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Five Things to Consider on Your 2010 Return

The good news about 2010 tax returns is that many things we’ve taken for granted in past years have not changed.

We still get 0% long-term capital gains tax in the 15% tax bracket and 15% long-term capital gains rates for all other brackets. We still have the lower tax brackets for singles, couples and heads of households. We can still use $3,000 of expenses towards the Child and Dependent Care Credit. The Child Tax Credit and American Opportunity Credit are still refundable.

Some important changes are worth your attention–one of them immediately.

IRAs and seniors Seniors have until January 31, 2011 to make transfers from their IRAs directly to charities without paying taxes on the transfers. That’s only days away, so you must act quickly. (Read Tax Guy Bill Bischoff’s explanation for more.)

Self-employed health insurance For returns filed in 2010 only, small business owners won’t have to pay a 15.3% self-employment (SE) tax on their health care insurance. Business owners have never been able to deduct their insurance on the Schedule C. Rather, it is treated as an adjustment to income on page 1 of the Form 1040. Since the insurance expense does not reduce their business profits, business owners normally end up paying the SE tax.  This year only, line 3 of Schedule SE is reduced by the cost of the health insurance for the business owner and family.   For someone paying family premiums of $8,000 per year, that’s a savings of approximately $1,100.

Adoptions Adoption benefits are quite generous, up to $13,170 X 2. That’s $1,000 more than last year. Why times 2? First, the adoption credit is refundable, which means you get the money back even if you have not paid any taxes into your account for the year. Second, your employer can opt to pay up to $13,170 of your adoption expenses on your behalf without including it in your wages. In other words, with the help of your employer, you get double the benefit. (The IRS has not released the new Form 8839 yet. Expect to see it by mid-February.)

Schedule L You may find that this year’s Schedule L. is confusing when it comes to the vehicle sales tax deduction.  It appears that folks who don’t itemize can deduct sales taxes on new vehicles purchased in 2010. Read the instructions closely and you will find that the deduction is for sales and use tax paid in 2010 on vehicles purchased in 2009.  Why would you be paying sales taxes in the subsequent year? The only example I can think of is that you bought the vehicle in 2009 in a different state with either no sales taxes, or lower sales taxes than in your state.  When you filed your state tax return for 2010, you paid use taxes to your state. Or you got caught with out of state license plates on your new car and were forced to pay the sales tax in your state.

You can still pick up the sales taxes on vehicles purchased in 2010 as itemized deductions on Schedule A. You have the choice of deducting either the sales taxes paid in 2010 or state income taxes paid. To deduct the sales taxes you paid, you’re welcome to collect all your receipts and add in the sales taxes on the vehicle. Or just use the IRS sales tax tables and add your vehicle’s sales tax.

Sales taxes vs state taxes Here’s a little tip for folks who live in a state with an income tax. If you’ve been itemizing, you may have noticed that your state income tax refunds are taxable income. Annoying, isn’t it? But if you use the sales tax deduction instead of the state income tax deduction, you won’t have to pay tax on your state income tax refund. Why? Because you never took a deduction for the state income taxes.

Readers, will any of these changes benefit you? Will any hurt?

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    • that, Japanese systems of toaitxan, even prior to the establishment of constitutional monarchy with the Meiji Restoration, were accompanied by pretty good public services, including irrigation. And after the restoration (I think) there was strong public education. I don’t know enough about the tax history of England or the rest of Asia to comment, though.The other issue we need to consider is that in Africa (not in Asia, generally), colonialism created new national boundaries and often replaced incipient states with much stronger bureacracies. Thus pre-colonial times had much less widespread, functioning toaitxan systems. But the colonies themselves didn’t spend much time thinking about toaitxan either they introduced some, but most of their energy was focused on resource extraction through other means, such as mining etc. As a result, post-colonial African states have, by-and-large, been building toaitxan structures where no robust or widespread systems existed before (not all of them, though particularly north Africa and some of the pre-colonial Kingdoms had structures and norms of tax-paying). As a result, they’ve been quite slow to develop accountability through toaitxan, esp. since so much of their financing comes from aid.

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About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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