Capital Gains Exclusion

Personal Residence Capital Gain Exclusion

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Summary of Federal Tax Changes 2010

Summary of Federal Tax Law Changes for 2008 - 2017

Tax breaks in recent tax-relief bills were designed to be phased in over a number of years, or are indexed to inflation. This article explains the changes scheduled to come into effect through 2017 to help you determine how these tax laws affect your long-term plans.

Tax Year Changes

2008 2010 2011 2011 2013 2017

Starting in 2010
Tax Credit of Up to $8,000 for First-Time Homebuyers

If you purchased a primary residence in 2010 before December 1, 2010 and are a “first-time” homebuyer, you can qualify for a tax credit equal to 10 percent of up to $80,000 of the purchase price. To be eligible, you must not have owned a residence in the United States in the previous three years. The credit phases out between $150,000 and $170,000 of Adjusted Gross Income for joint filers, and $75,000 to $95,000 for single filers.

The credit is refundable to the extent it exceeds your regular tax liability, which means that if it more than offsets your tax liability, you’ll get a refund check. But it does not offset the Alternative Minimum Tax.

You can even elect to claim the credit for a 2010 home purchase on your 2008 tax return. (If you filed for 2008 before buying, but before the December 1, 2010 deadline, you can claim your credit by filing an amended return using Form 1040X. Doing so will guarantee you a refund check.) Unlike the credit for 2008 purchases, the credit for 2010 purchases doesn’t have to be paid back over 15 years. But you will have to repay the credit if you sell the house within three years of the date you bought it.

Payroll Tax Credit

For 2010 and 2011, Congress gave workers a credit of 6.2 percent of their earned income, capped at $400 for single filers and $800 for joint filers. For single filers, the credit starts phasing out at $75,000 of Adjusted Gross Income and dries up at $95,000. The phaseout zone for couples is $150,000-$190,000. Employees will get the credit in advance via lower income tax withholding in each paycheck, not as a rebate check. Self-employeds can reduce their quarterly estimated payments to get an advance benefit from the credit. The exact amount of the payroll tax credit for the year will be calculated on the filers’ tax returns. Recipients of Social Security benefits, Railroad Retirement benefits, Supplemental Security Income or veteran disability pensions will get a one-time $250 check instead for 2010. Federal retirees who don’t receive any Social Security will also get a $250 check.

Sales Tax Deduction for New Vehicles

Buyers of new vehicles can deduct the sales tax paid on the purchase, even if they don’t claim sales taxes as itemized deductions. They can add the tax they pay to their standard deduction. This break applies to new cars, motor homes, light trucks and motorcycles purchased after February 16, 2010 and before January 1, 2011. Sales tax paid on the first $49,500 of cost qualifies. The benefit begins phasing out for married couples with AGI over $250,000 and singles with Adjusted Gross Income over $125,000. It is completely gone for single filers with Adjusted Gross Income of $135,000 or more, or joint filers with AGI of at least $260,000.

Itemizers who elect to deduct state sales taxes in lieu of state income taxes get no benefit from this change, since the auto sales tax is already included in the sales tax deduction. Itemizers who deduct state income taxes will get a separate deduction for auto sales taxes; non-itemizers will add the sales tax amount to their standard deduction amount.

Indexed Tax Brackets



Thanks to higher inflation in the past year, the 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent tax brackets all kick in at approximately 5 percent higher levels of income than in 2008.

Larger Personal Exemptions

For 2010, each personal exemption you can claim is worth $3,650, up by $150 from 2008.

Higher Standard Deductions

For 2010, the standard deduction for marrieds filing a joint return rises to $11,400, up by $450 from 2008. Joint filers can also add in up to $1,000 of property taxes paid.

For single filers, the amount increases to $5,700 in 2010, up by $250 over 2008. Singles can also deduct up to $500 of real estate tax payments.

Heads of household can claim $8,350 in 2010, a jump of $350 from 2008.

Non-itemizers who pay real estate taxes can claim even larger standard deductions. Non-itemizers can also add any casualty losses that occurred in presidentially-declared disaster areas.

Reduction in Itemized Deductions and Personal Exemptions for High-Income Taxpayers

As noted earlier, itemized deductions and personal exemptions are phased out as your income rises. In 2010, the reductions are a bit less painful. The cutback in itemized deductions occurs once your Adjusted Gross Income exceeds $166,800, regardless of your filing status. Your itemized deductions are reduced by 1 percent of the amount by which your AGI exceeds $166,800, but you can never lose more than 80 percent of your itemized deductions. Also, your medical expenses, investment interest deduction, deductible gambling losses and any casualty and theft losses are not subject to the cut. Personal exemptions are reduced by 2 percent for each $2,500 of Adjusted Gross Income over $250,200 for married filing jointly, $208,500 for heads of households and $166,800 for singles, but the reduction cannot exceed $1,217 per exemption.

Section 179 Expense Deduction

The maximum amount of equipment placed in service in 2010 that businesses can expense stays at $250,000. And the annual investment limit remains $800,000. Thus, you won't begin to lose the benefit of expensing until you place more than $800,000 of assets in service in 2010.

Tax-Free Parking for Employees

Starting in 2010, firms can pay for $230 a month of parking tax-free for employees, up $10 per month from 2008. The cap on tax-free transit passes is now $230 a month as well, the same as for parking. The limit had been $115 a month in 2008.

Tax Credit for College Tuition

For 2010 and 2011, the Hope credit is replaced by a new credit of up to $2,500 per student a year for four years of college, not just the first two years. It now also covers the cost of books, and begins to phase out at $80,000 of Adjusted Gross Income for single filers and $160,000 for joint filers. If the credit is more than your income tax liability, 40 percent of it is refundable. Also, the full credit is allowed against the Alternative Minimum Tax.

Child Tax Credit

If the credit exceeds the filer’s tax liability, all or part of the credit will be refunded if the filer earns more than $3,000 in 2010 and 2011, down from $12,550 in earnings previously.

Earned Income Tax Credit (EITC)


For families with three or more children, the maximum Earned Income Tax Credit for 2010 and 2011 rises by $628.50. And the phaseout of the credit for joint filers starts at higher income levels in 2010 and 2011, allowing more of them to claim the credit.

Higher Income Limits for Deductible IRAs and for Roth IRAs

If you are covered by a retirement plan at work, you can take a full IRA deduction in 2010 if your modified Adjusted Gross Income is less than $89,000 (married filing jointly) or $55,000 (single or head of household). A partial deduction is allowed until your Adjusted Gross Income reaches $109,000 if you are married filing jointly, or $75,000 if you are single or a head of household. Also, the opportunity to contribute to a Roth IRA is now phased out as your modified Adjusted Gross Income rises between $166,000 and $176,000 if you are married filing jointly, or $105,000 to $120,000 if you are single or a head of household.

Increased Contribution Limit for 401(k) Plans

The maximum employee contribution rises to $16,500 from $15,500 in 2010 for these and similar workplace retirement plans, including 403(b)s and the federal Thrift Savings Plan. Workers age 50 and older in 2010 can put in an additional $5,500 this year, also a $500 increase from 2007. Thus, their maximum contribution is $22,000.

State Tax Exemption

In 2010, the federal estate tax exemption rises to $3,500,000 from its 2008 level of $2,000,000.

Higher Annual Gift Tax Exemption

For 2010, you can give up any individual up to $13,000 without owing any gift tax—a $1,000 increase over 2008.

Exemptions for the Alternative Minimum Tax (AMT)

For 2010, the exemption levels rise to $70,950 for married filing jointly, $46,700 for singles and heads of household, and $35,475 for married couples filing separately. Otherwise, more than 20 million filers would have been added to the AMT rolls. Congress is likely to act again to prevent this from happening for the 2011 tax year. Also, interest on private-activity bonds issued in 2010 and 2011 is exempt from the Alternative Minimum Tax.

Credit for Residential Energy-Efficient Property

The credit for 30 percent of the cost of installing solar water heating equipment, solar electric equipment, geothermal heat pumps or small wind turbines in your primary residence or a second home is no longer limited to $2,000 after 2008. But the credit for fuel cell property still cannot exceed $500 per half-kilowatt capacity.

Credit for Energy-Saving Home Improvements

The old 10 percent tax credit of the cost of energy-saving home improvements is increased to 30 percent for 2010 and 2011, up to a maximum of $1,500 in the two-year period. It applies to qualified skylights, windows, outside doors, biomass fuel stoves and high-efficiency furnaces, water heaters and central air conditioners. In addition, the dollar limits on the particular type of improvement, such as a $200 cap on the credit for windows, are repealed.

Converting a Second Home to a Primary Home

If you convert a second home into a principal residence after 2008, you may not be able to exclude all of your gain. A portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion of up to $500,000, even if the seller meets the two-year ownership-and-use tests. The portion of the profit that’s subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit, to the total time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2011 for two years before selling it, only 10 percent of the gain (two years of nonqualified second home use divided by 20 years of total ownership) is taxed. The rest qualifies for the home-sale exclusion of up to $500,000.

Refundable Child Tax Credit

The $8,500 income threshold needed to qualify to claim the child tax credit if it exceeds your regular income tax bill decreases to $3,000 for 2010.

Partial Exclusion for Unemployment Benefits

For 2010, the first $2,400 of unemployment benefits you receive is tax-free.

College Savings Plans

Beginning in 2010, 529 College Savings Plans can be tapped tax-free to pay for a computer or Internet access.

Estimated Tax Relief for Owners of Small Businesses

If an individual’s Adjusted Gross Income for 2008 was less than $500,000 and more than half of the gross income was from a business with fewer than 500 workers, the estimated income taxes for 2010 estimated tax payments can be based on the lesser of 90 percent of tax liability for 2008 or 2010. The usual estimated tax benchmarks of 100 percent or 110 percent of tax liability do not apply.

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