By Dovid Wilschanski CPA. Refunds substantially increased due to changes in Earned Income Credit, Child Tax Credits and First Time Homebuyers Credits. Congress made many significant tax changes in late 2010, including passage of the Tax Relief Act, that will have a major impact over the next several years. The IRS was so ‘tzutumulted’ by the new changes that E-filing only started some days ago.

Tax Credit of up to $8,000 for First-Time Homebuyers and $6,500 for Existing Homeowners

The Congress extended and expanded the popular 2008 first-time homebuyer tax credit. In addition, the income limits were increased, making even more people eligible. Existing homebuyers are eligible to receive a tax credit of 10% of the purchase price up to $6,500 if they bought and closed on a replacement home by September 30, 2010. In order to be eligible for the credit, homeowners must have lived in the same principal residence for any five-consecutive-year period during the past eight years. They are not required to sell or dispose of their current home, but the new home must become their principal residence. If you purchased and closed on a primary residence before September 30, 2010 and are a “first-time” homebuyer, you can qualify for a tax credit of 10% of the purchase price up to $8,000. To be eligible, you must not have owned a residence n the United States in the previous three years. To qualify for either credit, you must have signed a binding contract to buy the house by April 30, 2010, and closed on it by September 30 2010. Because of the high dollar figures involved audits are common so make sure that you are eligible.

The credit is refundable to the extent it exceeds your regular tax liability, which means that if it more than offsets your tax liability, you’ll get a refund check. But it does not offset the Alternative Minimum Tax. In addition, income limits were expanded from earlier versions of the credit.

Note that if you took a credit on your 08 return some of that credit is due back on the 10 return.

Payroll Tax Credit

For 2009 and 2010, Congress gave employees a credit of 6.2 percent of their earned income, capped at $400 for single filers and $800 for joint filers. For single filers, the credit starts phasing out at $75,000 of Adjusted Gross Income and dries up at $95,000. The phase-out zone for couples is $150,000-$190,000.

Indexed Tax Brackets

The 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent tax brackets all kick in at income levels that are more than 4 percent higher than they were in 2009.

Personal Exemptions

For 2010, each personal exemption you can claim is worth $3,650, the same as in 2009.

Standard Deductions

For 2010, the standard deduction for married taxpayers filing a joint return is
$11,400, the same as in 2009.For single filers, the amount is $5,700 in 2010, up by $250 over 2009. Heads of household can claim $8,400 in 2010, up $50 from 2009.

Income Phaseouts for Itemized Deductions and Personal Exemptions for High-Income Taxpayers

The amount of itemized deductions and personal exemptions you can take are normally phased out as your income rises. In 2010, however, those income limits have been repealed, and the recent tax relief act extends the repeal for two more years, through 2012.

Section 179 Expense Deduction

The maximum amount of equipment placed in service in 2010 and 2011 that
businesses can expense was increased to $500,000. And the annual investment limit was raised to $2,000,000. Thus, you won’t begin to lose the benefit of expensing until you place more than $2,000,000 of assets in service in 2010 and 2011. The allowance drops to $125,000 for tax years beginning in 2012.

Tax-Free Parking for Employees

Companies can pay for $230 a month of parking tax-free for employees. The cap on tax-free transit passes is now $230 a month as well, the same as for parking.

Tax Credit for College Tuition

For 2010 through 2012, the Hope credit is replaced by a new credit. Now called the American Opportunity Tax Credit, it provides a credit of up to $2,500 per student per year for four years of eligible Institutions. It now also covers the cost of books, and begins to phase out at $80,000 of Adjusted Gross Income for single filers and $160,000 for joint filers. If the credit is more than your income tax liability, 40 percent of it is refundable. Also, the full credit is allowed against the Alternative Minimum Tax.

Child Tax Credit

If the credit exceeds the filer’s tax liability, all or part of the credit will be refunded if the filer earns more than $3,000 in 2010, down from $12,550 in earnings previously.

Earned Income Tax Credit (EITC)

For families with three or more children, the maximum Earned Income Tax Credit for 2010 rises by $628.50 to a maximum of $ 5656, with two children $ 5036,with one child $ 3050 and $ 457 without a qualifying child. Phaseout of the credit for joint filers starts at higher income levels in 2010.

The maximum amount of investment income which could be earned is
$ 3100. So if you earned one dollar in excess of the $ 3100 it may cost you
as much as $ 5656. Ouch!

Higher Income Limits for Deductible IRAs and for Roth IRAs

If you are covered by a retirement plan at work, you can take a full IRA
deduction in 2010 if your modified Adjusted Gross Income is $89,000 or less (married filing jointly) or $56,000 or less (single or head of household). A partial deduction is allowed until your Adjusted Gross Income reaches $109,000 if you are married filing jointly, or $66,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified Adjusted Gross Income rises between $167,000 and $177,000 if you are married filing jointly, or $105,000 to $120,000 if you are single or a head of household.

Contribution Limit for 401(k) Plans

The maximum employee contribution is $16,500 in 2010 for 401(k) and similar workplace retirement plans, including 403(b)s and the federal Thrift Savings Plan. Workers age 50 and older in 2010 can put in an additional $5,500, making their maximum $22,000.

Tax Rate on Capital Gains

The tax rate on capital gains from the sale of assets held longer than one year
remains at zero percent for people in the 10 percent or 15 percent tax brackets. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets also remains the same.

Estate Tax Exemption

For 2010, there is no federal estate tax. However the executors of estates
where the taxpayer died in 2010 can elect to apply the 2011 exemption of
$5,000,000, with a maximum estate tax of 35%. Different rules for the step up in cost basis apply in these two years, meaning some estates may find the 2011 rules more beneficial.

The estate tax was reinstated in the 2010 Tax Relief Act. For individuals dying after 2010, the federal estate tax continues with a $5 million exemption and a 35 percent maximum rate.

Higher Annual Gift Tax Exemption

For 2010, you can give up any individual up to $13,000 without owing any gift tax.

Credit for Residential Energy Efficient Property

The credit for 30 percent of the cost of installing solar water heating
equipment, solar electric equipment, geothermal heat pumps or small wind
turbines in your primary residence or a second home is unlimited in 2010. But the credit for fuel cell property cannot exceed $500 per half-kilowatt capacity.

Credit for Energy-Saving Home Improvements

The tax credit for the cost of energy-saving home improvements is 30 percent for 2010, up to a combined maximum of $1,500 in both 2009 and 2010. It applies to qualified insulation, windows, outside doors, biomass fuel stoves and high-efficiency furnaces, water heaters and central air conditioners.

Refundable Child Tax Credit

The income threshold needed to qualify to claim the child tax credit if it
exceeds your regular income tax bill is $3,000. The previous threshold was
$ 12500. The resulting refund will be substantial over the previous year.

Educators’ Deduction

You can deduct up to $250 ($500 if married filing joint and both spouses are
educators, but not more than $250 each) of any unreimbursed expenses you paid or incurred for books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom. You must have worked at least 900 hours a school year in a school that provides elementary or secondary education.

Tuition and Fees Deduction

You can deduct up to $4,000 of college tuition and fees through 2011.

Exemptions for the Alternative Minimum Tax

For 2010, the exemption levels were increased to $72,450 for married couples filing jointly, $47,450 for singles and heads of household, and $36,225 for married couples filing separately.

Partial Exclusion for Unemployment Benefits

For 2010, the first $2,400 of unemployment benefits you receive is no longer
tax-free.

Sales Tax Deduction for New Vehicles

Beginning in 2010, buyers of new vehicles no longer get a tax benefit for sales tax paid on new vehicles, unless they itemize and elect to deduct sales taxes instead of state income taxes.

Tax preparation and all accounting services at the office of Dovid Wilschanski CPA’s at Sovereign Bank Building at Sixth Street. Call 732 370-1114 or E-mail to [email protected] for more information.