If Uncle Sam got a bigger chunk of your paycheck last year than you'd like – or if you're dreading the big check you'll have to write on April 15 – it might cheer you up to look forward to some new tax breaks for 2010. The IRS generally introduces tax changes as the year progresses, but some new tax breaks that have already been announced can help lower your tax bill this year. (Learn more in 10 Most Overlooked Tax Deductions.)
There are new developments here on several fronts. First, the existing tax break for first-time homebuyers has been extended. First-time home buyers can still take advantage of this credit of up to $8,000 if they buy before April 30, 2010 and have their closing before June 30, 2010. But the program has also been expanded and is now available to current homeowners who want to replace their primary residence. These homebuyers can get a credit of up to $6,500. Be warned: the IRS will be cracking down and making sure current/former homeowners who take this credit actually meet the eligibility requirements.
Taxpayers who qualify can elect to take this credit on either their 2009 or 2010 returns. Members of the armed forces and certain federal employees based overseas have until 2011 to take advantage of this credit. Lawrence Yun, chief economist at the National Association of Realtors, believes the extended and expanded tax credit will encourage up to 2.4 million households to take the credit in 2010. (Learn more about buying a house in 10 Worst First-Time Homebuyer Mistakes.)
Earned Income Tax Credit
The American Recovery and Reinvestment Act included a temporary expansion of the EIC for 2009 and 2010 returns. There's a new category specifically for qualifying taxpayers with three or more children, who can get a credit of up to $5,657. The ARRA also temporarily increased the income limits for EIC eligibility. For the 2009 tax year, the credit gradually begins to phase out at $21,420 for married taxpayers with children, and $12,470 for married couples with no children.
No More Limits on Roth Conversions
The Journal of Accountancy has dubbed 2010 "The Year of the Roth Conversion." Until this year, you could only convert from a traditional IRA to a Roth IRA if you had an Adjusted Gross Income of under $100,000. Roth IRAs offer several advantages: namely, the money accumulates tax-free, and you don't pay taxes when you retire and withdraw the money. In 2010, that limitation disappears, allowing upper-income taxpayers to take advantage of a Roth conversion. In addition, the tax bite can be spread out over two years, giving you more time to pay the tax owed on the converted funds.
New Tax Breaks You Can Still Apply to Your 2009 Return
If you haven't yet filed your 2009 return, there are a few new breaks you can still take advantage of now.
- Haiti Relief Donations: Taxpayers who itemize and donate to Haitian relief organizations between Jan. 11 and March 1 can write this off on their 2009 returns.
- Making Work Pay Credit: Taxpayers with earned income and a modified AGI of under $95,000 ($190,00 for married filing jointly) can get this credit, which is 6.2% of your earned income, up to a maximum of $400 for singles, $800 for joint filers. The credit will be reduced if you received a $250 economic recovery payment in 2009.
- Homebuyer Credit: As mentioned above, if you qualify for this credit, you can choose whether to apply it to your 2009 or 2010 return.
With all of the available tax breaks, it looks like the IRS won't be able to take quite as much from you this year. If you have questions or want to know more ways to make tax breaks work for you, read our other articles in the Tax Section, and you can always consult a professional.