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Tax law changes to delay refunds ; IRS needs time to prepare systems

Taxpayers who claim deductions for home-mortgage interest, gifts to charity and state and local taxes will have to wait until middle to late February to file their 2010 returns.

The Internal Revenue Service attributed the late start of the filing season to changes in tax law for 2010 that were finished last week. The agency needs extra time to put processing systems in place, the IRS said Thursday.

"The majority of taxpayers will be able to fill out their tax returns and file them as they normally do," IRS Commissioner Douglas Shulman said. "We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the new year to get our systems reprogrammed and ensure taxpayers have a smooth tax season."

The delay also applies to filers preparing to take advantage of a deduction for college tuition and fees of up to $4,000, and a separate $250 deduction for teachers' out-of-pocket classroom expenses.

The late start to the filing season will affect an estimated one-third of U.S. taxpayers who itemize their deductions rather than claim the standard deduction, which for 2010 is $11,400 for a married couple filing jointly and $5,700 for individuals. According to IRS data for 2008, 33.8 percent of individual returns, or 48.2 million, included itemized deductions.

The changes don't affect the April 15 deadline for filing tax returns. Many taxpayers don't file until close to that deadline, in part because it can take time to gather necessary documents.

More than half of married couples filing jointly itemize their deductions, and taxpayers who itemize tend to have higher incomes.

Alan Straus, a New York-based certified public accountant, said the delay would affect taxpayers who are very eager to get their refund checks from the IRS. "For most of my clients, they're upper income and they won't file until much later anyway because their info isn't complete," said Straus. "This is only a big deal to those expecting refunds and counting on them quickly. For those people it will be unfortunate."

The change is unlikely to affect taxpayers who wait until close to the April 15 filing deadline to complete their returns. In 2010, more than 40 percent of taxpayers filed their returns after March 26.

Lou Crandall, chief economist at Wrightson ICAP in Jersey City, N.J., said the IRS move could delay between $10 billion and $20 billion in tax refunds that would have gone out in late January and early February.

The IRS will announce a specific date when it can start processing tax returns affected by the changes.

The changes in the law that will cause delays:

*The new line on Schedule A, Itemized deductions, to allow for state and local sales tax deductions. Taxpayers in states with income taxes usually chose that deduction instead. Taxpayers cannot complete Schedule A until this tax break is programmed in IRS computers.

*The new higher education tuition and fees deduction for parents and students, covering up to $4,000 paid to a post-secondary institution. Many parents and students, however, will instead use existing education credits.

*The new expense deduction for kindergarten-through-grade 12 educators who have out-of-pocket classroom expenses of up to $250.

The new tax law gives benefits ranging from tax cuts for millionaires and the middle class to longer-term help for the jobless.

Without the law, millions of Americans would have been hit with increases starting on New Year's Day.

The package retains Bush-era tax rates for all taxpayers, including the wealthiest Americans. It also offers 13 months of extended benefits to the unemployed and attempts to stimulate the economy with a Social Security payroll tax cut for all workers.

The Associated Press contributed to this report.

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