By JAN M. ROSEN
MANY taxpayers may be in for an unpleasant surprise this filing season: despite the extension of Bush-era tax rates, some of the breaks they enjoyed on their 2009 returns are not available for 2010.
As a result of the tax changes that President Obama signed into law on Dec. 17, taxpayers should also make sure they have the most up-to-date information, as many tax publications were printed before then.
Barbara Weltman, a tax lawyer in Millwood, N.Y., who helped edit “J. K. Lasser’s Your Income Tax 2011: For Preparing Your 2010 Tax Return,” and has written several specialized Lasser tax books, advised taxpayers to visit publishers’ Web sites for updates to any 2011 tax books they have bought. Even the Internal Revenue Service had to hurry to update everything on its site, irs.gov.
Several 2009 tax breaks, instituted to deal with the wavering economy, will disappear this filing season, Ms. Weltman said. These include the exclusion from income of up to $2,400 in unemployment compensation; for 2010, all unemployment payments are generally subject to taxation.
The following have also disappeared: add-ons to the standard deduction for net disaster losses and real estate taxes; a government retiree credit; and an itemized deduction or increased standard deduction for state or local sales or excise taxes on new vehicle purchases — unless a vehicle was bought in 2009 after Feb. 16 but the tax was paid in 2010.
Mark Luscombe, a lawyer and principal federal tax analyst at CCH, a tax information service for professionals, said that on 2009 returns many people were able to claim a generous first-time homebuyer’s credit, but for 2010 it is generally available only to people who signed a contract before May 1 and closed before Oct. 1.
Couples who are considered first-time homebuyers may be able to claim a credit of up to $8,000, while long-term homeowners may be able to claim up to $6,500.
There is a limit of $225,000 on modified adjusted gross income for couples filing jointly for the full credit, and it phases out at $245,000. Those who claim the credit must file Form 5405 and attach documentation to their returns, so they cannot file electronically, he said.
A similar credit of up to $7,500 was available on 2008 returns, but the law then stipulated that it would have to be repaid over a 15-year period starting two years later, Mr. Luscombe said. That means that a couple who claimed the maximum credit on their 2008 return will need to repay $500 of it on their 2010 return.
In 2009, the requirement that people over age 70½ take annual minimum distributions from I.R.A.’s and other retirement accounts was suspended. But that was not the case in 2010. Some tax professionals said clients had forgotten to take minimum distributions last year and now face a 50 percent tax penalty. What should they do?
Unfortunately, Ms. Weltman said, ignorance of the law is not an excuse. But people who have a good reason, such as being hospitalized or having sent the necessary paperwork to a fiduciary that failed to act, should take the distribution as soon as possible and apply to the I.R.S. for a waiver of the penalty by filing Form 5329 and a letter of explanation.
Discussing an I.R.A. change that took effect in 2010, Sidney Kess, a C.P.A. and tax lawyer with the law firm Kostelanetz & Fink in New York, said that people who converted regular I.R.A.’s to Roth I.R.A.’s last year would have to pay income taxes on the money from the regular I.R.A.’s. (A change in the law permitted people to make this conversion without being subject to income limits.)
Even if the conversion was made in 2010, the law allows the tax to be recognized and split between 2011 and 2012 returns, he said. But taxpayers may choose to recognize the income on their 2010 returns.
And people who convert regular I.R.A.’s to Roth I.R.A’.s can change their minds and do what the law calls “recharacterizing” the account — that is, change it back to a regular I.R.A, Mr. Kess said, until the due date of their return, which can be extended until October. That may be advisable if the investments in the account have performed poorly or if paying the taxes would be difficult.
The recession’s effects were widespread and may now have tax consequences. Many adult children have moved back to their parents’ homes, Mr. Kess said. In one case, a divorced mother lost her job, so she and her two children moved in with her widowed mother, who can now claim head-of-household status and take dependency exemptions for her daughter and grandchildren.
Another consequence of hard times, he said, is that some businesses have folded, making their stock worthless. People who hold such shares may claim a loss for whatever they paid for the shares on Schedule D for the year in which they became worthless. If necessary, taxpayers can file amended returns going as far back as seven years to claim the loss in the proper year.
Because of Congressional efforts to stimulate the economy, “this has been the year for business tax relief,” Ms. Weltman said. People who own their own businesses may be able to benefit from tax breaks, including bonus depreciation for property purchased, small-business credits and deductible start-up expenses.
Julian Block, a tax lawyer in Larchmont, N.Y., pointed out a new break for the self-employed, for 2010 only. Thanks to the Small Business Jobs Act, enacted last September, those who pay for health insurance, whether only for themselves or also for a spouse and any dependents, may deduct the premiums paid from income tax on Line 29 of the Form 1040 and from self-employment tax on Line 3 of Schedule SE, which covers Social Security and Medicare taxes.
Health insurance could cost “$10,000 or more for a family,” he said, “so it is a sizable deduction.” Yet the opportunity to take it on Schedule SE may be overlooked, he said, because the instructions for that line on the form do not specifically mention health insurance.
Among other tips from the tax professionals were these:
ADJUST YOUR WITHHOLDING The I.R.S. has reported that more than three-quarters of the 142 million individual tax returns filed last year were due a refund, and the average refund was $3,003. Mr. Block notes, however, that tax refunds amount to an interest-free loan to the Treasury. Rather than claim a refund a year from now, you can file a new Form W-4 with your employer to reduce the money withheld from your salary and have your money available all year, he advised.
CONSIDER FREE FILING If you’re eligible to use it, Form 1040EZ takes about five minutes to fill out online — and at no cost — at the I.R.S. Web site. So there is no need, Mr. Block said, to pay $15 for a smartphone app to do something similar. The I.R.S. site also gives information on “Free File,” a program involving software companies and available to people whose income is less than $58,000, and on free e-filing for anyone who fills out the I.R.S.’s new online forms.
BE CAREFUL WITH STATE RETURNS Taxpayers shouldn’t treat their state obligations as a mere afterthought to their federal returns, or worse, ignore them altogether says Mark A. Plostok, a C.P.A. “All the states are so desperate for money,” and many are stepping up their collection efforts, Mr. Plostok said at a December conference sponsored by the New York State Society of Certified Public Accountants. New York, for example, has enacted legislation to make failure to file for three consecutive years a felony if a taxpayer owes money.
New York City, too, is aggressively demanding its share, said Alan E. Weiner, a partner emeritus in the accounting firm Holtz Rubenstein Reminick in Melville, N.Y. There is a new line on the New York return asking people who maintain a pied-à-terre in the city how many days they spent in the city last year. Some filers may find to their surprise that they are liable for city income tax.
DON’T FORGET USE TAXES Levied in lieu of sales taxes on items purchased out of state, whether online, by mail or overseas, use taxes are another focal point for many states, including California and New York, Mr. Weiner said.
Feel that you have a lot of tax work ahead of you? Keep in mind that you have a little more time than usual to file your federal taxes this year. The normal filing date this year is April 18 because Emancipation Day is being observed in Washington on April 15. And if you need even more time, file Form 4868 for an automatic extension to file. Then your due date is Oct. 17.
Reprinted from the NY Times