Changes for Tax Year 2010

We begin this article guessing, presumably along with the reader, about its title. Was the person who came up with the title thinking about changes to 2009 tax returns which will be filed in 2010, or actually about changes that will take effect in 2010?

There are a slew of new changes associated  with “The American Recovery and Reinvestment Act of 2009 (ARRA)” [better known as the stimulus package] drafted by the Bush administration and signed into law on February 17, 2009 by President Obama. The bill included “federal tax cuts, expansion of unemployment benefits and other social provisions, including domestic spending in education, health care, and infrastructure, including the energy sector.” (IRS –,id=204981,00.html)

While most provisions of the 2009 ARRA take effect and are retroactive to January 1, 2009, President Obama is said to be considering asking congress to extend some provisions which only effect tax year 2009 into 2010 as well, but there is nothing concrete to report with respect to this at present.

Furthermore, in addition to carrying forward 2009 provisions, President Obama can be expected to ask congress for a few other changes including a repeal of George Bushes tax cuts for the richest one percent of Americans. But before we get to far along in summarizing ARRA changes which will effect 2009 and may effect 2010 as well, there is one big change coming for 2010 that can not escape mention here.


The current estate tax provisions expire on December 31, 2009 and for all intensive purposes the federal estate tax exemption becomes unlimited during 2010. In other words, if you are beneficiary to the family fortune and your benefactor dies in 2010, there is no federal inheritance tax to be paid. The current exemption amount in 2009 is 3.5 million and tax rate is 50%, but in 2011 the federal estate exemption amount is automatically reestablished at 1 million and the tax rate at 55%.  


Do you remember last spring when your net pay (take-home pay) increased by about $15 per month? If you are collecting social security, railroad retirement or a veterans disability, you may have noticed an extra $250 payment in addition to your regular amount last June or July. That was the Economic Recovery Payment (ECP), a one time incentive to get you to spend money. Yeah, your right, it seems a little trivial in comparison to the bonuses the government was paying to bankers and stock brokers who caused this economic debacle in the first place. At present the tax rate cut will carry over into 2010, but the one time $250 payment was restricted to 2009.


For 2009 and 2010, there will be a refundable tax credit equal to the lessor of 6.2% of earned income, or $400 ($800 MFJ), for eligible individuals. The credit is reduced, but not to zero, for taxpayer(s) with a modified AGI in excess of $75,000 ($150,000 MFJ). Social security, railroad retirement and disabled veterans who received a $250 ECP must deduct that amount from the credit. This is an item you will want to talk to your tax person about.


For 2009 and 2010, the Earned Income Credit percentage has increased, providing even greater incentives for people on welfare to get a job, that is if they can find one.


The Refundable Child Tax credit has been increased for 2009 and 2010.


The American Opportunity Education Tax Credit (AOETC) is the new name for the former “Hope Credit.” For 2009 and 2010, the credit increases from 100% of the first $1,200 to 100% of the first $2,000 of qualified education expenses, plus 25% of the next $2,000 of qualified expenses, for a maximum credit of $2,500 per student year. In addition, the credit now applies to the first 4 years of post secondary education (as opposed to the first 2 under the previous rules).


The First Time Home Buyer Credit (FTHBC) has been one of the best credits a tax payer could get a hold of for a long time. The credit was revised for 2009 and beyond. The provisions are too complex to detail here, but if your planning to buy a new home and can qualify, this credit can make a big dent in your mortgage payments. Talk to your real estate person or tax preparer.           


If you purchase a new automobile between February 17, 2009 and December 31, 2009, you can deduct the sales tax as an adjustment to total income. This is an above the line deduction, meaning that you don’t have to itemize deductions to take advantage of it. One restriction is, that the automobile purchased can not have  price tag higher than $49,500. There are some other restrictions pertaining to the types of automobiles that qualify and a phase out of the write-off for tax payers with a higher AGI.


In prior years, Unemployment Benefits have been fully subject to income tax. For 2009 only, the first $2,400 of unemployment benefits received are excludable from gross income. Amounts in excess of the first $2,400 are fully taxable.

Well, there you have a brief summary of some important changes for 2009 and 2010 effecting most taxpayers. There are a lot of other changes which effect businesses and we can only expect, with respect to 2010, that there are additional changes in the works.