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2010 Tax Tips

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Ø The Home Energy Credit expires at the end of this year.

Ø Job search expenses can be deducted on your tax return. Please keep track of your expenses.

Estate Tax Law Changes for 2010:

Ø The estate tax is reduced to 0% for tax payers who die during 2010. However, the basis (generally cost for tax purposes) of inherited property is the basis the deceased taxpayer had in the property. This could result in significant capital gains for the heir when the property is sold. There are potential additional filing requirements and exceptions to the basis determination. Prior to 2010, the basis of inherited property was the value of the property on the date of death. After 2010, the tax rate will be greater than 0%, but the exact rate and amount that can be excluded from taxation will be determined by congress.

Small Nonprofit organization filing requirements:

Ø Small nonprofit organizations have until October 15 to e-file for 2009. Failure to file will result in the charity losing their tax exempt status. This applies to charities with revenues of $25,000 or less. Midsize charities with gross receipts between $25,000 and $500,000 are also affected, but will be subject to a small penalty for late filing.

Home Office Deduction:

Ø If you work from home you may be entitled to a tax deduction for business use of your home. Several requirements must be met before you can take this deduction. First, your employer cannot have office space available for your use or you are self-employed and have no other regular work location. Second, the office space must be used only for business, and must be used regularly for business. While the home office does not need to be a whole room, the space used as the home office must be clearly defined. You can define the office space by marking it off on a floor plan.

Ø The most common expenses that are used to calculate the deduction are utilities, homeowners insurance, real estate taxes, and mortgage interest. These expenses are prorated to determine the actual amount that may be considered for the deduction. For example, if your home is 1500 square feet, and the home office is 150 square feet, 10% of the expenses apply to the home office. Since you would be allowed the deductions for taxes and interest anyway, the actual benefit would be limited to 10% of utilities and insurance plus a possible deduction for depreciation.

Ø Expenses for maintenance or remodeling of the home office, such as painting and carpeting are fully deductable as are any furniture and equipment you purchase for the office.

Tax Preparer Registration:

Ø You may be curious about the recent news coverage on the issue of tax preparer registration. Prior to this year, anyone could work as a paid income tax preparer, even if they had limited, or no income tax knowledge or experience. Even worse, there was no requirement that tax preparers be screened for prior felony convictions. The process beginning this year will eventually impose screening of tax preparers and require that they register with the IRS and meet certain tax education requirements.

Hybrid Vehicle Credits:

Ø The Tax credit for hybrid vehicles expires at the end of this year. To qualify, the hybrid must have been certified by the IRS. Only the first 60,000 certified vehicles sold by each manufacturer qualify for the credit. Toyota, Honda and Ford (and their related nameplates) have already reached the limit and are no longer eligible for the credit. As a purchaser, you can rely on the certification of the manufacturer or distributer that the vehicle qualifies for the credit.

Ø To qualify for the credit, the vehicle must be placed in service before 2011, you must be the original user of the vehicle, you must have acquired the vehicle for your own use, and it must be used primarily in the U.S. Credit amounts range from $900 to $2200 depending on the vehicle purchased.

Health Care Reform:

Ø Some of the upcoming changes that were included in the health care reform package signed into law earlier this year become effective in 2011. Those taxpayers who have Flexible Spending Accounts for medical expenses will no longer be allowed to purchase over-the-counter medications with FSA funds. In addition, the penalty for taking nonqualified distributions from a Health Savings Account (distributions for purposes other than medical expense reimbursement), have doubled—from 10% currently to 20% next year.

Ø For 2013, medical expenses for those under the age of 65 would be deductable only by the amount they exceed 10% of income compared with 7.5% under current law. This will create a tax planning opportunity in 2012 if you can accelerate some planned medical expenses from 2013 into 2012.

Proposed Income Tax Changes for 2011:

Ø Pending action by congress, here are some of the most discussed proposed tax law changes which will result from the expiration of the “Bush” tax cuts. The results of the election in November may result in modification to some or all of these currently expiring changes to the law.

Ø Income tax brackets are changing from the current 6 tax brackets to 5 next year. The 10% bracket is eliminated and all other brackets are increasing. This means you can benefit by moving taxable income into 2010 and deductable expenses into 2011 whenever possible.

Ø Capital Gain tax rates increase to 10% and 20% depending on your income level, and qualified dividend tax rates increase to 15% or your ordinary tax rate.

Ø The standard deduction and tax brackets for married taxpayers are reduced from 200% of the single rates to 167% of the single rates. This will result in somewhat higher taxes for married taxpayers.