2010 tax law changes

New vehicle sales tax - Effective January 1, 2010, individuals will no longer be able to take the itemized deduction or increase in standard deduction for sales tax on the purchase of a new motor vehicle.

Sales tax – Individuals will no longer be able to take an itemized deduction for state and local sales tax.

Educator expenses – Teachers will no longer be allowed to deduct out of pocket expenses incurred for school supplies. In the past, a deduction from adjusted gross income of up to $250 was allowed.

Roth IRA conversion – There are no income limits in 2010 for individuals that would like to convert a traditional IRA to a Roth IRA. Also, for any conversions in 2010, the tax will be paid in 2011 and 2012.

Phase outs - In 2010, there will be no phase out of itemized deductions or personal exemptions. This change will greatly benefit high income earners.

Unemployment income – In 2009, those receiving unemployment benefits can exclude up to $2,400 from their taxable income. This tax benefit will no longer be available in 2010.

Charitable distributions / contributions – Charitable distributions made directly from an IRA account to a qualified charity will no longer be excluded from your income

Home buyers credit – If you got on the home buyers tax credit gravy train back in 2008, you are required to start paying the credit back in 2010.

Alternative Minimum Tax – The AMT exemption is scheduled to decrease to $33,750 for single filers and to $45,000 for those filing a married joint return.

Retirement contributions - There is no change in the maximum contribution and individual can make to a 401(k) plan in 2010. This remains at $16,500. The catch up contribution of $5,500 for individuals age 50 + also remains the same.

Mileage reimbursement rates – The updated mileage reimbursement rates effective for January 1, 2010 are $0.50, $0.165 and $0.14 for miles incurred for business purposes, medical purposes and charitable purposes, respectively.

2009 tax law changes - excluding uncommon items

Common changes are listed. More are at IRS web site.

Tax Credit of Up to $8,000 for First-time Home Buyers. If you purchased a primary residence in 2009 before December 1, 2009 and are a "first-time" home buyer, you can qualify for a tax credit equal to 10% of up to $80,000 of the purchase price. To be eligible, you must not have owned a residence in the U.S. in the previous three years. The credit phases out between $150,000 and $170,000 of adjusted gross income for joint filers and $75,000 to $95,000 for single filers.

Payroll Tax Credit.

For 2009 and 2010, Congress gave workers a credit of 6.2% of their earned income, capped at $400 for single filers and $800 for joint filers. For single filers, it starts phasing out at $75,000 of adjusted gross income and dries up at $95,000. The phaseout zone for couples is $150,000 to $190,000. Employees will get the credit in advance via lower income tax withholding in each paycheck, not as a rebate check.

Sales Tax Deduction for New Vehicles. Buyers of new vehicles can deduct the sales tax paid on the purchase, even if they don’t claim sales taxes as itemized deductions. They can add the tax they pay to their standard deduction. This break applies to new cars, motor homes, light trucks and motorcycles purchased after February 16, 2009 and before January 1, 2010. Sales tax paid on the first $49,500 of cost qualifies. The benefit begins phasing out for married couples with AGIs over $250,000 and singles with adjusted gross incomes over $125,000, and is completely gone for single filers with adjusted gross income of $135,000 or more or joint filers with AGI of at least $260,000.

Indexed Tax Brackets. Thanks to higher inflation in the past year, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets all kick in at approximately 5% higher levels of income than in 2008.

Larger Personal Exemptions. For 2009, each personal exemption you can claim is worth $3,650, up by $150 from 2008.

Higher Standard Deductions. For 2009, the standard deduction for married couples filing a joint return rises to $11,400, up by $500 from 2008. For single filers, the amount increases to $5,700 in 2009, up by $250 over 2008. And heads of household can claim $8,350 in 2009, a jump of $350 from 2008. Non-itemizers who pay real estate taxes can claim even larger standard deductions. Joint filers can add in up to $1,000 of property taxes paid. Singles can add in up to $500 of real estate tax payments. Non-itemizers can also add any casualty losses that occurred in presidentially declared disaster areas.

Tax Credit for College Tuition. For 2009 and 2010, the Hope credit is replaced by a new credit of up to $2,500 per student a year for four years of college, not just the first two years. It now also covers the cost of books and begins to phase out at $80,000 of adjusted gross income for single filers and $160,000 for joint filers. If the credit is more than your income tax liability, 40% of it is refundable. Also, the full credit is allowed against the alternative minimum tax.

Child Tax Credit. If the credit exceeds the filer’s tax liability, all or part of the credit will be refunded if the filer earns more than $3,000 in 2009 and 2010, down from $12,550.

Earned Income Tax Credit. For families with three or more children, the maximum earned income tax credit for 2009 and 2010 rises by $628.50. And the phaseout of the credit for joint filers starts at higher income levels in 2009 and 2010, allowing more of them to claim the credit.

Unemployment income – In 2009, those receiving unemployment benefits can exclude up to $2,400 from their taxable income.