What's New for 2010 Individual Tax Returns?

Congress passed a tax relief or “extender” bill late in December 2010. This legislation is so extensive that the IRS says some taxpayers won’t be able to file their returns until mid-to-late February. This delay is for those taking advantage of extended or new provisions--detailed below and for those who itemize deductions. Unfortunately, not all of these changes will be allowed on your State of Ohio income tax return.

What are some of the 2010 tax changes?

Tax rates aren’t going up: Individual tax rates will remain the same 2010 through 2012. The brackets were to have reverted to 15, 28, 31, 36, and 39.6% levels. The late legislation preserved the lower 10, 15, 25, 28, 33, and 35% levels. In Ohio, the last installment of the income tax cuts launched by Governor Taft will be implemented in 2011. The Ohio income tax rates are unchanged for 2010, but for the first time ever the income tax brackets have been adjusted for inflation.

Capital gains and dividend tax rates remain the same: The special 0-15% tax rates on long term capital gains and qualified dividends were set to expire, but the Tax Relief Act has extended the lower rates through 2012.

Itemized deductions and Personal exemptions: These deductions will no longer be limited or phased-out for individuals at high-income levels. Taxpayers at all income levels are still subject to the limitations on particular itemized deductions. Those include medical expenses, casualty losses and certain miscellaneous deductions.

Alternative Minimum Tax: For 2010 and 2011, the AMT exemption was raised to provide middle income taxpayers relief from the additional tax. The exemption amounts had been scheduled to drop to $33,750 for singles and $45,000 for married couples filing a joint return. The AMT exemption is now $47,450/$48,450 for singles and $72,450/$74,450 for married couples filing a joint return, for 2010 and 2011, respectively. So this means fewer taxpayers will fall into a AMT situation. Additionally for those that still find themselves paying AMT, new laws provide the ability to use certain credits to offset regular tax AND the AMT.

Extended deductions related to education: The $250 educator deduction for K-12 teachers, the higher education tuition deduction and interest on student loan deduction scheduled to expire this year, were extended by the last minute tax act. If you take any of these deductions, you will have to wait to February to file your return. Also the deductions were not part of the Ohio conformity legislation. Therefore these federal income adjustments will have to be added back for state purposes and won’t reduce your Ohio taxable income.

Sales, income and real estate tax deductions: For 2010, you can continue to deduct sales taxes in lieu of state and local income taxes as itemized deductions. This mainly benefits those living in states without income taxes. Also for non-itemizers, there is no special exemption for sales tax on motor vehicles or real estate taxes as there was in prior years. Real estate taxes are deductible as an itemized deduction only.

Health insurance deduction: A new provision allows self-employed individuals to deduct the cost of health insurance when calculating net earnings from self-employment. This will reduce their social security tax liability and income tax liability.

First-time homebuyer credit: This credit has expired, except for certain military personnel. Generally, the deadline for closing on a first time home was Sept 30, 2010. Also those who claimed the credit for a home purchased in 2008, must begin repaying the credit in 2010. If you took the credit in 2009, there is no repayment requirement unless you sold or stopped using the house as your main home in 2010.

Child tax credit: This credit was set to revert to $500 per qualifying child. But the 2010 Act extends the $1,000 credit through 2012. You’re also now allowed to take the credit against Alternative Minimum Tax. For joint filers with adjusted gross income over $110,000, the credit starts to phase out. For singles, the phase out income level starts at $75,000.

Roth IRAs: More taxpayers qualify for Roth IRA conversions. For conversions in 2010, you can defer paying the tax until 2011 and 2012. Or you can pay the entire tax on the conversion amount in 2010. We now know that the Bush Tax Cuts have been extended to 2010 and 2011, which may help you decide when to pay the tax.