AdoptionThe Affordable Care Act raises the maximum adoption credit to $13,170 per child, up from $12,150 in 2009. It also makes the credit refundable, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including 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 2010 tax returns one or more adoption-related documents.
Archer Medical Savings Accounts (MSAs)High Deductible Health Plan (HDHP). For Archer MSA purposes, the minimum annual deductible for an HDHP is $2,000 ($4,050 for family coverage) and the maximum annual deductible is $3,000 ($6,050 for family coverage).
Maximum out-of-pocket expenses. The maximum out-of-pocket expenses limit for Archer MSAs is $4,050 ($7,400 for family coverage).
- Cash Contributions – You must have a bank record (i.e. canceled check, bank copy of canceled check, bank statement containing the name of the charity, date and the amount) or a written communication from the charity. The written communication from the charity must include the name of the charity, date of the contribution, and the amount of the contribution
Child’s Investment IncomeThe amount of taxable investment income a child can have without it being subject to tax at the parent's remains the same $1,900 for 2010.
Credit or Debit Card ConvenienceIf you pay your income tax (including estimated tax payments) by credit or debit card, you can deduct the convenience fee you are charged by the card processor to pay using your credit or debit card. The deduction is claimed for the year in which the fee was charged to your card as a miscellaneous itemized deduction on line 23 of Schedule A (Form 1040) (and is subject to the 2% of adjusted gross income floor).
Earned Income Amount for Additional Child Tax CreditFor 2010, the amount your earned income must exceed to claim the additional child tax credit is $3,000.
Earned Income Credit Amounts Increase*In order for me to evaluate whether or not this applies, please provide me with your date of birth.
Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2010 is:
- $3,050 if you have one qualifying child,
- $5,036 if you have two qualifying children,
- $5,666 if you have three or more qualifying children, or
- $457 if you do not have a qualifying child.
Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2010. You may be able to take the credit if:
- You have three or more qualifying children and you earn less than $43,352 ($48,362 if married filing jointly)
- You have two qualifying children and you earn less than $40,363 ($45,373 if married filing jointly),
- You have one qualifying child and you earn less than $35,535 ($40,545 if married filing jointly), or
- You do not have a qualifying child and you earn less than $13,460 ($18,470 if married filing jointly).
Investment income amount increased. The maximum amount of investment income you can have and still get the credit and still get the credit is still $3,100 for 2009.
Advance payment of the credit. If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2010 can be as much as $1,830.
Economic Recovery PaymentAny economic recovery payment you receive during 2010 is not taxable. These $250 payments are being made to most people who:
- Receive social security benefits, supplemental security income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits, and
- Live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.
If you are married and you and your spouse both meet these requirements, each of you may get a $250 payment.
If you are entitled to a payment, you will get it automatically. You do not need to apply for it.
Education Savings Bond ExclusionAn 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.
Exemptions not Phased OutThe 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.
Flexible Spending Arrangements (brand new for 2011)Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions for 2011.
First-Time Homebuyer CreditFinal 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.
Repaying the Credit for a Home Purchased in 2008
If you claimed the credit for a home purchased in 2008 and you owned and used the home as your main home during all of 2010, you must begin repaying that credit with your 2010 tax return. The minimum payment is 1/15 of the original credit received.
Health Care for Older ChildrenHealth coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Hope & Lifetime Learning Credits – Income Limits IncreaseFor 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
Itemized Deductions – no AGI Limits
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.
Long-Term Care and Accelerated Death Benefits ExclusionThe limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2010 to $290 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.
- The cost of qualified long-term care services during the period.
- The dollar amount for the period ($290 per day for any period in 2010).
Personal Casualty & Theft Loss LimitGenerally, a personal casualty or theft loss must exceed $100 to be allowed for 2010. This is in addition to the 10% of AGI limit that generally applies to the net loss.
Residential Energy CreditsNonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness 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.
Social Security & Medicare TaxesFor 2010, the employer and employee will continue to pay:
- 6.2% each for social security tax (up to $106,800 of wages are subject)
- 1.45% each for Medicare tax (all wages are subject)
Standard DeductionFor 2010, you can no longer increase your standard deduction by:
- State or local real estate taxes,
- New motor vehicles taxes (for vehicles purchased in 2010), or
- Disaster losses (for disasters occurring in 2010).
But, you can increase your standard deduction in 2010 if you:
- Had a net disaster loss in 2010 occurring in 2008 or 2009 (from Form 4684, line 17), or
- Purchased a new motor vehicle after February 16, 2009, and before January 1, 2010, and paid the sales or excise taxes in 2010.
For taxpayers using the head of household filing status, the basic standard deduction has increased to $8,400 for 2010. For other taxpayers, the basis standard deduction is the same as in 2009.
Standard Mileage Rates
For 2010, the standard mileage rate for the cost of operating your car for business use is 50 cents per mile. Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
Medical- and move-related mileage. For 2010, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 16.5 cents per mile.
Transportation Fringe BenefitsFor calendar year 2010, the monthly exclusion for commuter highway vehicle transportation and transit passes is $230. The monthly exclusion for qualified parking is $230
For calendar year 2010, the exclusion for reasonable expenses of qualified bicycle commuting is $20 multiplied by the number of qualified bicycle commuting months during that year. Reasonable expenses include the purchase of a bicycle and bicycle improvements, repair, and storage. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your residence and place of employment and you do not receive any of the other qualified transportation fringe benefits. You are not entitled to this exclusion if the reimbursement for bicycle commuting is made under a compensation reduction agreement.
Wage Threshold for Household EmployeesThe social security and Medicare wage threshold for household employees remains at $1,700 for 2010. This means that if you pay a household employee cash wages of less than $1,700 in 2010, you do not have to report and pay social security and Medicare taxes on that employee's 2010 wages. For more information, see Social security and Medicare wages in Publication 926, Household Employer's Tax Guide. Please contact me with any questions you may have,
Jennifer Hack, CPA