Are You Ready to File Your 2010 Tax Return

Filing of income tax return is one of the most critical annual responsibilities of all citizens, residents and some visitor of the United States of America. Knowing the changes and improvements on tax laws could dramatically affect one's return.

Having the knowledge of the anatomy of tax (income, minus the exemptions, minus the deductions and the credits, equals to the Adjusted Gross Income, also known as AGI) alone, is simply not enough for us to come up with a precise, or accurate tax return; being aware of the credits that could be available for us, really matters in so many ways.

For tax credits are laws. They were carefully studied and legislated by the House of Congress and the Senate, and were designed to benefit us, taxpayers.

Every year there are new laws enacted. It could be a totally brand new one, or a modified one that supersedes the previously enacted ones. But of course, to avail we must know the eligibility requirements for each, for not everyone qualifies. And how do we do this, simply by visiting the Internal Revenue Service' website (www.irs.gov), or calling their 24-hour hotlines at: 1-800-829-1040 for individuals, or 1-800-829-4933 for businesses (available from M-F, 7:00 A.M. to 10:00 P.M your local time), dropping by the local tax office, or by simply asking your paid tax preparers if you have any.

But, the easiest and most convenient way to find changes on tax laws is by simple checking the "What's New" Section of Publications 1040, 1040A and 1040EZ.

Tax experts say that the prerequisite requirements for most credits are your filing status and your age.

So, below are the highlights of the recent tax changes for fiscal year of 2010 for Individuals according to the IRS:

The Affordable Care Act , also known as Health Care Reform Act of 2010, enacted in March 23, is probably the most complicated and intricate of them all. It is designed to encourage both small businesses and small tax-exempt organizations to offer health insurance coverage to their employees for the first time or maintain coverage that they already enrolled in.

The new guidance also addresses small business queries about which firms qualify for the credit by clarifying that employers meet the eligibility requirements, which includes religious institutions that provide coverage through denominational organizations, small employers that cover their workers through insured multi-employer health and welfare plans, and those (employers) that subsidize their employees' health care costs through a wider range of contribution arrangements.

The credit is also available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. It is specifically designed to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers. The Act covers as follows:

Changes to Flexible Spending Arrangements. Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions for 2011.

Health Coverage for Older Children. Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans -- plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits -- to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return

10-Percent Excise Tax on Indoor UV Tanning Services. This new law went into effect on July 1, 2010. The first payment of the tax was due Monday, Nov. 1. Payments are made along with Form 720.

Employer Provide Health Coverage. As the tax year 2011 kicks in, the Affordable Care Act requires employers to report the value of the health insurance coverage they provide employees on each employee's annual Form W-2. However, to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with this requirement, the IRS will defer the reporting requirement for 2011, making that reporting by employers optional in 2011.

The revised Form W-2 for 2011 is now available in draft for viewing. This is the W-2 that most employees will receive in early 2012. The draft form includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan.

This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income, and it is not taxable.

Adoption Credit. The Affordable Care Act raises the maximum adoption credit to $13,170 per child, up from $12,150 in 2009. It also makes the credit refundable, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney's fees and travel expenses. Income limits and other special rules apply. In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their 2010 tax returns one or more adoption-related documents.

Qualified Therapeutic Discovery Project Program. This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. The Internal Revenue Service describes the application process.

Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by then, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.

The IRS published the names of the applicants whose projects were approved as required by the law.

Group Health Plan Health Requirements. The Affordable Care Act establishes quite a number of new requirements for group health plans. For more information please visit the websites of the Departments of Health and Human Services, likewise Labor for guidance.

Medicare Part D Coverage Gap "Donut Hole" Rebate. The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan's coverage gap. This payment is not taxable. This payment is not made by the IRS. For a thorough explanation, please visit
www.medicare.gov

Additional Requirements for Tax Exempt Hospitals. The Affordable Care Act adds requirements in the Internal Revenue Code that tax-exempt hospitals must meet to maintain their tax-exempt status. More information can be found in Notice 2010-39 (a copy of which is attached to this link: http://www.irs.gov/pub/irs-drop/n-10-39.pdf), which solicits written comments on the application of the new requirements. Comments must have been submitted on before July 22, 2010.

Annual Fee for Branded Prescriptions Pharmaceutical Manufacturers and Importers.The health Reform Act created an annual fee payable beginning in 2011 by certain manufacturers and importers of brand name pharmaceuticals. More information can be found in Notice 2010-71 (copy of which is attached to this link: http://www.irs.gov/pub/irs-drop/n-10-71.pdf), which provides proposed guidance and solicits comments on the new fee, and on Form 8947 , Report of Branded Prescription Drug Information.

Modification of Section 833 Treatment of Some Health Organizations. The Affordable Care Act amended section 833 of the Code, which provides special rules for the taxation of Blue Cross and Blue Shield organizations and certain other organizations that provide health insurance. Interim guidance can be found in 71 (copy of which is attached to this link: http://www.irs.gov/pub/irs-drop/n-10-79.pdf) , which also solicits comments on the application of the amended provision.

Alternative Minimum Tax

The AMT exemption amount has decreased to $33,750 ($45,000 if married filing jointly or qualifying widow(er); $22,500 if married filing separately).

Taxpayers who wish to avail this credit must know their tentative minimum tax. Taxpayers must complete Form 6251 through line 31 and attach it to their return for them to claim: the credit for child and dependent care expenses, the credit for the elderly or the disabled, the lifetime learning credit, the non-business energy property credit, the mortgage interest credit, or the District of Columbia first-time homebuyer credit.

The caution here is thatCongress is expected to consider legislation that would increase the AMT exemption amounts shown above and make it unnecessary for you to attach Form 6251 to your return to claim the credits listed above unless you actually owe AMT. It is helpful to constantly check the 2010 Form 6251 and the 2010 Instructions for Form 6251 to get updated with the changes on the legislation.

Chil Related Tax Changes

Changes on this law cover four areas of Child Investment Income, Earned Income for Additional Tax Credit, Expansion of Adoption Credit andNew Rules for Children of Divorce or Separated Parents.

For more info, please visit: http://www.irs.gov/formspubs/article/0,,id=207333,00.html

Cobra Premium Assistance

To be eligible for COBRA premium assistance, you must be a qualified beneficiary as a result of an involuntary termination that occurred during the period beginning on September 1, 2008, and ending on May 31, 2010 (a 5 month extension of the original period). In addition, you are eligible for the premium assistance for a maximum period of 15 months (increased from 9 months) after the first month for which the premium assistance applies to you. There are also special rules for individuals who lost their health coverage because of a reduction in work hours. For more information on COBRA premium assistance, please refer to Publication 502.

Decrease in Personal Loss or Theft Loss Limit.

The personal casualty or theft loss must exceed $100 to be allowed for 2010. This is on top of the 10% of AGI limit that generally applies to the net loss.

Deduction for New Motor Vehicle Taxes

You can deduct state or local sales or excise taxes (or certain other taxes or fees in a state without a sales tax) paid in 2010 for the purchase of any new motor vehicle(s) after February 16, 2009, and before January 1, 2010.

This deduction can be used to increase the amount of your standard deduction, or you can take it as an itemized deduction.

Earned Income Credit

The maximum amount of the credit has increased. The most EIC you can get for 2010 is:

• $3,050 if you have one qualifying child,
• $5,036 if you have two qualifying children,
• $5,666 if you have three or more qualifying children, or
• $457 if you do not have a qualifying child.

Please see Publication 596 (http://www.irs.gov/pub/irs-pdf/p596.pdf), Earned Income Credit for more information.

Economic Recovery Payment

Commonly known as the stimulus, or the Making Work Pay Credit; is non-taxable in 2010. These $250 payments were made in 2010 to people who:

• Received social security benefits, supplemental security income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits in November 2008, December 2008, or January 2009,

• Live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands and,

• Did not receive an economic recovery payment in 2009.

For married filing jointly, each of you may get a $250 payment, or a fraction depending on your AGI.

If you are entitled to a payment, you will get it automatically. You do not need to apply for it, and it did not came in check like in 2008, however, it gets credited right away to your 2009 return for as long as you've filled up and attached Schedule M to your 1040, or 1040A.

Education

There are some updates on Education Savings Bond Exclusion, Expanded Definition of Qualified Expenses for Qualified Tuition Programs and Hope and American Opportunity Credit for 2010.

For more details, please read Publication 970 (http://www.irs.gov/pub/irs-pdf/p970.pdf), Tax Benefits for Education.

Income Averaging for Farmers and Fishermen

From Exxon Valdez Litigation, Averaging Farming and Fishing Income, leasing and crewing (staffing) of fishing boats, to Merchant Marine Capital Construction Fund Deposits, there changes on laws that could significantly benefit both farmers and fishermen.

Schedule J (http://www.irs.gov/pub/irs-pdf/f1040sj.pdf), Treasury Decision 947 (http://www.irs.gov/irb/2008-37_IRB/ar07.html), are some of the helpful materials related to this subject.

Increase on Limit on Long-Term Care and Accelerated Death Benefits Exclusion

According to the IRS, the limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2010 to $290 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Under this restriction, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.

• The cost of qualified long-term care services during the period.

• The dollar amount for the period ($290 per day for any period in 2010).

Please see 8853 (http://www.irs.gov/pub/irs-pdf/f8853.pdf) and its instruction for more information.

Increased Standard Deduction

For the Fiscal Year of 2010, you can no longer increase your standard deduction by:

• State or local real estate taxes,
• New motor vehicles taxes (for vehicles purchased in 2010), or
• Disaster losses (for disasters occurring in 2010).

But, you can increase your standard deduction in 2010 if you:

• Had a net disaster loss in 2010 occurring in 2008 or 2009 (from Form 4684, line 17), or
• Purchased a new motor vehicle after February 16, 2009, and before January 1, 2010, and paid the sales or excise taxes in 2010.

If you increase your standard deduction by either of these items, use Schedule L (Form 1040A or 1040) to figure your standard deduction.

For those using the head of household filing status, the basic standard deduction has increased to $8,400 for 2010. For some, the basis standard deduction is the same as in 2009.

Home/Residence Related Tax Changes

• First Time Homebuyer and Repayment

Final Year for Claiming the Credit

For most taxpayers, 2010 is the final year to claim the first-time homebuyer credit. In order to claim the credit for a main home purchased in 2010, taxpayers must have purchased their home:

1. Before May 1, 2010, or
2. After April 30, 2010, and before September 1, 2010, and entered into a binding contract before May 1, 2010, to purchase the property before July 1, 2010.

Additional Time to Purchase for Members of the Uniformed Services or Foreign Service and Employees of the Intelligence Community.

Members of the uniformed services or Foreign Service and employees of the intelligence community serving outside the United States may have additional time to purchase a home and qualify for the credit. They may claim the credit for a main home purchased in the United States:

1. Before May 1, 2011, or
2. After April 30, 2011, and before July 1, 2011, and they entered into a binding contract before May 1, 2011, to purchase the property before July 1, 2011.

Repaying the Credit for a Home Purchased in 2008

If you claimed the credit for a home purchased in 2008 and you owned and used the home as your main home during all of 2010, you must begin repaying that credit with your 2010 tax return. The minimum payment is 1/15 of the original credit received.

• Sale of Main Home

Gain from the sale or exchange of the main home is no longer excludable from income if allocable to periods of nonqualified use.

Generally, nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home (with certain exceptions).

A period of nonqualified use does not include:

1. Any portion of the 5-year period ending on the date of the sale or exchange that is after the last date you (or your spouse) use the property as a main home;
2. Any period (not to exceed an aggregate period of 10 years) during which you or your spouse is serving on qualified official extended duty:
   • As a member of the uniformed services,
   • As a member of the Foreign Service of the United States, or
   • As an employee of the intelligence community; and
   • Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.

To figure the portion of the gain that is allocated to the period of nonqualified use, multiply the gain by the following fraction:

total nonqualified use during period of ownership after 2008
total period of ownership

Special Rule for Uniformed or Foreign Service Members, Peace Corps Employees and Volunteers and Employees of the Intelligence Community

If you or your spouse is an employee, enrolled volunteer or volunteer leader of the Peace Corp and you sell your main home, you may be able to exclude the gain from income even if you did not live in it for 2 years during the 5-year period ending on the date of sale. Generally, you can elect to have the 5-year test period for ownership and use suspended for up to 10 years during any period you or your spouse serve outside the United States (on qualified official extended duty if an employee). Similar benefits apply to members of the uniformed services, Foreign Service, or employees of the intelligence community.

Itemized Deductions

The limit on itemized deductions expired in 2010. However, under current law, the limit on itemized deductions will resume in 2011 at pre-2006 levels.

Personal Exemption Amount

The amount you can deduct for each exemption has not changed for 2010. It is still $3,650. But unlike 2009, when you would lose part of your deduction for personal exemptions if your adjusted gross income (AGI) was more than a certain amount, in 2010 you will not lose any part of your deduction for personal exemptions, regardless of the amount of your AGI.

Qualified Transportation Benefits

For calendar year 2010, the monthly exclusion for commuter highway vehicle transportation and transit passes is $230. The monthly exclusion for qualified parking is also $230.

For calendar year 2010, the exclusion for reasonable expenses of qualified bicycle commuting is $20 multiplied by the number of qualified bicycle commuting months during that year. Reasonable expenses include the purchase of a bicycle and bicycle improvements, repair, and storage. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your residence and place of employment and you do not receive any of the other qualified transportation fringe benefits. You are not entitled to this exclusion if the reimbursement for bicycle commuting is made under a compensation reduction agreement.

Residential Energy Credits

Non-business energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a non-business energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2010. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.

The total amount of credit you can claim in 2009 and 2010 is limited to $1,500.

Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.

Social Security and Medicare Taxes

For the year 2010, the maximum amount of wages subject to the social security tax for 2010 is $106,800. There is no limit on the amount of wages subject to the Medicare tax.

However, for 2011, the maximum amount of wages subject to the social security tax for 2011 is $106,800. There is no limit on the amount of wages subject to the Medicare tax.

Special Limitation Period for

If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period.

Generally, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed or 2 years from the time the tax was paid, whichever period expires later. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended for 1 year beginning on the date of the determination. The extension applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination.

Standard Mileage Rate

For 2010, the standard mileage rate for the cost of operating your car for business use is 50 cents per mile. Please check out Publication 463 for more details.

Medical and Move-Related Mileage.

For 2010, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 16.5 cents per mile. See Publication 521 for more information.

Charitable-Related Mileage

For 2010, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Wage Threshold for Household Employees

The social security and Medicare wage threshold for household employees is $1,700 for 2009. This means that if you pay a household employee cash wages of less than $1,700 in 2009, you do not have to report and pay social security and Medicare taxes on that employee's 2009 wages.

The social security and Medicare wage threshold for household employees remain at $1,700 for 2010. This means that if you pay a household employee cash wages of less than $1,700 in 2010, you do not have to report and pay social security and Medicare taxes on that employee's 2010 wages.

Make the most out of filing your return; check the credits and file timely. And for all you know there are big bucks await you for your refund, so, good luck!

Disclaimer: This is meant to be an informational article, and the author does not intend to give legal advice, nor describes and evaluates your legal options. For more info, please visit www.irs.gov