Tax breaks aren't just for the rich, and they probably never were. Deductions, credits and other ways to cut your tax bill have long been available to taxpayers in all brackets.
(Learn the logic behind the belief that reducing government income benefits everyone. Check out Do Tax Cuts Stimulate The Economy?)
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A big one in the news lately: If you convert a regular IRA to a Roth IRA this year, you get two options. You can leave the resulting income off your 2010 tax return and instead split it evenly between your 2011 and 2012 returns. The other choice, if it works out better for you tax-wise, is simply to report all the income from the conversion on your 2010 return.
As tax season approaches, here are six other new and improved tax breaks to keep in mind.
- Higher Standard Deductions
At $5,700, the standard deduction for single people is $250 higher this year than in 2009. It's $50 more for those who plan to file as head of household, bringing their standard deduction to $8,400. There's no new break for married couples who file jointly, though. In 2010, their standard deduction will be the same $11,400 they received in 2009.
- No limit on Itemized or Standard Deductions
Here's one for the wealthy, whose itemized and standard deductions are usually phased out gradually once their income reaches certain levels. Those phaseouts have been repealed for this tax season, but they will resume next year unless Congress decides to extend them.
- Larger Earned Income Credit
This one's for working folks who aren't quite as well off. It consists of a tax credit when income is below a certain level and the credit varies depending on how many kids you have. For example, a married couple with three children and combined earnings of less than $48,362 are eligible for an earned income credit of up to $5,666 - that's $628.50 more than last year. The credit is available to singles and married couples, and the maximum credit is higher than last year in all cases.
- Bigger Credit for College Expenses
If you've got kids in college, you may qualify for the American opportunity tax credit, or AOC. Formerly known as the hope credit, the AOC is a tax break on the costs for the first two years of post-secondary education. The maximum amount has been raised to $2,500 for 2010, up $700 from last year. The credit covers 100% of tuition and eligible expenses up to $2,000 plus 25% of the next $2,000. Like many credits, the AOC is subject to gradual phaseout at higher income levels.
- Tax-Free Employer-Paid Parking and Transit Costs
Some employers are generous enough to kick in for commuting and parking expenses, which can be substantial. This year, you can get up to $230 per month from your employer for those expenses tax-free. It's kind of like getting nearly a $2,700 raise, and you don't have to pay income tax on it. (We clarify some rules that often puzzle taxpayers. Read Common Tax Questions Answered.)
- Health Insurance Deduction for the Self-Employed
While people who work for themselves have always been able to deduct health insurance premiums, a new federal law can effectively increase the size of the deduction by about 15% for many of the self-employed. That's because the law now allows these individuals to deduct health insurance premiums at a more favorable point in the process of completing their tax returns - before they've calculated their self-employment taxes. The result will be a marked reduction in self-employment taxes since the amount of income those taxes are based on will be substantially reduced. (Running your own business has both personal and financial perks. See 10 Tax Benefits For The Self-Employed.)
Ask a Professional or Use Top-Notch Software
These are just a handful of the breaks to which you may be entitled this tax season, but there are many others. To make sure you don't miss out on any, seek the advice of a reputable and experienced tax professional. If you're a diehard do-it-yourselfer, invest in the best available tax prep software, even if it costs a little more.
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