Key Changes in Tax Laws for 2010 Individual Returns

New tax laws could affect your 2010 tax year return. Here's what you need to know.

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Every year, taxpayers and tax professionals dust off their magnifying glasses and try to understand what's new in federal and state tax law. 2011 is no different. So, as you get your tax returns ready for the 2010 tax year, what changes should you pay particular attention to? This article looks at the key federal tax law changes that affect your filing in April 2011, according to the IRS. And don't forget to check for new state tax laws that could affect you too. A good place to start is the website for your state's tax agency. (For everything you need to know to get your personal tax return together this year, check out Nolo's Personal Income Taxes section. Business owners and self-employed taxpayers can get tips on 2011 tax law changes in Nolo's article 2011 Tax Laws: What's New for Businesses and the Self-Employed.)

2011 IRS Filing Deadline Is April 18 (Not April 15)

This year you'll have until April 18 to file your federal income tax return with the IRS (instead of the typical April 15 deadline). That's because Emancipation Day -- a holiday observed in Washington, D.C. -- falls on April 15 this year, which is a Friday. And since any D.C. holiday affects tax deadlines the same way that a federal holiday would, this year's deadline for filing your federal returns is moved to Monday, April 18.

Roth IRA Conversions: More Taxpayers Qualify

Income limits no longer apply to rollovers or conversions to Roth IRAs from other retirement plans. In the past, only taxpayers with modified adjusted gross income of $100,000 or less were eligible, and a married person filing a separate return who lived with his or her spouse at any time during the year was barred from Roth IRA rollovers or conversions, regardless of income.

For 2010 rollovers and conversions only, half of the resulting income must be included as income in tax year 2011 and the other half in 2012, unless the taxpayer chooses to include all of it as income in 2010. In all situations, taxpayers must report any 2010 conversion on Form 8606 for tax year 2010. These rules do not apply to rollovers from another Roth IRA or from a designated Roth account.

Did You Claim the First-Time Homebuyer Credit in 2008?

Taxpayers who claimed the first-time homebuyer credit for a home bought in 2008 must generally begin repaying it on the 2010 return. In most cases, the credit must be repaid over a 15-year period. Many of those affected by this requirement received reminder letters from the IRS.

A repayment requirement also applies to a taxpayer who claimed the credit on either a 2008 or 2009 return and then sold or stopped using the home as a main residence in 2010.

The first-time homebuyer credit hasn't gone away completely. Certain members of the armed forces and some other taxpayers still have time to buy a home and use the credit.

Alternative Minimum Tax Exemption Increased

For tax-year 2010, the alternative minimum tax exemption increases to the following levels:

  • $72,450 for a married couple filing a joint return and qualifying widows and widowers (up from $70,950 in 2009).
  • $36,225 for a married person filing separately (up from $35,475).
  • $47,450 for singles and heads of household (up from $46,700).

Special Charitable Contribution Tax Breaks for Certain IRA Owners

This provision, now available through the end of 2011, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner age 70½ or over can directly transfer, tax-free, up to $100,000 per year to eligible charities. Known as a qualified charitable distribution (QCD), this option is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible to be treated as a qualified charitable distribution. For tax-year 2010 only, IRA owners can choose to treat QCDs made during January 2011 as if they occurred in 2010.

To qualify, the funds must be contributed directly by the IRA trustee to an eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

Donations to some charities won't be eligible for the tax break. For example, donor-advised funds and supporting organizations are not eligible recipients. Remember to check eligibility of the charity before requesting a QCD. (Retirees can learn more about reducing their taxes and enriching their retirement years with Nolo's article Tax Deductions for Your Charitable Contributions and Volunteer Work.)

Health Insurance Deduction Reduces Self Employment Tax

For tax year 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their Social Security self-employment tax liability in addition to their income tax liability. As in the past, eligible taxpayers claim this deduction on Form 1040 Line 29. But for 2010, eligible taxpayers can also enter this amount on Schedule SE Line 3, thus reducing net earnings from self-employment subject to the 15.3 percent social security self-employment tax.

Premiums paid for health insurance covering the taxpayer, spouse, and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child, under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer's dependent.

As before, the insurance plan must be set up under the taxpayer's business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

Standard Mileage Rates for 2010

The standard mileage rate for business use of a car, van, pick-up, or panel truck is 50 cents for each mile driven. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 16.5 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.

Adoption Credit Expanded

The maximum adoption credit for 2010 is increased to $13,170 per child, up from $12,150 in 2009. The credit is refundable, meaning that eligible taxpayers can get the credit even if they owe no tax. In general, the credit is based on qualified adoption expenses, which include adoption fees, court costs, attorney's fees, and travel expenses. Income limits and other special rules apply.

In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their return an adoption order or decree or certain other documents.

Because of these documentation requirements, taxpayers claiming the adoption credit will have to file paper tax returns. Normally, it takes six to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. Taxpayers claiming the credit will still be able to use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.

Deduction for Corrosive Drywall

Taxpayers may claim a casualty loss deduction, using a special formula, for amounts paid to repair damage to their homes and household appliances resulting from corrosive drywall. The deduction is smaller for taxpayers with a pending claim for reimbursement or those who plan to pursue reimbursement through property insurance, litigation, or other means.

For everything you need to know to get your 2010 tax year return together, check out Nolo's Taxes Center and our Tax Law Tips Blog.

Some content reproduced from the Internal Revenue Service.

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