Late Tax Law Changes May Affect Your 2010 Taxes

As it moved to extend current tax rates at the end of the year, Congress made a few other changes to the federal tax law. Some of those changes might affect your 2010 tax return, although most have impact over the next two years.

One significant change for 2010 has to do with IRA distributions. If you are over age 70 and a half, you must withdraw some funds from your IRA each year. With the extension of the tax rates for two years, Congress also extended a provision allowing you to make the minimum IRA withdrawal, up to $100,000, and donate it to a charity, thus neutralizing the taxable event.

And because Congress was so late in passing this law, lawmakers are allowing taxpayers to make that distribution in January 2011 and still count it as a 2010 withdrawal.

Other aspects of the new law also impact 2010 tax filers. The tuition and fees deduction, the $250 teacher supply deduction, and the deduction for sales tax in lieu of income tax for itemized deductions were extended to include 2010 taxes. However, the special real estate tax deduction for taxpayers who do not itemize was not extended.

Bonus depreciation

For business filers, bonus depreciation on new business assets, purchased between January 1 and September 8, 2010, is allowed at 50 percent. The percentage rises to a full 100 percent for assets purchased between September 9, 2010 and December 31, 2011.

One of the biggest bonuses in the new tax bill is for taxpayers who face what's called the Alternative Minimum Tax (AMT). Congress devised the AMT years ago to make sure very wealthy and sophisticated taxpayers paid at least some taxes.

The problem developed when the brackets weren't adjusted and millions of middle class taxpayers, because of inflation, got pulled into paying the higher level of taxes. The "patch" Congress put in place to help resolve this problem expired in this tax year, but Congress has extended it for about 20 million middle class taxpayers. Otherwise, they could have faced thousands of dollars more in taxes for 2010.

Looking ahead to 2011

Most of the 2010 Tax Relief Act will have impact in 2011. While it doesn't affect your 2010 return, knowing about the changes may help you better prepare for the 2011 tax filing season.

In 2011, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation. These inflation adjustments relate to eight tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

New dollar amounts affecting 2011 returns, filed by most taxpayers in early 2012, include the following:

• The value of each personal and dependent exemption, available to most taxpayers, is $3,700, up $50 from 2010.

• The new standard deduction is $11,600 for married couples filing a joint return, up $200, $5,800 for singles and married individuals filing separately, up $100, and $8,500 for heads of household, also up $100. The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000, up from $68,000 in 2010.

• The maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,751, up from $5,666 in 2010. The maximum income limit for the EITC rises to $49,078, up from $48,362 in 2010.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

• The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $102,000 for joint filers, up from $100,000, and $51,000 for singles and heads of household, up from $50,000.

Several tax benefits are unchanged in 2011. For example, the monthly limit on the value of qualified transportation benefits (parking, transit passes, etc.) provided by an employer to its employees, remains at $230. Details on these inflation adjustments can be found in Revenue Procedure 2011-12.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation.

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