Home

Tax Prep Quote

Tax Newsletter

Getting Organized

Contact Us

Tax Year 2010-2011 Newsletter

Real Estate Tax Issues

Home Foreclosures, Short Sales, Cancellation of Debt (COD) Income

2010 Child & Dependent Care

• Family Tax Relief Act of 2009 improves Child & Dependent Care Credit, now fully refundable and enabling 1.6 million additional families to claim.  
• Franchise Tax Board (FTB) checks all day-care providers claimed on Form 3506, Child and Dependent Care Expenses Credit. 
• If you meet the other requirements, you must no longer maintain a household.

$1000 Child Tax Credit

Per qualifying child.

2010 Education Credits

You may be eligible:

• For The American Opportunity Credit (replaces HOPE credit, maximum $ 2,500 per eligible student, 4 years, includes course materials).
• For The Lifetime Learning Credit (maximum $2,000 per eligible taxpayer).
• To deduct student loan interest.

Elimination of Age Limits on Roth IRA Conversions

Starting After 2009, the AGI income limits on converting traditional IRAs to Roth IRAs are eliminated.

2009 Retirement Contribution Limits

• IRA and Roth IRA limit is $5,000 (with an extra $1,000 catch-up if 50+ years old).  
• SIMPLE plan limit is $11,500 with a $2,500 catch-up. 
• 401(k) limit is $16,500 (or $ 22,000 if age 50 or over)
• SEP-IRA limit is $49,000.

Charitable Contributions Rules

After 8/17/06:
Charitable contributions of clothing or household goods MUST be in good used condition.

Starting 1/01/07:  Monetary contribution deductions NOT allowed without a bank record (check), credit card receipt, or a written communication or receipt from charity, showing name of charity, date and contribution amount. COMBINED YEARLY DONATIONS OF $250 OR MORE to an organization REQUIRES contemporaneous written acknowledgement from the charity & MUST indicate what goods or services were provided to you, if any. Letter MUST be dated before earlier of date you file tax return, or due date. Your bank records are NOT enough.

Keep Proper Records or IRS Will Not Allow Deductions.

Since 2009, car donations to qualified charities, used in its own charitable operation, may deduct full fair market value. But if the charity sells the asset (with no significant intervening use), you can ONLY deduct the gross sale proceeds the charity receives. They must provide you with a 1098-C form after the sale.

Tax-Free IRA Distribution to Charity

Up to $100,000 of taxpayer’s IRA balances can be donated in tax years 2008-2011 with no reportable income.

To qualify, the IRA owner must be at least age 70 1/2, and distribution must be made directly by the IRA trustee to a qualifying charitable organization. Do NOT take money out yourself to give to the charity.

“Kiddie Tax” Age Limit Raised from 14 to 18 to 24

• For 2008, a child subject to the “kiddie tax” pays federal tax at parents’ highest marginal rate on the child’s unearned income over $1,800. This prevents lowering taxes by shifting income from parents to low-bracket children.
   
• For 2008, the age limit is raised to 24 (in 2007, it was 18).
   

2010 Social Security Facts

• $106,800 Social Security (FICA) wagebase (was $ 102,000 in 2008).
   
• Maximum additional earnings not penalized in 2009 if aged 62-65 is $ 14,160.
   

Home Office Deduction

Whether you own or rent:

• You can’t create or increase a net business loss.
   
• Unused deductions carry forward.
   
• Divide business area by home’s total area for pro rata share of indirect expenses, such as rent, utilities, insurance, security system and telephone costs.
   
• You may also have direct expenses, such as painting or repairs to area used ONLY for your business.

Section 179 Expensing

Federal maximum for business property placed into service in 2010-2011  is $500,000 (was $250,000 in 2009). California is $25,000.

California Audits Head of Household Status

You must pay over half the cost of a household that is the principle abode for over half the year of either a qualifying child OR an individual for whom you may claim a dependency exemption.

Audits are less likely if you e-file with head of household questionnaire (Form 4803e).

K-1 Matching Program

New bar-coded paper K-1 forms have extensive identifying bar-codes to characterize income and deductions. They are used for matching, examination, classification and identification of non-filers.

Foreclosure or “short sale” (at a loss) of real estate may have triggered taxable income (even though you received no “real money”).

• You MUST report COD income.  Banks typically issue a 1099-C. But the form itself can't tell you if you really owe COD taxes or are covered by any IRS exclusions. 
• Original loans to purchase a home are normally non-recourse. Re-financed loans are usually recourse loans.
   
• It is important to disclose and pay this with your extension form, if you are not filing by April 15.

Because this tax issue is so complicated, it is best to discuss your situation with me directly.

Home Sale Sec. 121 Tax Exclusion

• $500,000 (married joint) or $250,000 (single or married separate).
   
• IF you OWNED your home 2 of the last 5 years, AND it was your primary residence 2 of the last 5 years.
   
• Since 2004: If acquired in a Section 1031 like-kind exchange, home is NOT eligible for Section 121 exclusion for 5 years.

Mortgage Interest

Mortgages must be a secured debt (for which the taxpayer is legally liable) on a taxpayer’s main or second home.

• “Home Acquisition Debt” is to buy, build or improve a taxpayer’s home. $1 million DEDUCTION LIMIT (married filing joint) or $500,000 (married filing separate).
   
• “Home Equity Debt” is for any other purpose. $100,000 Deduction Limit (may be subject to AMT).
   
• Since 2007, you may deduct mortgage insurance paid for loans for new homes as home mortgage interest. The amount is reduced by 10% for every $1,000 ($500 if filing married separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately).

Registered Domestic Partners

Since tax year 2007, registered domestic partners in California MUST file as married (either joint or separate). But you must each still file SINGLE (or Head of Household) federal returns.

• Since California returns depend on a federal AGI (adjusted gross income) to be completed, this means a “dummy” federal return must be prepared in order to complete the CA return. This is in addition to the 2 REAL federal returns.  
   
• If registered domestic partners are filing married separate for California, many more adjustments are necessary, because they must file using community property rules for California but not for federal. NOTE: For tax year 2010 and beyond, this has CHANGED. New federal law now requires registered domestic partners in states with community property laws (such as California) to split their income and expenses based on community property laws, even though they can only file federal returns as single or head of household.
   
• Is this good or bad for you from a tax perspective? It depends on your individual tax situations. There are also estate-planning issues, since registered domestic partners do NOT qualify for the unlimited marital estate deduction when one partner dies. California SB Bill 559, signed into law on Oct. 10, 2007, provides special relief for registered domestic partner transferees of real property between 1/1/2000 and 1/1/2006 (but no property tax refunds are allowed for any prior assessment year).

There are many possible tax complications, and you’ll need to discuss this with me.

2010 Standard Deductions & Personal Exemptions

The personal and dependent exemption is $3,650.

The standard deductions for tax year 2010 are:

• $5,700 (married filing separate or single).
• $11,400 (married filing jointly or qualifying widower).
• $8,400 (head of household).

2010 Mileage Deductions

• Business use for 2010 is 50 cents per mile (was 55 cents in 2009). Medical or moving mileage rates is 16.5 cents per mile (was 24 cents in 2009). Charity work mileage rate is 14 cents per mile.
   
• Keep an auto log during the year, recording your business mileage.
   
• You can either use the standard mileage deduction OR actual allowed expenses, such as gas, insurance, tires, repairs and depreciation. HOWEVER, once you use one method for a particular vehicle, you can’t change it.

Offers-In-Compromise Requires Non-Refundable Deposits

• Lump sum offers (up to 5 payments) submitted on or after 7/16/06 must include a non-refundable 20% payment.
   
• Periodic payment offers (over 5 payments) must include non-refundable payment of first proposed installment.
   
• You must continue making non-refundable payments while offer is being evaluated.
   
• Offers not rejected within 24 months are deemed to be accepted.

Qualified Dividend Income

Qualified Dividend Income is treated as adjusted net capital gains, taxed at 15% (or ZERO % for taxpayers in the lowest two brackets).

Reduced Capital Gains

For sales after 5/5/03, the 10% and 20% long-term rates are now 15% (or ZERO %  for taypayers in the lowest two bracketsd).

Qualified Domestic Production Activities

(Section 199)

Maximum deduction (up to 50% of W-2 wages paid) from qualified income:

• Is 9% in 2010.

Manufacture in the U.S. of tangible personal property. U.S. construction projects (includes civil engineering & architectural services). Growing and processing of food and agricultural products (but NOT prepared food or retail beverage sales). Production (not transmission) of electricity, gas and potable water. Software production. Film and videotape production, rental and licensing.

Increased 2010 AMT Exemptions

2010 exemptions are $ 72,450 (up from $70,950 in 2009) for married filing joint and surviving spouses, and $ 47,450 for single filers (up from $ 46,700 in 2009).