Last Call Tax Tips for 2010
As 2010 draws to a close, so will many important tax credits and deductions. This is the eleventh hour for many tax benefits included in the 2008 Economic Recovery Act as well as the 2001 Bush tax cuts. If not renewed by Congress, they will be history come January 1st, 2011. (Remember: The Bush tax cuts are still in effect for 2010 and these changes won’t impact your 2010 tax return.)
So take one final look—there’s still time to take advantage of them.
- Extra money in your paycheck.
If you’re a W-2 wage earner, you’ve probably been getting slightly larger paychecks since 2009. That’s because of reduced withholding linked to the Making Work Pay Credit.
After December 31st, the $400 credit for single filers ($800 for joint filers) will expire and your paychecks will revert to the higher withholding rates. If you’ve been claiming the credit on your tax return, that benefit will expire as well.
- Help paying for college education.
The clock is ticking on the American Opportunity Tax Credit, a benefit that can help you offset the costs of college tuition and related expenses you pay in 2010.
A credit of up to $2,500 is available if your expenses for the first four years of college are $4,000 or more. The full credit is available to single filers making less than $80,000 and joint filers making under $160,000. Taxpayers with higher incomes may be eligible for a reduced credit. After 2010 this credit reverts to the less generous Hope Scholarship Credit.
- A tax credit for energy-saving home improvements.
The Nonbusiness Energy Property Credit allows you to take a 30% tax credit on what you paid for any qualifying home improvement that makes your primary residence more energy-efficient. Installations like storm doors, windows, roofing, water heaters and air conditioning may qualify.
The maximum credit is $1,500 and reduces your tax bill dollar for dollar. So don’t be left out in the cold—install your improvement by December 31st to qualify.
- Tax benefits for buying a fuel-efficient car.
Now is the time to buy that fuel-efficient car you’ve been wanting. The Hybrid Vehicle Tax Credit is still available for vehicles purchased by December 31, 2010. The credit amount depends on when the vehicle is purchased.
The IRS defines hybrids as cars that run on an internal combustion engine and a rechargeable battery. Leased vehicles are not eligible and the taxpayer must be the car’s original owner. You’ll find a list of qualified vehicles and other requirements at www.irs.gov.
- The Earned Income Tax Credit in your pocket.
On December 31st, say goodbye to the Advance Earned Income Tax Credit, which enables low-income workers to receive a portion of their earned income credit in advance in their regular paychecks. Starting in 2011, you can still take the credit on your tax return, but can’t get it in advance in your paycheck.
- A tax benefit for working families.
The Child Tax Credit is a major benefit for working families and single parents. In 2010, you can take a credit of $1,000 per child under 17 years of age. The credit will drop to $500 come January 1, 2011. Other rules concerning this credit will also change.
For example, the Additional Child Tax Credit (a refund you get if your total child tax credits exceed your tax liability) will have new eligibility rules. The income threshold needed to claim the credit is $3,000 in 2010. Next year, that threshold will rise to $12,550.
- Keep track for your flexible spending account.
The rules on Flexible Spending Accounts (FSAs) are changing. For the rest of 2010, you can use your tax-free medical account to purchase over-the-counter medications without restrictions.
Come January 1st, FSAs can be used for OTC products only if you have a doctor’s note or prescription. So plan your health spending deductions wisely—fast-track your OTC purchases now before the rules change and change your 2011 contributions to eliminate OTC products.
Many of the Bush-era tax cuts from 2001 and 2003 are set to expire as well. The list is long, but here’s one of the most important changes:
- Higher tax brackets may be coming back.
American taxpayers got a big break in 2001 when tax brackets on ordinary income were reduced. On January 1st, you’ll ring in more than a new year—you’ll ring in new tax rates, too.
Current tax brackets are set at 10%, 15%, 25%, 28%, 33% and 35%. The new 2011 rates will revert back to the pre-2001 rates of 15%, 28%, 31%, 36% and 39.6%.
While you may wince at this development, look at it this way: the 2011 tax rates will be no higher than the rates we all paid in the 1990s.
Reviewing these expiring tax rules now can save you money come April 15. Unless Congress extends them by the end of 2010, when the ball drops on January 1st, most of them will be gone for good.