It’s hard to feel lucky at tax time, but experts say overall 2010 was a pretty good year for most taxpayers, who will wind up paying the same or less than they did in 2009. And while there are exceptions, of course, the majority of those who come out ahead have the Obama administration to thank. After a heated political battle, Congress voted late last year to extend the tax cuts passed by President Bush in 2001 and 2003 — for all income groups through 2012.
There’s more good news: A patch to the Alternative Minimum Tax means that more than 21 million households dodged a tax increase. Other provisions to the tax code, including changes to the estate tax and extensions of several tax credits, will put money in more taxpayer pockets as well. “Everybody won,” says Michael Koppel, CPA, a Senior Tax Partner at the Massachusetts-based Gray, Gray & Gray, LLP. “Your lower tax bracket people won, small business won, large business won, estates won ...”
Well, not everyone. A few groups, including the unemployed and people who bought a home in 2008, will fare worse. If you bought a hybrid car in 2010, sorry, you missed the credit. And because there were so many changes in the tax law over the past 18 months, tax-return preparation may be more expensive this year. Of course, as good as 2011 may be for the individual, there is a major loser, and that’s the government, which could lose $3.9 trillion in revenue between 2011 and 2020 from the extension of the Bush tax cuts and the AMT adjustment alone.
Not sure yet how you’ll make out? Here is our analysis of the biggest winners and losers of the 2010 tax code.
First-time (and some second- and third-time) homebuyers
If you closed on a home on or before September 30, 2010, congratulations! You may be eligible for a First-Time Homebuyer Credit of up to $8,000. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers, according to the IRS. (Military personnel and federal employees stationed overseas and their spouses may still qualify for the credit if they close before June 30, 2011.) The 2010 credit differs from previous home-buying credits because it applies to homeowners buying a new primary residence (including some second- and third-time buyers) and raises the income limits for those claiming the credit. Unlike the 2008 credit, it does not require repayment unless the taxpayer moves out within three years following the purchase (in which case they must repay the whole credit).
It may be cold comfort after paying those tuition bills, but parents of college students may qualify for the American Opportunity Credit, which is worth up to $2,500 per student, if their modified adjusted gross income is $80,000 or less (or $160,000 or less for couples filing a joint return). Past education credits had so many limits on income eligibility that few people were able to use them, according to Barbara Kogen, CPA, JD, of the California-based NSBN LLP. “This is going to be a big boon to a lot of people,” she says. In addition, the extension of the Bush tax cuts and the AMT reform prevents a tax increase of over $2,000 dollars for more than 100 million middle class families.
The 2010 tax code temporarily lifts the limits on itemized deductions, so some higher-income taxpayers (generally around $100,000 for joint-filers, after deductions) who hadn’t been able to take these deductions in the past will be eligible this year. The elimination of the estate tax represents a tax-free windfall for the heirs of wealthy people who died last year, including Yankee owner George Steinbrenner, who’s estimated net worth was at $1.1 billion.
Congress gave the estates of people who died in 2010 the choice between 2010 and 2011 tax law, says Roberton Williams, a senior fellow at The Urban-Brookings Tax Policy Center. Based on the 2011 law, they would have a $5 million exemption, a 35 percent tax rate, and step-up in basis (meaning a readjustment based on the higher market value of the asset, not the asset’s original purchase price) for all inherited assets. If they decided to follow the 2010 law, there was no estate tax, a 35 percent tax rate on taxable gifts, $1.3 million step-up in basis (see previous), plus $3 million for a surviving spouse but a carry-over basis for rest of the estate.
Business owners who provide health care coverage to employees and meet certain other criteria can claim the Small Business Health Care Tax Credit. The amount of the credit varies based on the number of full-time employees, their average wages and other factors. But according to Kogen, “for 2010-2013, a small employer generally may claim a tax credit of 35 percent of the amount of qualifying health insurance costs they pay.”
Entrepreneurs, as well as some larger businesses, could also benefit from an expansion of Section 179, which deals with depreciation. “It’s a provision that allows businesses to immediately expense assets that they buy,” explains Koppel. “Not [assets] that you buy used, but first-time use assets like furniture and equipment. All of those can be immediately expensed instead of having to be amortized, which lets you get a deduction now.”
As harsh as it sounds, those who lost jobs during the recession may take a hit this tax season. During 2009, the first $2,400 of unemployment benefits was tax exempt. But for 2010, those collecting unemployment benefits must pay taxes on the full amount. (Some of these same people, however, did benefit from an extension of unemployment benefits.) Those who did not have money withheld from benefits could get a nasty surprise on tax day. Many of the unemployed don’t realize they even have to pay taxes on their benefits, or that an extension on benefits might put them in a different tax bracket then they were expecting. “I’ve had at least 10 people in this situation,” says Ebere Okoye, CPA, MBA of the Maryland-based Wealth Building CPA. “Their unemployment was extended, but it’s throwing a lot of them into a different tax bracket and now they’re having to pay more in taxes.”
Homebuyers who must start repaying their 2008 tax credit
Unlike this year’s credit, the first-time homebuyers tax credit in 2008 worked like an interest-free loan. “People who took advantage of the first-time homebuyers credit in 2008 have to pay it back over 15 years starting this year,” explains Williams at the Tax Policy Center. “People who took the full $7,500 tax credit have to add $500 more tax.” Had they waited a year, the “loan” would be free. Homebuyers who closed after September 30, 2010 don’t quality for either credit.
Even though the Obama administration has said it will no longer fight challenges to the Defense of Marriage Act, the law remains on the books. So same-sex couples may not file their federal taxes jointly even though some states allow them to do so. Filing separately can have a negative impact on these couples, according to Okoye, “because they miss out on some deductions that they would have gotten together. Here in Maryland, you get a two-income earner subtraction but if you’re filing a single return, you don’t get the benefit of that deduction.”
Even though the short-term news is good for most of us, we’re postponing the inevitable. When Congress cuts taxes, “there’s obviously the issue of raising revenue,” says Williams. “Any cuts that you have on the revenue side can hurt all of us down the road because the government has a larger deficit.” In fact, the Congressional Budgeting Office (CBO) expects a revenue loss of $39 billion between 2011 and 2020 from the Small Employer Tax Credit alone. The extension of the 2001/2003 tax cuts and an adjustment of the AMT will result in a revenue loss of $3.9 trillion during that same period, according to the CBO.
Beware the Costly and Complicated Alternative Minimum Tax (Fox Business)
Estate Tax to Return in 2011, and it Could Hurt Ordinary Folks (USAToday)
Can Same Sex Couples Finally File Jointly? (SmartMoney.com)