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Tax news you need to know

March 24, 2011

March means that winter is finally coming to an end and the 2010 tax return filing deadline is a month away. Now is the time to gather all of your W-2s and 1099s to determine what income can be included on your 1040 and go through your checkbook and credit card statements to see what may deductible.
  
For all of the debate over tax rates that clogged the airwaves a couple months ago, there were very few changes to the Internal Revenue Code that will affect 2010 returns. Here is a look at some of them.

One bit of good news for Schedule A itemizers is that you no longer have to reduce your total deductions if you have an adjusted gross income over a certain amount (in 2009 it was AGI of $166,800 and higher).
  
Although most taxpayers were never affected by this, there is no longer a phase-out of personal exemptions for the very wealthy. Yes, we can all sleep better knowing that Warren Buffett and Alex Rodriguez can enjoy reducing their taxable income by the amount of their personal exemptions for the first time in years.
  
Speaking of personal exemptions, they remain the same as in 2009, $3,650 per dependent. This marks the first time in recent memory that the personal exemption amount was not even raised at least a token $50 per dependent. The same can be said for the various standard deduction amounts relating to your filing status.
  
The business mileage rate actually decreased from 55 cents per mile in 2009 to 50 cents per mile in 2010. Here is one safe prediction — given the rapid jump in gas prices that we have seen in the last few months, sure to get worse given the uncertainty in the Middle East, the IRS will have no choice but to allow a higher rate in 2011. If you used your car for charitable purposes, the rate remains a measly 14 cents per mile.
  
The alternative minimum tax has long been a sore point for taxpayers and politicos. When the AMT was imposed in 1969 it was designed to ensure that wealthy individuals who used otherwise allowable deductions paid their “fair share” to the United States Treasury. The “alternative minimum taxable income” recalculates what taxable income would be if such deductions as state, local and real estate taxes, unreimbursed business expenses and a portion of medical expenses were not allowed to be deducted. The AMT was never properly indexed for inflation and the end result was that more and more middle class Americans are now subject to it. There was a fear that the alternative minimum taxable income was actually going to be lowered in 2010 from its 2009 levels, but Congress intervened at the last minute and the 2010 AMT income levels are $47,450 for singles (in 2009 it was $46,700) and $72,450 for joint filers (an increase of $1,500 over 2009’s $70,950).
  
Long-term capital gains and qualified dividends are still taxed at a maximum rate of 15 percent (and are totally tax-free on the federal return for those with small incomes). You should note, however, that New York State treats both long-term capital gains and qualified dividends as ordinary income on your IT-150 or 201 returns.
  
Prior to last November’s elections it appeared likely that President Obama was going to seek an increase in these preferential tax rates. With Republicans now controlling the House of Representatives — most of them preferring to cut federal spending than increase taxes by even a small amount no matter what — the odds are that there won’t be any changes to the tax treatment of long-term capital gains and qualified dividends.
  
Last year, the “Making Work Pay” tax credit was introduced and caused a lot of confusion. This refundable credit was akin to the long-established earned income credit, except that it was geared to middle class wage earners. Single employees received a credit of $400, while married couples received an $800 credit towards their tax liabilities.
  
The confusion came about because the IRS stipulated that wage earners could not take the credit if they received an economic stimulus check in 2009. This year the IRS is saying that you cannot take this credit if your employer already gave you higher net take-home pay because it was already built into the company payroll calculations. You should check with your employer before filing Schedule M for your 1040.
  
Before preparing your tax return or making an appointment to see your tax preparer, it is a good idea to pick up a copy of the “Ernst & Young Tax Guide 2011” or J.K. Lasser’s “Your Income Tax 2011” to give yourself every advantage possible.
  
Lloyd Carroll and Harvey K. Man are certified public accountants and full-time faculty members at Borough of Manhattan Community College.

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