January 31 Deadline for Charitable IRA Rollovers

Eligible taxpayers still have a few more days to make tax-free contributions to charities from an IRA.  This provision had expired on December 31, 2009, but was renewed for 2010 in the tax bill passed by Congress last month.  The National Association of Enrolled Agents has more coverage, from one of their weekly news updates for members:

The tax deal reached by Congress and the President in December included a provision which retroactively extends the ability of taxpayers to contribute tax-free to authorized charities from their IRA (up to $100,000). The issue that is unique with the charitable IRA rollover is that because the bill wasn't passed until mid-December, but is retroactive to January 1, 2010, Congress gave taxpayers the ability to elect to treat a charitable rollover made in January 2011 as if it were made on December 31, 2010. There is only a short window of opportunity to take advantage of the incentive.

Itemizers Can File Starting February 14

The IRS today announced that it will start accepting tax returns with itemized deductions on February 14.  The IRS had previously announced that there would be a delay in accepting returns from itemizers.  The last-minute tax legislation passed by Congress on December 17th affected certain types of deductions, and the IRS said it needed time to update its computer systems for the changes.

Unemployment Benefits are Taxable in 2010

One item that did not get extended in this month's tax bill was the exclusion from income of the first $2,400 of unemployment benefits. 

In 2009, taxpayers who received unemployment compensation during the year were not taxed on the first $2,400 of benefits received.  This provision was not extended for 2010, so all unemployment benefits received in 2010 will be taxable.

Residential Energy Credit Extended, But It's Not As Generous

The tax bill signed into law last week extended the "residential energy credit" that provides a tax credit for purchases of certain energy efficient doors, windows, insulation, furnaces, air conditioning systems, certain types of water heaters, and even certain types of roofs. 

The credit had been set to expire on December 31, 2010, but has been extended through 2011.  There's a catch though -- the amount of available credit has decreased, and people who have taken the credit in the past may not be able to take it at all in 2011.

2010 Rules vs. 2011 Rules

• 2010:  The credit is 30% of the purchase price.  The maximum amount of residential energy credit that you can take in total from 2005-2010 is limited to $1,500 (the credit has existed in several forms since 2005).
• 2011:  The credit is 10% of the purchase price, and the maximum amount of residential energy credit that you can take in total from 2005-2011 is limited to $500.

This means if you have claimed $500 or more in residential energy credits since 2005, the credit is not available to you in 2011.

AMT Patch Approved

A few weeks ago, I posted a story about the Alternative Minimum Tax (AMT) and how it would hit an estimated 1-in-5 taxpayers in 2010 if Congress didn't take action.  Luckily, Congress did take action.  The bill sets the following exemption amounts:

• Married: $72,450 in 2010 and $74,450 in 2011
• Single and head of household: $47,450 in 2010 and $48,450 in 2011.

The AMT was first enacted in 1969 in an effort to force a small number of wealthy taxpayers (155 to be exact) who were reporting little or no taxable income.  Like most aspects of the tax code, the AMT is complex and is hard to explain in a blog post without making your eyes glaze over.  Essentially, the AMT is an "alternate" calculation of taxable income in which certain deductions are not allowed and certain items are calculated differently than for "regular" tax calculations.

Taxpayers are allowed a certain amount as an AMT exemption (see the amounts above) but ridiculously, the exemption amount is not indexed for inflation.  Instead, Congress passes "patches" to the AMT exemption amount year after year that increase the exemption for a year or two at a time.  Unfortunately, even with higher exemption amounts, millions of people (4.5 million in 2009) have been hit with AMT.  Without the patches, that number would be even higher.  Again, when the law was enacted 40 years ago, it was targeted at 155 high-income people, but now it's grown into a monster.

Why isn't the AMT exemption set higher to begin with and indexed for inflation (the "non-patched" base AMT amounts are the same as they were in 1993)?  It's a way to boost revenue projections when lawmakers calculate the "cost" of legislation.  For example, the current AMT "patch" is set to expire at the end of 2011.  So long-term budget projections will forecast revenue for 2012 and beyond based on the old, lower AMT exemption amounts, even though we all know that Congress will pass another "patch" for those later years.

Additional Standard Deduction for Real Estate Taxes is No More

Many tax breaks that had expired or were set to expire got extended in the tax bill passed by Congress last week.  But one break that did not get extended and thus has gone away is the additional standard deduction for property taxes paid.

This tax break allowed people who don't itemize deductions to add up to $500 ($1,000 for married taxpayers) to the standard deduction for property taxes paid.  This was a handy extra deduction for anyone who didn't have enough itemized deductions and had to take the standard deduction.  Unfortunately, this tax break expired on December 31, 2009, and was not renewed in any legislation in 2010, meaning that this extra deduction for non-itemizers has ridden off into the sunset.

People who itemize deductions will still get to claim an itemized deduction for property taxes, same as always.  The expiration of this tax break only affects those who take the standard deduction.

Analyzing the Tax Cut Deal

President Obama signed a tax bill into law yesterday (Friday) that gives us some clarity on what the tax situation will be for 2011 and 2012.  Here are the highlights of the bill:

• Tax brackets to remain the same, with a 10% bottom rate and a 35% top rate.  Without this legislation, the bottom rate would have increased to 15% and the top rate to 39.6%.
• A "payroll tax holiday" that reduces the amount of FICA withholding by 2% (self-employed taxpayers will see their self-employment tax decrease by 2%).  For a person making $40,000/year, this would equal an $800 savings.  (But the Making Work Pay Credit is expiring, which negates some of the savings.)
• Another "patch" to the Alternative Minimum Tax that will help millions of taxpayers avoid this tax.
• The capital gains and qualified dividends rates remain at 0% for taxpayers in the 10% and 15% tax brackets, and at 15% for taxpayers in the higher tax brackets. 
• The Child Tax Credit will remain at $1,000 (it had been set to decrease to $500 in 2011).
• You can claim dependent care expenses of $3,000 for one child or $6,000 for two or more children.  These amounts had been set to decrease to $2,400 and $4,800.
• The expanded Earned Income Credit remains in place through 2012.
• The credit available for energy efficient upgrades to your home remains in place through 2012 (it had been set to expire at the end of this year).
• Extension of the American Opportunity Credit for college expenses, and an extension of the "above-the-line" deduction for college expenses.
• Special 100% "bonus depreciation" for purchases of brand-new assets from September 9, 2010, through the end of 2011.
• The estate tax returns with a $5 million exemption per person, and a 35% top rate, retroactive to January 1, 2010.  Estates arising in 2010 will have the option of of using these rules, or using the "old rules" of no estate tax and a reduction in the amount of increase in carryover basis.

We Have a Tax Deal

The House has approved a tax deal that extends the Bush Tax Cuts and provides for a number of other tax provisions for 2011 and 2012.  The bill heads to President Obama for signature today.  Over the next few days, I'll post more about the tax implications of the bill.

Article from CNN.

Closure on Bush Tax Cuts Could Come Today

The long wait to know what the tax landscape will look like in 2011 could end today.  The U.S. House is expected to vote on an extension of the "Bush Tax Cuts."  The Senate approved the extension yesterday by a vote of 81-19.  Iowa's Senators were split on the measure, with Republican Charles Grassley voting for it, and Democrat Tom Harkin voting against it.  In addition to extending the Bush-era tax rates, the measure also includes other tax provisions such as another "patch" to the Alternative Minimum Tax.

Making Work Pay Credit Expires - Paychecks Will Decrease

I haven't seen much media coverage of the "Making Work Pay Credit," but this credit expires soon and will cause a lot of people's paychecks to be smaller in 2011.

The Making Work Pay Credit was part of the 2009 economic "stimulus" package and existed in 2009 and 2010, but is set to expire on December 31st.

The credit amounts to $400 per person for most working adults.  People who receive W-2 wages have received the credit bit-by-bit in each paycheck, in the form of lower withholding. 

If Congress does not renew the Making Work Pay Credit, you'll notice that your first paycheck of 2011 will be lower.  The decrease will amount to $33.33 per month per person ($400/12).

President Obama has proposed extending the credit into 2011, but lawmakers have not been receptive to the idea.

(UPDATE:  the tax bill signed into law December 17th, 2010, did not extend the Making Work Pay Credit, but it did provide for a reduction in FICA withholding from paychecks in 2011, which will more than offset the expiration Making Work Pay Credit.)