Last Updated Feb 24, 2011 6:23 AM EST
This story was last updated February 10, 2011.
First of all, the IRS has a gift for you: an extra three days to file your returns! Individual taxpayers will have until Monday, April 18, to file their returns. The reason: Friday, April 15, is a legal holiday in the District of Columbia, and because D.C. holidays affect tax deadlines in the same way federal holidays do, all taxpayers are being given an extra three days to file their returns.
When you contribute to an individual retirement account. you help fund a future goal while lowering your current tax bill. In other words, socking cash in an IRA is like saving with help from your Uncle Sam.
The rules are pretty simple: You have until tax filing (again, that’s April 18) to contribute up to $5,000 to a 2010 IRA ($6,000 if you are 50 or older). If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can even wait until then to put 2010 money into those accounts.
Even if you’re covered by a retirement plan at work, you can deduct some or all of your IRA contribution if you are single and your income is less than $66,000 (less than $109,000 if married). If you are not covered by a workplace retirement plan but are married to someone who is, you can deduct some or all of your IRA contribution if your joint income is less than $176,000 or less.
- Roth IRA Conversion Rules: Just a reminder for those who converted from a traditional IRA into Roth IRA in 2010 — don’t forget that you now owe taxes!
The amount of money that was converted is considered income that can be spread over a two-year period, beginning in 2011. This means you include one-half of the amount as income in 2011 and the other half as income in 2012. You can elect to include all of the income in 2010 (that is, on the return you're filing this April), which may be advantageous if your tax bracket is likely to be lower in that tax year than it will be in the future. See Form 8606 .
New Rules on Itemized Deductions
- Itemized deductions and personal exemptions: The itemized deduction limitation is repealed for 2010 (and through 2012). This means that taxpayers can deduct the full amount of their itemized deductions in 2010. The personal exemption phase-out rules also do not apply through 2012.
Tax Tips for 2011
Erica Hill talks to CBS News Business and Economics Correspondent Rebecca Jarvis about how to deal with changes in the tax code.
Get the Credit(s) You Deserve
Tax credits are even better than deductions, because they lower your taxes dollar for dollar, instead of being calculated based on your tax bracket. A number of credits and deductions that were set to expire for 2010 were retroactively extended by the 2010 Tax Relief Act and are therefore available for taxpayers who qualify — so don’t miss them!
- Making Work Pay. The payroll “tax holiday” is still in effect for 2010. That means that workers get a tax credit of 6.2% on their earned income — but the credit maxes out at $400 for single filers and $800 for joint filers. The credit is subject to income limits and starts phasing out at $75,000 for singles and $150,000 for joint filers. You will need to file for this credit on Schedule M .
- The Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2010. This credit can be claimed in addition to the credit for child and dependent care expenses. (Details are inIRS Publication 972 .)
- The Earned Income Tax Credit is a refundable credit for married couples filing jointly with 2010
earned income under $48,362 and singles with income under $43,352. Yourincome and family size determine the amount of the credit. (Details are in IRS Publication 596 .)
- The Child and Dependent Care Credit of up to $1,050 per child or $2,100 for two or more children is calculated based on your expenses paid for the care of your kids under age 13 to enable you to work or to look for work in 2010. The credit is 20 to 35 percent of your child-care expenses up to $6,000 — the size of your credit depends on your income. (Details are in IRS Publication 503 .)
- The Retirement Savings Contributions Credit is designed to help low- and moderate-income workers save for retirement. Individuals with incomes of up to $27,750 and married couples with joint incomes of up to $55,500 may qualify for a credit of up to $1,000 per person. Check out Form 8880 for the rules.
- First-Time Homebuyer Credit: The first-time homebuyer credit expired during 2010. It is available to eligible taxpayers who closed on their home purchase on or before Sept. 30, 2010 (under a binding contract in place before May 1, 2010). The closing date deadline was moved during the year from June 30 to Sept. 30 by the Homebuyer Assistance and Improvement Act. The credit allows you to claim a credit of 10 percent of the purchase price, up to $8,000. There is a different credit of up to $6,500 for those who already owned a home but purchased a new primary residence. The details are mind-numbing; a good place to start is this homebuyer credit post by CBS MoneyWatch.com blogger Ilyce Glink. For more details, see this IRS explanation.
While we’re on the subject: If you claimed the First-time Homebuyer Credit in 2008, it’s time to pay up. The 2008 credit was worth up to $7,500 and was similar to an interest-free loan. Taxpayers generally must begin repaying it in equal payments for 15 years. If the taxpayer no longer lives in the house, then the credit must be repaid in full with the next tax return. Taxpayers who claimed the credit in 2009 and 2010 will not have to repay it unless the house is sold or no longer their principal residence within three years of purchase.
- The Hope Credit was been replaced with the American Opportunity Tax Credit. Each student can now get a $2,500 “higher education tax credit” for the first four years of college. The credit is based on 100 percent of the first $2,000 of tuition and related expenses, including books, paid during the tax year, plus and 25 percent of the next $2,000 of tuition and related expenses paid during the tax year (subject to income phase-outs starting at $80,000 for singles and $160,000 for joint filers).
- The December tax compromise included a new deduction for families with college costs. Every family can deduct up to $4,000 of college tuition and fees in 2010 and 2011. If your modified AGI is between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers, you are entitled to a reduced deduction of up to $2,000. Note: The new form for taking this deduction will be available from the IRS in February.
- Also, for anyone with a 529 college savings plan: Computers and Internet access qualify as “qualified education expenses” for the 2010 tax year, so you can pay for them tax-free.
Add Up Those Itemized Deductions