We wish you a great 2011 and hope your 2010 was healthy and fruitful. This is an update on the tax laws for 2010 and beyond. Much of the changes were actually renewals of the existing laws (thank goodness) which allowed for deductions and credits to NOT increase everyone?s taxes in 2010. We would expect your 2010 taxes to be very similar to your results from 2009, assuming nothing has drastically changed in 2010.
Individual Extenders: These deductions and credits were extended through the end of 2012:
Child tax credit ($1000 for each child under 17) same rule as 2009.
Earned Income credit (including third child credit) same rule as 2009.
Dependent Care Credits (Max $6,000 in dependent care paid on two children) same rule as 2009.
College Tuition Credits and Deduction same rule as 2009.
Teacher expenses extended through 2011. Same rule as 2009.
Student Loan Interest. Same rule as 2009 with some income phaseouts.
State & Local Sales Taxes. Same rule as 2009 extended through 2011.
Marriage Penalty Relief. Same rule as 2009.
Mortgage Insurance Deduction same rule as 2009.
Charitable Contributions from IRAs. Same rule as 2009, extended through 2011.
Energy Efficient Home Improvements (A/Cs, Water Heaters, furnaces, Windows, Doors, etc) $1500 Lifetime Max through 2011.
Individual NOT extended: The deductions and credits expired and were not renewed in 2010:
Home Property Tax Deduction add-on. (Property taxes remain deductible, but at lesser value.)
Make Work Pay Credit (the $400 per worker credit is changed to the 2% SS wage tax reduction)
Social Security tax reduction: Workers will get a 2 percentage-point break on their payroll tax for one year. Instead of paying 6.2% on wages up to $106,800, they will only have to pay 4.2% in 2011. This tax break replaces the Making Work Pay credit, which expires this year. Unlike Making Work Pay, which was limited to workers making less than $75,000 ($150,000 for couples), the payroll tax holiday will be available to everyone who pays into Social Security.
Extended income tax rates: The six federal income tax rates will remain at the same levels as 2009: 10%, 15%, 25%, 28%, 33% and 35% through 2012. In addition, itemized deductions will continue to be allowed in full for high-income taxpayers.
Smaller estate tax: Under the bill, the exemption level will be raised to $5 million (per person) and the top rate lowered to 35%.0:00 /3:14CEO: Obama is 'salesman-in-chief' The legislation will also reinstate the so-called "step up in basis" for beneficiaries of those who die in 2010, 2011 or 2012. A stepped-up basis means that when someone sells an inherited asset, his capital gains tax bill will be based on the asset's price the day he inherited it, rather than when the decedent originally bought it. Practically speaking that means the beneficiaries of those who died in 2010 will be allowed to choose which estate tax rules to follow -- those of 2011 or those of 2010. Under 2010 rules, there is no estate tax but also no step-up rules; there is only an option to exempt $1.3 million worth of capital gains.
Extended investment tax rates: Everybody will get to keep their low investment tax rates for the next two years. That means their qualified capital gains and dividends will continue to be taxed at 15%. Low-income tax filers will continue to enjoy a 0% tax rate on their capital gains or dividends.
College tuition credit: Retention of the American Opportunity tax credit, which is an expansion of the HOPE tax credit. The Opportunity credit is worth up to $2,500 (up to 100% of the first $2,000 spent and up to 25% of the next $2,500), and it may be claimed for four years' worth of college. Eligibility to take the credit is limited to those with modified adjusted gross income below $90,000 ($180,000 for couples filing jointly). Tuition and fees, same rule: This is one of the above-the-line deductions. You don't have to itemize to claim this tax break, which could be as much as $4,000. You take the deduction directly on your Form 1040 or Form 1040A.
AMT fix: More than 20 million tax filers will be protected from having to pay the so-called "wealth tax," otherwise known as the Alternative Minimum Tax. For tax year 2010, the bill will raise the amount of income that is exempt from the reach of the AMT to $47,450 for individuals and to $72,450 for couples filing jointly. In 2011, those exemption amounts will increase to $48,450 and $74,450 respectively. In addition, the bill will allow taxpayers to apply nonrefundable credits (which reduce one's tax bill dollar for dollar) to their tax liability -- whether under the AMT or the regular tax code.
Bonus Depreciation: Extends the 2009 rule for a 50% bonus depreciation for 2010. A change in the bonus depreciation rules allows for 100% deduction in 2011. Also the Section 179 rule for first year equipment purchases up to $500,000 for 2010 and 2011.
The Ten Most Important Red Flags in to IRS.
Ever wonder why some tax returns are audited by the IRS while most are ignored? Well, there's a whole host of reasons to this age-old question. The IRS audits only about 1% of all individual tax returns annually. The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for an audit. And of course, the only reason filers should worry about an audit is if they are cheating on their taxes. Here are the 12 most important ones:
1. Failure to report all taxable income. The IRS receives copies of all 1099s and W-2s that you receive during a year, so make sure that you report all required income on your tax return. The IRS computers are pretty good at matching these forms received with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill.
2. Claiming large charitable deductions. This comes up again and again because the IRS has found abuse on audit, especially with those taking larger deductions. If your charitable deductions are disproportionately large compared to your income, it raises a red flag. That's because the IRS can tell what the average charitable donation is for a person in your tax bracket. Also, if you don't get an appraisal for donations of valuable property or if you fail to file Form 8283 for donations over $500, the chances of audit increase. Be sure you keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules.
3. Home office deduction. In order to take this write-off, the space must be used exclusively and on a regular basis as your principal place of business. That makes it difficult to claim a guest bedroom or children's playroom as a home office, even if you also use the space to conduct your work. Exclusive use means a specific area of the home is used only for trade or business, not also where the family watches TV at night. Don't be afraid to take the home-office deduction if you're otherwise entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.
4. Business meals, travel and entertainment. Schedule C is a treasure trove of tax deductions for the self-employed. But it's also a gold mine for IRS agents, who know from past experience that the self-employed tend to claim excessive deductions. Most under-reporting of income and overstating of deductions are done by those who are self-employed. To qualify for meals or entertainment deductions, you must keep detailed records generally documenting the following for each expense: amount, place, persons attending, business purpose and nature of discussion or meeting.
5. Claiming 100% business use of vehicle. Another area that is ripe for IRS review is use of a business vehicle. Claiming 100% business use for an automobile on Schedule C is red meat for IRS agents. Make sure you keep very detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction.
6. Claiming a loss for a hobby activity. If your Schedule C loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention. It's issued guidelines to its agents on how to sniff out those who improperly deduct hobby losses. Large Schedule C losses are audit bait, but reporting losses from activities in which it looks like you might be having a good time is just asking for IRS scrutiny. Tax laws don't allow you to deduct hobby losses on Schedule C. However, you do have to report any income earned from your hobbies. In order to claim a hobby loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes you're in business to make a profit, unless the IRS establishes to the contrary
7. Cash businesses. Small business owners, especially those in cash-intensive businesses -- taxi drivers, car washes, bars, hair salons, restaurants and the like -- are an easy target for IRS auditors. The agency is well aware that those who primarily receive cash in their business are less likely to accurately report all of their taxable income. The IRS wants to narrow the tax gap, and history has shown that cash-based businesses are a good source of audit adjustments. It has a new guide for agents to use when auditing cash intensive businesses, telling how to interview owners and noting various indicators of unreported income.
8. Failure to report a foreign bank account. The IRS is intensely interested in people with offshore accounts, especially those in tax havens. U.S. tax authorities have had some recent success in trying to get foreign banks (such as UBS in Switzerland) to disclose information on U.S. account holders. sure that if you have any such accounts, you properly report them when you file your return. Keep in mind, though, that if you have never previously reported the foreign bank account on your return, and you decide to do so for the first time in 2010, that might also look suspicious to the IRS.
9. Math errors. One of the biggest reasons that people receive a letter from the IRS is because of mathematical mistakes they make on their tax returns..
10. Taking higher-than-average deductions. If deductions on your return are disproportionately large compared to your income, the IRS audit formulas take this into account when selecting returns for examination. But if you've got the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.
