New Tax Rules for 2010

You may be thinking about filing your 2009 tax return in the coming weeks or months. It’s also a good idea to take note of new tax rules for 2010 so you can begin strategies for saving taxes this year.

No More High-Income Taxpayer Phase-outs

For the past 8 years, taxpayers with modified adjusted gross income (MAGI) over a set amount lost all or some of their exemptions and itemized deductions. This phase-out no longer applies for 2010.

Planning strategy. Divorced parents should rethink which one can claim the exemption for any child of the marriage. Prior to the phase-out, it was common for a divorce decree to award the exemption to the parent paying child support; this practice was not routinely used once the phase-out began. Now, it may save the family as a whole more money to allow the higher-income parent to claim the exemption. Be sure that if that parent is the noncustodial parent, the other parent should sign a waiver on Form 8332.

No More Income Limits for Roth IRA Conversions

In 2009, a traditional IRA or qualified retirement plan could be converted to a Roth IRA only if the taxpayer’s MAGI did not exceed $100,000. If the taxpayer was married, he or she had to file jointly to make the conversion. The income limit and filing status requirement have both been eliminated starting in 2010. This means anyone is eligible to make a Roth IRA conversion.

Planning strategy. Decide whether a conversion makes sense for you. Making the conversion this year means half of the income that results is picked up in 2011 and the other half in 2012 unless you choose to report it all in 2010. You’ll need the cash to cover the taxes from the conversion, and you’ll need to decide in which year to report the income. Because the tax rates after 2010 are unknown, it may require you to obtain a filing extension for your 2010 taxes so you’ll have until October 15, 2011, to decide.

Domestic Production Activities Deduction Increased

For business owners in certain U.S.-based industries, such as construction; engineering and architectural services on U.S. projects; or the lease, film production, software development, or rental or sale of equipment you manufactured, a larger portion of revenues will effectively escape tax. This is because the domestic production activities deduction increases to 9% of net income (up from 6% in 2009).

Planning strategy. The rules for figuring this important deduction are complex. In order for owners of pass-through entities to benefit from it, there must be sufficient W-2 wages paid by the business. Work closely with a knowledgeable tax advisor to arrange your operations in the best way to qualify for the deduction.

Last Chance for Home Energy Improvements

If your home needs insulation, storm windows, a new furnace, or certain other energy improvements, now may be the best time to make them. A tax credit of 30% of the cost up to a top credit of $1,500 applies only through 2010.

Planning strategy. Determine what improvements are needed for your home. Then find items that meet energy standards set by the law. You can rely on manufacturer’s claims for this purpose.

Note: The $1,500 credit limit applies in the aggregate for 2009 and 2010, so if you used it up in 2009, you cannot claim any additional credit in 2010.

Extenders

At the time this went to press, the fate of numerous expired provisions was unclear. While Congress clearly wants to extend many noncontroversial provisions, including the itemized deduction for state and local sales taxes and the above-the-line deductions for educator costs and tuition and fees, final passage of an extender act has yet to occur.