognition period ends before their 2011 taxable year begins, and then no tax is imposed on the net recognized built-in gain for the 2011 tax year.
An expense deduction is allowed for businesses which choose to treat the cost of certain qualified property, called section 179 property, as an expense rather than a capital expenditure. For qualifying property placed in service during the taxable years 2010 and 2011, the new law increases both the maximum amount of the deductible expense under IRC Section 179, as well as the statutory phase-out amount. The provision also allows an election by a taxpayer to exclude qualified real property from the definition of IRC Section 179 property.
Generally, businesses are allowed to recover the cost of capital expenditures over time through depreciation expense. IRC Section 168(k) allows for additional first-year depreciation, for 50% of the basis, of certain qualified property placed in service after
December 31, 2009. The new law extends the additional first-year depreciation deduction to qualified property acquired and placed in service during 2010.
For taxpayers starting an active trade or business, the new law increases the amount the taxpayer is allowed to elect as a deduction for start-up expenditures under section 195(b) for taxable years beginning after December 31, 2009. Section 2031 allows up to $10,000 as a deduction for start-up expenditures and provides for a dollar-for-dollar reduction of the $10,000 deduction if startup expenditures exceed $60,000.
Generally, small business owners may not deduct the cost of health insurance when calculating self-employment tax. Under the Small Business Jobs Act, and subject to specific statutory limitations (i.e. deduction is not available if self-employed individual is eligible to participate in an employer-subsidized health plan maintained by the employer of the taxpayer or the taxpayer’s spouse), business owners can deduct the cost of health insurance for themselves and their family in the calculation of their 2010 self-employment tax.
Page Last Reviewed or Updated: January 08, 2011
Source: www.irs.gov |
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In 2009, numerous new and expanded deductions and credits came into being for a broad cross-section of taxpayers: College tax benefits for parents and students; energy credits for homeowners who are going green; and even tax breaks for home buyers and car buyers.
Following is a summary of these and other key changes taxpayers will find when they start preparing their 2009 federal income tax returns.
More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:
- Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
- The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
- Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent’s rate, commonly referred to as the kiddie tax.
Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.
There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That’s because the credit is only allowed for the first four years of a post-secondary education.
Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.
People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the non-business energy property credit and the residential energy efficient property credit.
This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. This means that a homeowner can get the maximum credit by spending at least $5,000 on qualifying improvements. Homeowners must make the improvements to an existing principal residence; this tax credit is not available for new construction. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs are also eligible for the credit, though the cost of installing these items does not count.
Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Qualifying property purchased for new construction or an existing home is eligible for the credit. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.
Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s Web site or the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.
New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, non-leased, after Feb. 16, 2009, and before Jan. 1, 2010.
Taxpayers who buy a new vehicle may deduct state or local fees or taxes that are similar to a sales tax whether or not their state imposes a sales tax. To qualify, the fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per-unit fee.
The amount of the deduction is reduced for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A.
More workers and working families are eligible for the Earned Income Tax Credit. In particular, expanded benefits are now available for those with three or more qualifying children and married couples. The EITC helps taxpayers whose incomes are below certain income thresholds, which in 2009 rise to:
- $48,279 for families with three or more qualifying children
- $45,295 for those with two or more children
- $40,463 for people with one child
- $18,440 for those with no children
One in six taxpayers can claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.
In addition, the earned income formula for the additional child tax credit is revised for tax years 2009 and 2010. As a result, more low and moderate income families qualify for the full $1,000 child tax credit.
Nearly two out of three taxpayers choose to take the standard deduction rather than itemizing deductions such as mortgage interest and charitable contributions. The basic standard deduction is:
- $11,400 for married couples filing a joint return and qualifying widows and widowers, a $500 increase compared with 2008
- $5,700 for singles and married individuals filing separate returns, up $250
- $8,350 for heads of household, up $350.
Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else’s dependent.
In addition, eligible taxpayers can further increase their standard deduction by any of the following three deductions:
- State or local real estate taxes paid in 2009
- A net disaster loss reported on Form 4684 and
- State or local sales or excise taxes on the purchase of a qualifying new motor vehicle.
For tax-year 2009, Congress raised the alternative minimum tax exemption to the following levels:
- $70,950 for a married couple filing a joint return and qualifying widows and widowers, up from $69,950 in 2008
- $35,475 for a married person filing separately, up from $34,975
- $46,700 for singles and heads of household, up from $46,200
Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2010.
The standard mileage rate for business use of a car, van, pick-up or panel truck is 55 cents for each mile driven. The standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 24 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.
The value of each personal and dependency exemption is $3,650, up $150 from 2008. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation.
The amount of taxable investment income a child can have without it being taxed at the parent's rate is $1,900, up $100 from 2008.
There are several modifications to the definition of a qualifying child. For example, the child must be younger than the taxpayer, unless the child is totally and permanently disabled. These changes affect who can claim various tax benefits including the dependency exemption, child tax credit, credit for child and dependent care expenses, head of household filing status and the EITC.
A new rule applies to the noncustodial parent in situations where a couple is divorced or legally separated after 2008. To claim a child as a dependent, the noncustodial parent must attach Form 8332 or a similar statement to his or her tax return. For pre-2009 divorces and separations, the noncustodial spouse still has the option of attaching certain pages from the divorce decree or separation agreement, instead of Form 8332.
A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS “cash for clunkers” program is not taxable to the consumer buying or leasing a new car.
Unemployment benefits up to $2,400 received in 2009 are tax free for unemployed workers. Every person who receives unemployment benefits can exclude the first $2,400 of these benefits on their return. Unemployment benefit amounts over $2,400 are taxed.
Page Last Reviewed or Updated: January 08, 2010
Source: www.irs.gov
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