Tax Season: What’s New for 2010

Last year, millions of Americans received unemployment checks. Which makes for millions of people with some tax-free income. Congress made the first $2,400 of unemployment benefits exempt from federal income tax for last year.

See? Not all tax policies cause pain.

And that’s just one example of what’s new this year for taxpayers nationwide.

If you’re sending someone through college, bought a new home or a car last year, you may have some extra tax breaks waiting for you.

“For the most part, new legislation was aimed at helping to spur the economy and those (laws) are designed to be helpful and to put money in people’s pockets and give people credits,” said Greg Rosica, an Ernst & Young tax partner based in Tampa, Fla., and a contributing author to the Ernst & Young Tax Guide 2010.

For the 2010 tax season, here are a few things you need to know:

COLLEGE STUDENTS AND FAMILIES

The new American Opportunity Tax Credit is worth up to $2,500 ? and 40 percent of that is refundable ? for households with students in college, according to CCH, a Wolters Kluwer business that provides tax and accounting information. Even those who owe no tax can get a refund of up to $1,000 for each eligible student, the IRS says.

This is more generous than the credits families had last year and it is available to more people in upper income brackets. Previously, families had to pick either an $1,800 per student Hope Scholarship Credit or a $2,000 per taxpayer Lifetime Learning Credit.

HOME BUYERS

First-time home buyers ? those didn’t own a home for the previous three years ? who bought a home after Jan. 1, 2009, are eligible for a tax credit of up to $8,000. More good news: It does not have to be repaid so long as you live in the house for three years. This credit will be available this year, too, for home purchases that close by June 30.

Here’s one snag: The IRS says that anyone who bought a home last year and wants to take this credit must use Form 5405 and attach a copy of the settlement statement, a document that shows who bought the home, who sold it and other details of the transaction.

And that requirement to show proof means anyone wanting this credit for 2009 must file a paper return including the statement. If you were planning to file electronically, claim this credit and get a quick refund, that won’t work.

Not a first-time buyer? Tax law still has something for you, too. If you have lived in your home five of the eight years before you bought a new home and you purchased it after Nov. 6, 2009, there’s a credit of up to $6,500 for your 2009 taxes. This credit continues this year for homes that you agree to buy by April 30 and that you purchase through June 30.

CAR BUYERS

If you received a cash-for-clunkers payment last year it is not taxable. The government doesn’t get any of that $3,500 or $4,500 voucher or payment.

HOMEOWNERS IN TROUBLE

Ordinarily, if you get a debt forgiven ? such as your mortgage lender agrees to a short sale of your home ? that forgiven amount could become taxable. But not right now, in certain circumstances, on your residence.

If your lender forgives up to $2 million in debt on your principal residence, that can be excluded from your income if this happened or happens between Jan. 1, 2007, and Dec. 31, 2011.

THE UNEMPLOYED

The biggest benefit ? the $2,400 tax free unemployment compensation ? is for 2009 only. If you are receiving unemployment benefits in 2010, you should have tax withheld or you should begin making quarterly estimated tax payments.

Your health insurance premiums, if you are paying for continuation of your coverage under COBRA, generally are not tax deductible, says CCH.

The only way they can be deducted is you can take them as part of a medical expense deduction and you itemize your taxes. If your premium cost plus other medical expenses exceed 7.5 percent of your adjusted gross income, that would qualify. But, because many unemployed are getting subsidies from their former employers to limit their costs, they may not have expenses high enough to qualify for this deduction.

ROTH IRA CONVERSIONS

2010 is the first year that anyone can convert an individual retirement account or IRA into a Roth IRA. The big difference is that withdrawing your money from a Roth IRA is tax-free. With a traditional IRA, you’ll pay federal income taxes on withdrawals.

Previously, you could not make this conversion if your modified adjusted gross income was $100,000 or more.

The snag to this item is the possibility of owing tax on the amount in your IRA that you convert. The twist is that if you convert during 2010 you can spread that tax bill over the tax years of 2011 and 2012.

Each one of these tax provisions have more details than can be explained here. So be sure to check for income limits and other details as you begin the annual tax calculations. The best place to go is IRS.gov and use the “Forms and Publications” tab to read the full rules.

SOURCE: Sun Sentinel. Distributed by McClatchy-Tribune Information Services (c) 2010.