Reminder of 2010 Tax Law Changes for Individuals - 3/5/2010
CLIENT ALERT
Many important tax law changes for individuals go into effect in 2010. This Client Alert briefly summarizes some of the more significant changes for individuals in 2010, so that planning can begin immediately!
The Alternative Minimum Tax (AMT) May Affect Many More Taxpayers.
Unless Congress deals with the AMT problem through another one-year patch, as it has several times before, or by revising the AMT in the context of an overall tax reform bill, the AMT will affect many more taxpayers in 2010. The AMT exemption amount for 2010 is $33,750 ($45,000, if married filing jointly; $22,500, if married filing separately). The AMT exemption amount for 2009 was $46,700 ($70,950, if married filing jointly, $35,475, if married filing separately). In addition, for 2010, many personal nonrefundable tax credits can no longer offset the AMT. For 2009, personal nonrefundable credits could offset the alternative minimum tax.
IRA and Retirement Plan “Required Minimum Distributions” Return.
“Required Minimum Distributions” (or “RMDs”) must be made from IRAs and employer-provided qualified retirement plans, such as 401(k) plans, for calendar year 2010. Because of the difficulties in the financial markets in 2008, Congress had waived the RMD requirements for calendar year 2009.
Conversions to Roth IRAs Can Be Made, Regardless of Income.
Beginning in 2010, the rule that barred taxpayers with more than $100,000 of modified AGI from converting traditional IRAs to Roth IRAs is eliminated. In addition, married taxpayers filing separate returns may now convert amounts in a traditional IRA into a Roth IRA (before 2010 they were barred from doing so).
For Roth conversions made in 2010, any amounts that would be included as income as a result of the conversion will be included in income in equal amounts in 2011 and 2012, unless the taxpayer elects to include the entire amount in income in 2010.
AGI-Based Exemption Phase-Out / Itemized Deduction Reduction Eliminated.
For 2010, taxpayers with higher levels of adjusted gross income (“AGI”) will no longer face a phase-out of their deduction for personal exemptions or a reduction in their itemized deductions. For 2009, the personal exemption phase-out began when AGI exceeded these threshold amounts: $250,200 (joint return), and $166,800 (single). The itemized deduction reduction began for 2009 when AGI exceeded $166,800 ($83,400 for married filing separately).
Recapture of Some First-Time Homebuyer Credits.
Taxpayers who claimed a first-time homebuyer credit for homes purchased after April 8, 2008 and prior to January 1, 2009, must begin repaying the credit in 2010. The credit must generally be recaptured (i.e., repaid) in equal installments over a 15-year period. Recapture is accelerated if a taxpayer disposes of his/her residence or it ceases to be his/her principal residence before the end of the 15-year recapture period.
New Modified Carryover Basis Regime.
As part of the estate tax repeal that applies for individuals dying in 2010 (see our separate Client Alert detailing those changes), the income tax basis rules for property acquired from a decedent in 2010 are similar to the gift tax carryover basis rules. However, there are opportunities for heirs to get some increases in basis. For example, it is possible to increase the basis of assets received from an individual dying in 2010 by $1.3 million, and by an additional $3 million for assets going to a spouse. The basis step-up on death rules return for 2011.
Eased Casualty Loss Rules Return.
In general, personal casualty or theft losses for the tax year generally are allowable only if they exceed a dollar limitation per casualty or theft. In addition, aggregate net casualty and theft losses generally may be claimed as an itemized deduction only to the extent they exceed 10% of an individual's adjusted gross income (AGI). For 2010, the dollar limitation per casualty or theft is $100; it had been $500 for 2009.
Expired tax breaks. Unless Congress acts to retroactively revive them, none of the following tax breaks for individuals will be available this year because they expired at the end of 2009:
• The rule allowing taxpayers who are age 70 1/2 or older to make tax-free distributions to charity from an Individual Retirement Account (IRA) of up to $100,000 per taxpayer, per tax year.
• The ability to exclude part of unemployment compensation benefits. For 2009, up to $2,400 of unemployment compensation benefits received was excluded from gross income.
• The election to take an itemized deduction for State and local general sales taxes instead of the itemized deduction permitted for State and local income taxes.
• The additional standard deduction for State and local real property taxes, limited to the lesser of the amount allowable as an itemized deduction for real property taxes or $500 ($1,000 on a joint return).
• The additional standard deduction for disaster losses.
• The ability to claim either an itemized deduction or an increased standard deduction for state or local sales or excise taxes on the purchase of a new motor vehicle.
• The “above-the-line” tax deduction for qualified tuition and related expenses.
• The $250 above-the-line tax deduction for teachers and other school professionals for expenses paid or incurred for books, certain supplies, computer equipment, other equipment, and supplementary materials used by the educator in the classroom.
If you have any questions on the 2010 income tax changes, please contact Jeff Perlmuter at (216) 515-1654.
This document is intended to provide general information about legal developments, not legal advice.
Receipt of this information does not create an attorney-client relationship.
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