2010 Tax Law Changes

As with each new year brings new opportunities it also brings a slew of tax law changes.  2010 is no different. Certain tax provisions are set to sunset, retirement savings have changed little, and high wage earners are most likely to take a hit. Here are the tax law changes of 2010 that you’ll want to take note of the upcoming year. You can also check out this post at Good Financial Cents that covers the 2010 tax law changes updated at mid-year by the IRS.

2010 Tax Law Changes

Retirement Accounts Not Changed

The contribution limits for 401k’s and IRA’s remain unchanged for 2010.  It was speculated that the limits might even decrease, but that didn’t occur.  For 2010, you can contribute $16,500 into your 401k with a $5,500 catch up for boomers over the age of 50.  IRA’s (Roth and Traditional) allow you to put in $5,000 with a $1,000 catch up.

Phaseout Limits Eliminated on Itemized Deductions

This may provide you with an opportunity for some notable tax savings. Historically, high-income taxpayers have been subject to a reduction in the value of itemized deductions and personal exemptions. That has gradually decreased in this decade. In 2010, the phaseouts are gone entirely. In 2011, they are poised to return.

As IRS standard deduction and personal exemption amounts are indexed to inflation, you’ll see very little change there for 2010. The standard deduction for heads of household will rise by $50 to $8,400 for the 2010 tax year. Other standard deductions will stay put, and the personal exemption amount will remain at $3,650 for 2010.

Capital Gains Rate Still Low

Unless Congress decides to extend these Bush-era cuts, capital gains tax rates will revert to pre-2003 levels in 2011. For 2010, the long-term capital gains rate for those in the 10% and 15% tax brackets is 0%. In 2011, it is set to go to 10%. If you fall into the 25%, 28%, 33% or 35% tax brackets, the capital gains rate is 15% in 2010 and 20% in 2011.2

Tax Extenders Act of 2009.

The House passed this legislation on December 9, and the Senate is likely to follow suit. The final version of this bill would likely extend the additional standard deduction for real property taxes, the deduction for state and local sales tax, and deductions for tuition/education expenses and teachers’ classroom expenses into 2010.

Estate Tax Update

2010 Tax Law Changes

0% estate taxes in 2010? That was the plan … but the reality is that estate taxes are likely to remain at current levels in 2010 with some retroactive lawmaking. In early December, the House voted to restore the estate tax for 2010; a week later, the Senate voted against temporarily extending 2009 estate tax levels into the coming year. The Senate will almost certainly take up the issue again in January. However, to prevent a complete repeal of the estate tax next year, any new legislation is expected to contain a retroactive provision. So instead of taking effect upon passage, any new estate tax law would likely be made retroactive to January 1, 2010.

Alternative Minimum Tax

You know how it works – Congress comes up with another AMT patch at the stroke of midnight and middle-class taxpayers are saved once more. Well, just to make things interesting, the Tax Extenders Act of 2009 doesn’t include an AMT patch for 2010. Many tax professionals think the 2010 patch issue will be addressed early next year, with the patch for the 2010 tax year made retroactive.

How will marginal tax rates rise in 2011?

Does anyone think taxes won’t increase in the near future? At present, the marginal tax rates are 10%, 15%, 25%, 28%, 33% and 35%. If Congress doesn’t act by the end of 2010, the tax brackets will reset to 15%, 28%, 31%, 36% and 39.6%. By the way, President Obama and some Democrats have proposed future tax brackets of 10%, 15%, 25%, 28%, 36% and 39.6% for 2011 (that is, only the highest two brackets would revert to pre-EGGTRA levels).

A healthcare surtax?

If the healthcare reforms pass in 2010, taxpayers in the highest brackets might pay even more to the IRS. For example, the legislation that the House passed would require couples with MAGI of $1,000,000 or more or individuals with MAGI of $500,000 or more to pay an additional 5.4% surtax.

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