For taxpayers who are procrastinators, this is your year.
Not only is the Internal Revenue Service asking those with more complex returns to hold off filing until mid-February, but the usual tax deadline has been extended three days, to April 18, because of a holiday in Washington.
The IRS needs extra time to gear up for returns with itemized deductions because the law to extend the Bush-era tax cuts was passed so late last year. The agency must update its systems to account for certain revived tax breaks. Filers also may want more time. Not all expiring tax breaks were renewed under the new law, so you will need to navigate the changes.
"With all the rhetoric going on about what will and what won't get passed, when things actually did get completed, there was lot of confusion," says Kathy Pickering, executive director of the Tax Institute at H&R Block. For example, she says, jobless filers didn't have to pay income tax on the first $2,400 of unemployment benefits a year ago. Now they do.
If you have a simple return, you're free to file now. And even if you're waiting to submit an itemized return — an estimated 9 million filers — it's not too early to fill it out. Some tax preparers are offering to hold completed returns and submit them Feb. 14, when the IRS will begin processing them.
So if you're getting a jump on your taxes, or just thinking about doing them at some point, here are some changes for this season:
Adoption credit Families adopting children will be able to get a larger credit for the expenses incurred for travel, adoption fees and legal costs. Under the new health care law, the credit was increased by more than $1,000 to a maximum of $13,170 per child for 2010 and this year.
A credit reduces your bottom-line tax bill dollar for dollar. Another improvement to the adoption credit is that it is now refundable for 2010 and 2011. That means if you don't owe any taxes, you'll get the credit as a refund. The credit begins phasing out once income reaches $182,520.
Repaying homebuyer credit Before the wildly popular first-time homebuyer credit that gave you $8,000 for purchasing a house, there was another one that was less generous and had to be repaid. This is the first tax season where homeowners must start repaying that credit using Form 5405, says Melissa Labant, technical manager with the American Institute of CPAs.
This credit was worth up to $7,500 for first-time homebuyers purchasing a house from early April 2008 to the end of that year. The idea was that homebuyers could use the money to buy furniture or make upgrades and then repay it — without interest — over 15 years.
Even homebuyers lucky enough to get the $8,000 credit in 2009 or 2010 might have to repay that money all at once if they have since sold their house, Labant adds. The credit requires that homebuyers stay in the house for three years.
But you only have to repay to the extent that you have a gain on the sale, Labant says. Sell it for a loss, and you don't have to repay the credit.
Premium tax relief New health care provisions allow self-employed parents to deduct insurance premiums paid on behalf of adult children younger than 27, says William E. Massey, a consultant with Thomson Reuters' Tax & Accounting business. The children must be on the parent's plan, but they don't have to be dependents, he says.
Roth conversions If you converted a traditional individual retirement account last year into a Roth IRA, you have a choice: Pay taxes now or spread the tax bill over 2011 and 2012 returns.
You'll owe tax on money being converted to a Roth that hasn't been subject to taxes before. However, Roth withdrawals in retirement will be tax-free.
Thanks to the recent tax law, we know that income tax rates will remain steady for at least another two years. So if you wait to pay the tax, you don't have to worry that tax rates will be at a much higher level than today.
Nevertheless, even procrastinators may want to pony up sooner than later.
"Normally, you want to take advantage of the deferral," Massey says. But if your income dropped last year or you will be claiming more deductions and credits than usual this season, you could be better off paying the tax now, he says.
Save that refund Uncle Sam has been encouraging us to save by allowing us to split our refunds among a variety of savings vehicles.
Now you can save for others. This year, you can designate all or some of your refund to go toward buying a Series I savings bond for someone else, such as a child or grandchild. The bonds are sold in increments of $50.
To buy bonds for another, fill out Form 8888. Paper bonds will be issued in the name of the person you listed and mailed to you about three weeks after your return is processed.
IRA charitable distributions Congress revived an expired tax break so that those age 701/2 and older can make a direct contribution from a traditional IRA to a charity without having to pay income tax on the distribution. These charitable distributions also count toward the minimum withdrawals seniors must make each year from the IRA.
Because this extension came so late in the year, taxpayers have until Jan. 31 — not much time — to make the donation and still have it count as being made in 2010.
Another charitable option Marylanders now have a third choice on the state income tax return to make a charitable donation. The state added a line so you can designate how much you want to contribute to the Developmental Disabilities Administration's Waiting List Fund. The money helps provide physical therapy, job training and other services to those on a waiting list for such assistance.
The other two options — the Maryland Cancer Fund and the Chesapeake Bay and Endangered Species Fund — raised a total of $2.1 million last year.
Electronic push Some taxpayers just don't like sending their returns via the Internet. But if they hire a tax preparer this year, it will be harder for them to avoid electronic filing.
Starting this tax season, Uncle Sam requires tax preparers handling 100 or more returns to file electronically, unless the client opts out and fills out a form saying why.
A similar e-filing push started last year in Maryland. This season, preparers handling at least 200 returns must electronically file, provided clients don't ask for a waiver.
"It's the older generations that don't want their returns e-filed. They are afraid that their information is aired for everyone to see and it only takes a clever hacker to steal their identity," says Cindy Hockenberry, research supervisor with National Association of Tax Professionals. "Once people try it, they realize this is not as bad as they think."