This year's tax season will look a lot like last year's, with a few sweeteners added.
Most of the tax changes that were put in place in 2009 to spur the economy remained in effect in 2010, even though the recession was officially declared over. Among them: the Making Work Pay tax credit, which put a little extra money in the hands of 95 percent of U.S. taxpayers. Homebuyers and those who installed energy-efficient furnaces, windows and other items in their homes also could benefit, along with college students or their parents, schoolteachers and adoptive parents.
"There's really not much from a change perspective," said Greg Rosica, a tax partner at Ernst & Young accounting firm.
But new sweeteners include elimination of the phase-out of itemized deductions and personal exemptions for higher-income taxpayers.
Low-income taxpayers benefit from a raise in income limits for the earned income tax credit. Congress in December also approved a patch for the alternative minimum tax that will protect about 20 million middle-income families from an additional tax bill of $3,900 or so.
The late action by Congress on the AMT and other provisions means that taxpayers who itemize deductions, teachers seeking a deduction for out-of-pocket expenses, and those filing for the tuition and fees deduction will have to wait until the Internal Revenue Service updates its systems before filing their returns. Terry Lemons, the IRS' senior spokesman, estimates the delay could last until mid-February.
Taxpayers also will have a few extra days to file. Returns aren't due until April 18 because of Emancipation Day, celebrated April 15 in the District of Columbia.
Nearly 99 million tax returns were filed electronically last year, up 3 percent from the previous year. The total represents nearly 70 percent of returns filed.
About 77 percent of taxpayers received a refund on 2009 returns, averaging $2,994 each.
Though the jobless rate remains close to 10 percent, the unemployed lost a key tax break. "All unemployment insurance is taxable this year," said Mark Luscombe, principal analyst at CCH, a tax preparation service. For the 2009 tax year, the first $2,400 of unemployment benefits had been excluded.
Another recession-battling tax break not renewed was the deduction for sales and excise taxes on the purchase of a new car. However, Congress did extend the state and local sales tax deduction, which primarily benefits those in areas without state and local income taxes.
Deductions reduce the income on which you are taxed. Credits reduce the amount of tax owed and generally are considered more advantageous to the taxpayer.
The capital gains rate remains at a maximum of 15 percent. For those taxed overall at the 10 percent or 15 percent rate, the capital gains rate is 0.
Middle-class taxpayers will benefit from the patch to the alternative minimum tax, which originally was aimed at ensuring that people weren't wrongly escaping taxes by claiming deductions. The AMT is not indexed for inflation, so every year Congress passes a patch so millions more taxpayers aren't affected.
The patch for the 2010 tax year increases the exemption to $72,450 for a married couple filing a joint return and qualifying widows and widowers, up from $70,950 in 2009. For singles and heads of households, it's $47,450, up from $46,700.
Also adjusted for inflation was the maximum income level you could have and still qualify for the earned income credit, as well as the value of the credit itself. Income levels and the amount of credit are based on the number of children in the household.
During 2010, the vast majority of taxpayers benefited from the Making Work Pay tax credit, aimed at combatting the recession. There were income limits, however, and taxpayers will have to file Schedule M to claim the credit, which is up to $400 for singles or $800 for married couples filing jointly. Since payroll withholding was adjusted so you could get the immediate benefit of the credit, you could find yourself owing money if both spouses worked or if you have more than one job.
You have to file a paper return if you claim the expanded adoption credit. The maximum is $13,170 for each child, up from $12,150 in 2009.
The energy credit, worth a maximum $1,500, also remained in place. Homeowners who installed energy-efficient windows, furnaces, air conditioners or other items may qualify for a credit of 30 percent of the cost of the items. But there's a catch: The items had to be installed by Dec. 31.