Tax Changes For 2010

Here are a few important income tax changes for 2010 from Kiplingers-Lou

Tax Changes Ring in the New Year

As you prepare to fill out your 2009 tax return, take note of new tax rules that will apply for 2010.

The new year brings with it several major tax changes that will have an impact on your 1040 and on business tax returns as well. There’s both good news and bad news in 2010’s new rules and in what lies ahead.

For individuals:

– Roth IRAs are now an option for upper income folks because, as of Jan. 1, the limit — $100,000 of adjusted gross income (AGI) — on converting from a regular IRA to a Roth is gone. Converting to a Roth generally makes sense if you expect to be in the same or a higher tax bracket in retirement and you can pay the tax bill with other funds. Folks who convert in 2010 can elect to defer the tax and report 50% of the conversion income on their 2011 tax returns and the balance on 2012 returns. But with the 39.6% top rate likely to return in 2011, that election may not pay off.

– Itemized deductions and personal exemptions are juicier for upper incomers this year because the phaseout rules don’t apply in 2010. Those taxpayers’ write-offs will, however, be trimmed again in 2011. Most itemized deductions will have to be cut by 3% of the amount by which AGI exceeds approximately $170,000, though the cutback doesn’t apply to medical expenses, investment interest or casualty losses. In 2011, personal exemptions will have to be reduced by 2% for each $2,500 of AGI over approximately $255,000 for married couples and $170,000 for singles.

– The Medicare Part B premium will remain at $96.40 a month for about 75% of Social Security beneficiaries, thanks to a law that prevents Part B hikes when there is no cost-of-living adjustment. But the premium goes up to $110.50 a month for folks who sign up for Part B in 2010 and for those whose premiums are paid by Medicaid. Upper income seniors will pay even higher amounts. Singles with AGIs exceeding $85,000 and couples with AGIs over $170,000 will owe a fee based on their 2008 AGI, plus any tax-exempt interest, EE bond interest used for education and excluded foreign earned income. The maximum monthly premium of $353.60 is nearly four times the basic monthly charge.

– The estate tax and the generation-skipping tax both disappeared on Jan. 1, and the top rate on the gift tax dropped to 35%. The downside: Also taking effect is a rule that replaces the date-of-death value rule as the basis for inherited assets with a system that starts with the decedent’s basis. Under that carryover basis regime, when the inherited assets are sold by heirs, they could exclude up to $1.3 million of gain — $4.3 million for surviving spouses. The estate tax won’t stay dead for long, however: Congress is expected to reinstate it and the generation-skipping tax retroactively, and get rid of the carryover basis regime. But a return to last year’s $3.5-million estate tax exemption and 45% rate isn’t assured. A group of Senate Republicans and moderate Democrats will fight hard for a $5-million exemption and 35% top rate, and they may get their way.

For businesses:

– Special expensing rules for small firms are history, at least for now. Congress failed to extend the Section 179 expensing limit of $250,000 that expired at the end of 2009. So right now, companies can expense only $134,000 of assets that are put in use this year. And the ability to claim expensing in lieu of depreciation phases out dollar for dollar once more than $530,000 of assets are placed in service, down from $800,000 in 2009. But Congress is likely to retroactively restore the higher expensing caps. The same probably won’t be true for 50% bonus depreciation, a special break that also disappeared at the end of 2009.

– The Social Security wage base remains at $106,800 in 2010, the first time it hasn’t budged since 1971. The reason: The law doesn’t allow the wage base to rise if there’s no cost-of-living increase in Social Security benefits. The tax rates won’t change, either: 6.2% for FICA tax and 1.45% for Medicare. Self-employed folks pay 15.3% on the first $106,800 of their net earnings and 2.9% on any amounts above that. But the relief is likely to be short-lived: There will be a whopping increase in the wage base when the next benefit hike takes effect.

– IRS’ standard mileage rate takes a dive, to 50¢ a mile this year — a 5¢ drop from 2009 — because of lower fuel costs. For medical travel and moving, the rate is 16.5¢ a mile, down 7.5¢. The charitable driving rate remains at 14¢ a mile.

– Estimated tax relief for small business owners ended as of Jan. 1. That means they won’t be able to base estimates for 2010 income taxes on 90% of the prior year’s tax, as they could for 2009, to avoid the underpayment penalty. This year, they must prepay 90% of their 2010 tax liability, or 100% of their 2009 tax liability (110% if their 2009 AGI exceeded $150,000)

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