Starting in 2010

Estate Tax

The Tax Relief Act of 2010, signed into law by President Obama on December 17, 2010, reinstates the estate tax at a maximum of 35 percent with a $5 million exclusion amount for decedents dying after December 31, 2009 and before January 1, 2013.

For decedents dying after December 31, 2009 and before January 1, 2011, the option exists to elect to apply (1) the estate tax based on the new 35 percent top rate and $5 million exclusion amount, with stepped-up basis or (2) no estate tax and modified carryover basis rules under EGTRRA.

Starting in 2010, individuals with any amount of modified Adjusted Gross Income are free to switch a traditional IRA to a Roth IRA. Conversions are fully taxable at your regular tax rate. For conversions in 2010, taxpayers can spread the tax due over two years. Half the tax will be due in 2011, and the remaining half will be payable in 2012. Removing the limit on conversions effectively eliminates the income limit on contributions to Roth IRAs. A taxpayer with income too high to use a Roth will be able to contribute to a traditional IRA (which does not have income limits for contributions) and immediately convert to a Roth.

Domestic Production Activities Deduction

In 2010, this deduction increases to nine percent of qualifying business net income. This deduction applies to businesses engaged in construction, engineering or architectural services, film production, or the lease, rental or sale of equipment you manufactured. However, the rate remains 6 percent for oil and gas companies.

State and Local Sales Tax Deduction

The opportunity for itemizers to choose to deduct their state sales tax payments instead of deducting their state and local income taxes ends after 2009, unless Congress extends it.

Educators' Deduction

This deduction for classroom supplies purchased by educators lapses after 2009, unless Congress extends it.

Nontaxable Combat Pay Allowed for Earned Income Tax Credit (EITC)
 

The election to include nontaxable combat pay in the calculation of earned income for the Earned Income Tax Credit is not available after 2009, unless Congress extends it.

Tuition and Fees Deduction

The deduction for up to $4,000 of college tuition and fees expires after 2009, unless Congress extends it.

Direct Donations of IRAs to Charity

Beginning in 2010, the opportunity for IRA owners age 70½ to directly donate part of their IRA balance to charity will disappear, unless Congress extends it.

Income Earned Abroad

The maximum foreign earned income exclusion is increased to $91,500. This is a $100 increase from 2009.

Additional Standard Deduction for Property Taxes

Starting in 2010, non-itemizers will no longer be allowed to increase their standard deduction by up to $1,000 of property taxes paid, unless Congress extends this break.

Section 179 Expense Deduction

The maximum amount of equipment placed in service that businesses can expense drops by nearly 50%, to $135,000 from $250,000 previously.

Limits on Deducting Farm Losses

Beginning in 2010, the amount of farm losses you can enter to offset nonfarm income is capped at the greater of $300,000 or your net farm income over the past five years. But this limit will apply only if you get federal farm payments or Commodity Credit Corporation (CCC) loans. You can take suspended losses in later years. The caps will also apply to partners and S corporation owners.

Capital Gains Tax Rates

The tax rate on capital gains from the sale of assets held longer than one year remains at 0% for people in the 10 percent or 15 percent tax brackets. The 15 percent maximum tax rate on long-term capital gains for taxpayers in higher brackets also remains the same. However, these rates are scheduled to increase in 2011.

Dividend Tax Rates

Similarly, the special 5 percent maximum rate on dividends of taxpayers in the 10 percent and 15 percent tax brackets remains at zero percent through 2010.

Exemptions for the Alternative Minimum Tax

For 2010, the exemption levels drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately. Congress, can, however, act in 2010 to extend the relief that was available in 2009.

Partial Exclusion for Unemployment Benefits

For 2010, the first $2,400 of unemployment benefits you receive is no longer tax-free.

Sales Tax Deduction for New Vehicles

Beginning in 2010, buyers of new vehicles no longer get a tax benefit for sales tax paid on new vehicles, unless they itemize and elect to deduct sales taxes instead of state income taxes.

Credit for Energy-Saving Home Improvements

The 30 percent tax credit of the cost of energy-saving home improvements reverts to 10 percent after 2010, and is capped at $500.