2010 Federal Tax Law Changes
2010 FEDERAL TAX CHANGES
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. Learn more by reading our news release or this notice.
Small Business Health Care Tax Credit
This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers.
Employer-Provided Health Coverage — Not Taxable; Reporting Requirement Optional in 2011
Starting in tax year 2011, 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.
Group Health Plan Requirements
The Affordable Care Act establishes a number of new requirements for group health plans. More information is available on the websites of the Departments of Health and Human Services and Labor and in additional 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. More information can be found at www.medicare.gov.
Alternative Minimum Tax (AMT)
2010 Changes
The following changes to the AMT went into effect for 2010. For more information , see Form 6251, Alternative Minimum Tax--Individuals, and its instructions.
AMT exemption amount decreased. 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 must know their tentative minimum tax to claim certain credits. Taxpayers must complete Form 6251 through line 31 and attach it to their return to claim: the credit for child and dependent care expenses, the credit for the elderly or the disabled, the lifetime learning credit, the nonbusiness energy property credit, the mortgage interest credit, or the District of Columbia first-time homebuyer credit.
Caution. Congress 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. If that legislation is enacted, we will update this page as soon as possible. You can also check the 2010 Form 6251 and the 2010 Instructions for Form 6251 once they become available
Decrease in Personal Casualty and Theft Loss Limit
Generally, a personal casualty or theft loss must exceed $100 to be allowed for 2010. This is in addition to the 10% of AGI limit that generally applies to the net loss.
Economic Recovery Payment
Any economic recovery payment you receive during 2010 is not taxable. 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.
If you are married and you and your spouse both meet these requirements, each of you may get a $250 payment.
If you are entitled to a payment, you will get it automatically. You do not need to apply for it. However, any payment you receive will reduce your making work payment credit on Schedule M (Form 1040A or 1040).
Education Savings Bond Exclusion
An individual who redeems qualified U.S. saving Bonds to pay for higher education expenses may be able to exclude interest income from gross income.
For 2010, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (AGI) is between $105,100 and $135,100. You cannot take the exclusion if your modified AGI is $135,100 or more.
For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $70,100 and $85,100. You cannot take the exclusion if your modified AGI is $85,100 or more. For more information, see chapter 10 in Publication 970, Tax Benefits for Education.
Expanded Definition of Qualified Expenses for Qualified Tuition Programs
The definition of qualified higher education expenses for tax-free distributions from a qualified tuition program is expanded to include amounts paid in 2009 or 2010 for the purchase of computer software, any computer or related peripheral equipment, fiber optic cable related to computer use, and Internet access (including related services) that are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.
Hope and American Opportunity Credits for 2010
For tax year 2010, the following changes have been made to the Hope and American opportunity credits.
- The Hope credit is not available for 2010.
- The American opportunity credit is available for 2010 and is unchanged from 2009.
Health Savings Accounts (HSAs)
2010
High Deductible Health Plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,200 ($2,400 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,950 ($11,900 for family coverage).
Limits on contributions. The maximum HSA contribution increases to $3,050 ($6,150 for family coverage).
2011
Nonprescription medicines no longer qualify. For tax years beginning after December 31, 2010, nonprescription medicines (other than insulin) do not qualify as an expense for HSA purposes unless they are prescribed.
Long-Term Care Premiums
2010
Increase in Deductible Limit for Long-Term Care Premiums
For 2010, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).
- Age 40 or under - $330.
- Age 41 to 50 - $620.
- Age 51 to 60 - $1,230.
- Age 61 to 70 - $3,290.
- Age 71 or over - $4,110.
Increased Standard Deduction
2010 Changes
For 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 taxpayers using the head of household filing status, the basic standard deduction has increased to $8,400 for 2010. For other taxpayers, the basis standard deduction is the same as in 2009.
First-Time Homebuyer Credit and Repayment of the Credit
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:
- Before May 1, 2010, or
- 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:
- Before May 1, 2011, or
- 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.
For more details on repaying or claiming the credit visit the First-Time Homebuyer Credit page.
Itemized Deductions
2010
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
2010 Changes
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.
Residential Energy Credits
2010
Nonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness 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.
Limitation. 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
2010 Changes
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.
2011 Changes
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.
Standard Mileage Rate
For 2010, the standard mileage rate for the cost of operating your car for business use is 50 cents per mile.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expenses.
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 Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.
Charitable-related mileage. For 2010, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.
Build America Bonds
A build America bond is a bond issued after February 17, 2009, and before 2011 that qualifies as a tax-exempt bond that is not a private activity bond, and for which an election is made by the issuer.
A tax credit of 35% of interest payable on build America bonds is available to the bondholder, unless the issuer elects to receive a direct payment in lieu of the credit to the bondholder. The amount of credit is taxable as interest income to the bondholder. The unused credit is not deductible, but can be carried forward to succeeding tax years. Use Form 8912, Credit to Holders of Tax Credit Bonds, to claim the credit.
Depreciation and Section 179 Expense
SBJA and Section 179 Deduction
A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.
The Small Business Jobs Act (SBJA) of 2010 increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years.
Under SBJA, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011. Without SBJA, the expensing limit for section 179 property would have been $250,000 for 2010 and $25,000 for 2011.
The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000.
The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.
SBJA also removes cellular telephones and similar telecommunications equipment from the definition of listed property for tax years beginning in 2010.
Depreciation limits on business vehicles. The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2010 is increased to $3,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $3,160.
Caution. These limits are reduced if the business use of the vehicle is less than 100%.
Domestic Production Activities Deduction
For tax years beginning after 2009, the percentage used to figure the domestic production activities deduction increases to 9%.
Also, for tax years beginning after 2009, taxpayers with oil-related qualified production activities income must reduce the domestic production activities deduction by 3% of the least of the following amounts.
Health Savings Accounts (HSAs)
2010 Changes
Eligibility. For 2010, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,950 for self-only coverage and $11,900 for family coverage.
Employer contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2010, you can contribute up to the following amounts to a qualified individual's HSA.
- $3,050 for self-only coverage or $6,150 for family coverage.
- $4,050 for self-only coverage or $7,150 for family coverage for a qualified individual who is age 55 or older at any time during the year. The $7,150 limit is increased by $1,000 for two married individuals who are age 55 or older at any time during the year provided and each spouse has a separate HSA.
Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.
For more information, see Health Savings Accounts in the 2010 Publication 15-B Employer's Tax Guide to Fringe Benefits.
2011 Changes
Eligibility. For 2011, a qualifying high deductible health plan (HDHP) must
have a deductible of at least $1,200 for self-only coverage or $2,400 for
family coverage and must limit annual out-of-pocket expenses of the
beneficiary to $5,950 for self-only coverage and $11,900 for family
coverage.
Employer contributions. Up to specified dollar limits, cash contributions to
the HSA of a qualified individual (determined monthly) are exempt from
federal income tax withholding, social security tax, Medicare tax, and FUTA
tax. For 2011, you can contribute up to the following amounts to a qualified
individual's HSA.
- $3,050 for self-only coverage or $6,150 for family coverage.
- $4,050 for self-only coverage or $7,150 for family coverage for a qualified individual who is age 55 or older at any time during the year. The $7,150 limit is increased by $1,000 for two married individuals who are age 55 or older at any time during the year provided and each
spouse has a separate HSA.
Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.
For more information, see Health Savings Accounts in the 2011 Publication 15-B.
Identity Theft and Your Tax Records
The IRS does not initiate communication with taxpayers through e-mail. Before identity theft happens, safeguard your information.
What do I do if the IRS contacts me because of a tax issue that may have been created by an identity theft?
If you receive a notice or letter in the mail from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please respond immediately to the name, address, and/or number printed on the IRS notice.
Be alert to possible identity theft if the IRS issued notice or letter:
- states more than one tax return was filed for you, or
- indicates you received wages from an employer unknown to you.
An identity thief might also use your Social Security number to file a tax return in order to receive a refund. If the thief files the tax return before you do, the IRS will believe you already filed and received your refund if eligible.
If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return.
If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.
What do I do if I have not been contacted by IRS for a tax issue but believe I am a victim of identity theft?
If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity, credit report, or other activity, you need to provide the IRS with proof of your identity.
You should submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver's license, or passport, etc, along with a copy of a police report and/or a completed IRS Identity Theft Affidavit - Form 14039.
Please send these documents using one of the following options:
Mailing address:
Internal Revenue Service
P.O. Box 9039
Andover, MA 01810-0939
FAX: Note that this is not a toll-free FAX number
1-978-247-9965
You may also contact the IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490 for guidance.
Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).
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