Tax-cutting moves still possible for 2010
One thing is clear: No matter what Congress does in terms of extending the Bush-era tax cuts, they will apply for tax year 2010. Period.
The compromise tax plan announced last week between President Obama and congressional Republicans calls for extending reduced tax rates for income, capitals gains and dividends into 2011 and 2012 for all taxpayers, including couples who make more than $250,000 and individuals who make more than $200,000. The proposal also calls for a one-year reduction in Social Security payroll taxes paid by workers, renewing benefits for the long-term unemployed for another 13 weeks and restoring some tax breaks aimed at the middle class.
While Congress might not adopt all of the tax breaks under debate, it is presumed that the biggest bone of contention -- the continuation of reduced tax rates for income -- will be extended past their Dec. 31 expiration date. That means that at the very least, the status quo for income tax rates is likely to remain unchanged for the next two years.
So what does that mean for tax year 2010?
"It's a tax year like years before, and there are basic moves and things you can do to reduce your taxes," said Mark Steber, chief tax officer for Jackson Hewitt Tax Service, a tax preparation firm.
Don't overlook tax breaks that apply to lifestyle changes such as having a child, taking care of a dependant parent or going back to school.
"Lifestyle changes now are not just getting married or having a child. It really is more complex, like taking care of a dependant parent," Steber said.
Some tax breaks are no longer around.
In 2009, federal income tax on the first $2,400 of unemployment benefits was not taxed as income. That is not the case this year. And unemployment benefits do not appear to be excluded from income in 2011 under the compromise tax plan, said a briefing by CCH, a provider of tax, accounting and audit information.
• Housing : Taxpayers who went through a foreclosure, short sale or loan modification on a primary residence do not have to pay federal income taxes on forgiven debt resulting from the transaction. For more details and limitations, visit here .
On the other side of the housing coin, there is a federal tax credit for qualified 2010 primary home purchases for transactions that closed by Sept. 30. (An earlier June 30 closing deadline was extended by three months for homes under contract.) Again, click here for more details.
• Retirees : One big change for tax year 2010 applies to retired taxpayers age 70 1/2 years or older who have traditional Individual Retirement Accounts, 401(k)s and other tax-deferred retirement plans. The requirement to take minimum distributions was temporarily suspended by Congress in 2009 to shield retirees from having to withdraw money from accounts that lost value from the late 2008 market sell-off.
Now that suspension is over. So account holders who did not take a required minimum distribution last year must take their 2010 distribution before Dec. 31. Those who do not are subject to tax penalties. (The requirement does not apply to tax-free Roth IRAs).
• IRAs : Taxpayers have until Dec. 31 to take advantage of an opportunity to convert a traditional tax-deferred IRA into a tax-free Roth IRA while having the option to spread out the income tax dues on the conversion into tax years 2011 and 2012. (While the ability to spread out the tax over two years goes away in 2011, income restrictions have been permanently lifted for converting traditional IRAs into Roth IRAs.)