Tax Law Changes for 2010

The Internal Revenue Service plans a February 14 start date for processing tax returns delayed by last month’s tax law changes. The IRS reminded taxpayers affected by the delay they can begin preparing their tax returns immediately because many software providers are ready now to accept these returns.

Beginning February 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction. Based on filings last year, about nine million tax returns claimed any of these deductions on returns received by the IRS before February 14.

The IRS needed the extra time to update its systems to accommodate the tax law changes without disrupting other operations tied to the filing season. The delay followed the December 17 enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which extended a number of expiring provisions including the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Personal Investing:  Many people feared that the capital gains and dividend tax rate would be increased in the revised tax cut plan by President Obama, but the Republicans fought hard to keep it the same at 15 percent, and it will stay that way until at least the end of 2012. For any non-tax deferred investing you plan on doing, make sure you take advantage of the low 15 percent capital gains tax rate now, because the chances of it staying this low past 2012 are slim.

Roth IRA Conversion:  A new change in 2011 is now allowing anyone, regardless of income, to convert a traditional IRA to a Roth IRA. In the past, there were income restrictions on who was allowed to convert a traditional to a Roth, but that has changed in 2011. Converting to a Roth IRA can really help you save money on taxes mainly because a Roth IRA takes in taxable money, which is then not taxed when withdrawn at the retirement age. If you believe that you’ll be in a higher tax bracket at retirement, then converting now definitely makes sense.

The Payroll Tax Holiday:  For 2011 only, the Social Security payroll tax of 6.2 percent taken from everyone’s paycheck has been reduced by 2 percent to 4.2 percent. The tax is actually 12.4 percent, but the other half is picked up by your employer, up to $106,000 in income. That other half is not reduced for employers with this payroll tax holiday. A 2 percent increase to your paycheck is almost the standard amount of yearly raises that many employees receive. So why not set aside the 2 percent to a savings account?

See What’s New on the 2010 Form 1040 if you like to find out some key changes for the tax year of 2010. Yahoo! Finance

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