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Highlights of 2010 Tax Law Changes For Individuals:

Child-Related Tax Changes

Child's Investment Income

The amount of taxable investment income a child can have without it being subject to tax at the parent's rate for 2010 remains the same ($1900) as 2009.

Earned Income for Additional Child Tax Credit

For 2010, the amount your earned income must exceed to claim the additional child tax credit is $3,000.

Expansion of Adoption Credit

For 2010, the adoption credit is refundable, meaning that you may claim it even if you owe no tax. The maximum adoption credit has increased to $13,170. Also, the maximum exclusion from income for benefits under your employer's adoption assistance program has increased to $13,170. These amounts are phased out if your modified AGI is between $182,520 and $222,520. You cannot claim the credit or exclusion if your modified AGI is $222,520 or more.

New Rules for Children of Divorced or Separated Parents

Revocation of release of claim to an exemption. For tax years beginning after July 2, 2008 (the 2009 calendar year for most taxpayers), new rules apply to allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or similar statement. The revocation is effective no earlier than the tax year following the year in which the custodial parent provides, or makes reasonable efforts to provide, the noncustodial parent with written notice of the revocation. Therefore, if the custodial parent provides notice of revocation to the noncustodial parent in 2009, the earliest tax year the revocation can be effective is the tax year beginning in 2010. You can use Part III of Form 8332 for this purpose. You must attach a copy of the revocation to your return for each tax year you claim the child as a dependent as a result of the revocation.

Post-1984 and pre-2009 divorce decree or separation agreement. If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent may be able to attach certain pages from the decree or agreement instead of Form 8332. The decree or agreement must state all three of the following.
The noncustodial parent can claim the child as a dependent without regard to any condition, such as payment of support.
The custodial parent will not claim the child as a dependent for the year.
The years for which the noncustodial parent, rather than the custodial parent, can claim the child as a dependent.

The noncustodial parent must attach all of the following pages of the decree or agreement to his or her tax return.
The cover page (write the other parent's social security number on this page).
The pages that include all of the information identified in items (1) through (3) above.
The signature page with the other parent's signature and the date of the agreement.

Post-2008 divorce decree or separation agreement. Beginning with 2009 tax returns, the noncustodial parent can no longer attach pages from the decree or agreement instead of Form 8332 if the decree or agreement went into effect after 2008. The noncustodial parent will have to attach Form 8332 or similar statement signed by the custodial parent and whose only purpose is to release a claim to exemption. The noncustodial parent must attach the required information even if it was filed with a return in an earlier year.

Decrease in Personal Casualty and Theft Loss Limit

Generally, a personal casualty or theft loss must exceed $100 to be allowed for 2010. This is in addition to the 10% of AGI limit that generally applies to the net loss.

Deduction for New Motor Vehicle Taxes

You can deduct state or local sales or excise taxes (or certain other taxes or fees in a state without a sales tax) paid in 2010 for the purchase of any new motor vehicle(s) after February 16, 2009, and before January 1, 2010.
This deduction can be used to increase the amount of your standard deduction, or you can take it as an itemized deduction.
To use the deduction to increase your standard deduction, use Schedule L. To take the deduction as an itemized deduction, use Schedule A.

Earned Income Credit (EIC)

The following paragraphs explain the changes to the credit for 2010. For details, see Publication 596, Earned Income Credit (EIC).
Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2010 is:
$3,050 if you have one qualifying child,
$5,036 if you have two qualifying children,
$5,666 if you have three or more qualifying children, or
$457 if you do not have a qualifying child.
Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2010. You may be able to take the credit if:
You have three or more qualifying children and you earn less than $43,352 ($48,362 if married filing jointly),
You have two qualifying children and you earn less than $40,363 ($45,373 is married filing jointly),
You have one qualifying child and you earn less than $35,535 ($40,545 if married filing jointly), or
You do not have a qualifying child and you earn less than $13,460 ($18,470 if married filing jointly).
Investment income amount. The maximum amount of investment income you can have and still get the credit is still $3,100 for 2010.
Advance payment of the credit. If you get the advance payments of the credit from your employer with your pay, the total advance payments you get during 2010 can be as much as $1,830.

Economic Recovery Payment

Any economic recovery payment you receive during 2010 is not taxable. These $250 payments were made in 2010 to people who:
Received social security benefits, supplemental security income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits in November 2008, December 2008, or January 2009,
Live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands and,
Did not receive an economic recovery payment in 2009.
If you are married and you and your spouse both meet these requirements, each of you may get a $250 payment.
If you are entitled to a payment, you will get it automatically. You do not need to apply for it. However, any payment you receive will reduce your making work payment credit on Schedule M (Form 1040A or 1040).

Education-Related Tax Changes

Education Savings Bond Exclusion

An individual who redeems qualified U.S. saving Bonds to pay for higher education expenses may be able to exclude interest income from gross income.
For 2010, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (AGI) is between $105,100 and $135,100. You cannot take the exclusion if your modified AGI is $135,100 or more.
For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $70,100 and $85,100. You cannot take the exclusion if your modified AGI is $85,100 or more.
Expanded Definition of Qualified Expenses for Qualified Tuition Programs

The definition of qualified higher education expenses for tax-free distributions from a qualified tuition program is expanded to include amounts paid in 2009 or 2010 for the purchase of computer software, any computer or related peripheral equipment, fiber optic cable related to computer use, and Internet access (including related services) that are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.
For more information, including restrictions on qualifying software, see chapter 9 of the 2009 revision of Publication 970.

Hope and American Opportunity Credits for 2010

For tax year 2010, the following changes have been made to the Hope and American opportunity credits.
The Hope credit is not available for 2010.
The American opportunity credit is available for 2010 and is unchanged from 2009.

Traditional IRA Contribution and Deduction Limit

The contribution limit to your traditional IRA for 2010 will be increased to the smaller of the following amounts:
$5,000, or
Your taxable compensation for the year.
If you were age 50 or older before 2011, the most that can be contributed to your traditional IRA for 2010 will be the smaller of the following amounts:
$6,000, or
Your taxable compensation for the year.

Modified AGI Limit for Retirement Savings Contributions Credit

For 2010, you may be able to claim the retirement savings contributions credit if your modified AGI is not more than:
$55,500 if your filing status is married filing jointly,
$41,625 if your filing status is head of household, or
$27,750 if your filing status is single, married filing separately, or qualifying widow(er).

Residential Energy Credits

Nonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2010. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.
Limitation. The total amount of credit you can claim in 2009 and 2010 is limited to $1,500.

Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.

Standard Mileage Rate

For 2010, the standard mileage rate for the cost of operating your car for business use is 50 cents per mile.
Car expenses and use of the standard mileage rate are explained in chapter 4 of Publication 463, Travel, Entertainment, Gift, and Car Expense.
Medical- and move-related mileage. For 2010, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 16.5 cents per mile.
See Transportation under What Medical Expenses Are Includable in Publication 502 or Travel by car under Deductible Moving Expenses in Publication 521, Moving Expenses.
Charitable-related mileage. For 2010, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Making Work Pay Credit

Most eligible taxpayers qualify for the maximum making work pay credit of $800 for a married couple filing a joint return or $400 for other taxpayers. The credit equals 6.2 percent of earned income up to the maximum amount. Thus, any eligible couple whose earned income is $12,903 or more qualifies for the $800 maximum credit. Other taxpayers qualify for the $400 maximum if their earned income is $6,451 or more.
For most workers, the credit is based on the taxable wages reported to them on Forms W-2. Self-employed individuals figure the credit using the net profit or loss they receive from a business or farm. Additional calculations are necessary for some taxpayers, including those who have net business losses, wages from work performed while a prison inmate or foreign earned income. More information, including a worksheet, can be found in the instructions for Schedule M.
Some taxpayers are not eligible for the making work pay credit, including:
Joint filers whose modified adjusted gross income (MAGI) is $190,000 or more.
Other taxpayers whose MAGI is $95,000 or more.
Anyone who can be claimed as a dependent on someone else’s return.
A taxpayer who doesn’t have a valid social security number.
Joint filers, if neither spouse has a valid Social Security number.
Nonresident aliens.
Other taxpayers qualify for the credit but must reduce the amount of the credit they claim, including:
Joint filers whose MAGI is more than $150,000 but less than $190,000.
Other taxpayers whose MAGI is more than $75,000 but less than $95,000.
Taxpayers who received an economic recovery payment. This special $250 payment was made during 2009 to recipients of Social Security benefits, supplemental security income (SSI), railroad retirement benefits or veterans disability compensation or pension benefits.
Taxpayers who claim the government retiree credit.

Archer Medical Savings Accounts (MSAs)

High Deductible Health Plan (HDHP). For Archer MSA purposes, the minimum annual deductible for an HDHP is $2,000 ($4,050 for family coverage) and the maximum annual deductible is $3,000 ($6,050 for family coverage).

Maximum out-of-pocket expenses. The maximum out-of-pocket expenses limit for Archer MSAs is $4,050 ($7,400 for family coverage).

Health Savings Accounts (HSAs)

High Deductible Health Plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,200 ($2,400 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,950 ($11,900 for family coverage).
Limits on contributions. The maximum HSA contribution increases to $3,050 ($6,150 for family coverage).

Long-Term Care Premiums

Increase in Deductible Limit for Long-Term Care Premiums
For 2010, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).
Age 40 or under - $330.
Age 41 to 50 - $620.
Age 51 to 60 - $1,230.
Age 61 to 70 - $3,290.
Age 71 or over - $4,110.

Increased Standard Deduction

For 2010, you can no longer increase your standard deduction by:
State or local real estate taxes,
New motor vehicles taxes (for vehicles purchased in 2010), or
Disaster losses (for disasters occurring in 2010).
But, you can increase your standard deduction in 2010 if you:
Had a net disaster loss in 2010 occurring in 2008 or 2009 (from Form 4684, line 17), or
Purchased a new motor vehicle after February 16, 2009, and before January 1, 2010, and paid the sales or excise taxes in 2010.
If you increase your standard deduction by either of these items, use Schedule L (Form 1040A or 1040) to figure your standard deduction.
For taxpayers using the head of household filing status, the basic standard deduction has increased to $8,400 for 2010. For other taxpayers, the basis standard deduction is the same as in 2009.

First-Time Homebuyer Credit and Repayment of the Credit

Final Year for Claiming the Credit
For most taxpayers, 2010 is the final year to claim the first-time homebuyer credit. In order to claim the credit for a main home purchased in 2010, taxpayers must have purchased their home:
Before May 1, 2010, or
After April 30, 2010, and before September 1, 2010, and entered into a binding contract before May 1, 2010, to purchase the property before July 1, 2010.

Additional Time to Purchase for Members of the Uniformed Services or Foreign Service and Employees of the Intelligence Community
Members of the uniformed services or Foreign Service and employees of the intelligence community serving outside the United States may have additional time to purchase a home and qualify for the credit. They may claim the credit for a main home purchased in the United States:
Before May 1, 2011, or
After April 30, 2011, and before July 1, 2011, and they entered into a binding contract before May 1, 2011, to purchase the property before July 1, 2011.

Repaying the Credit for a Home Purchased in 2008

If you claimed the credit for a home purchased in 2008 and you owned and used the home as your main home during all of 2010, you must begin repaying that credit with your 2010 tax return. The minimum payment is 1/15 of the original credit received.

Sale of Main Home

Gain from the sale or exchange of the main home is no longer excludable from income if allocable to periods of nonqualified use.
Generally, nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home (with certain exceptions).
A period of nonqualified use does not include:
Any portion of the 5-year period ending on the date of the sale or exchange that is after the last date you (or your spouse) use the property as a main home;
Any period (not to exceed an aggregate period of 10 years) during which you or your spouse is serving on qualified official extended duty:
As a member of the uniformed services,
As a member of the Foreign Service of the United States, or
As an employee of the intelligence community; and
Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.
To figure the portion of the gain that is allocated to the period of nonqualified use, multiply the gain by the following fraction:

Itemized Deductions

The limit on itemized deductions expired in 2010. However, under current law, the limit on itemized deductions will resume in 2011 at pre-2006 levels.
Personal Exemption Amount

The amount you can deduct for each exemption has not changed for 2010. It is still $3,650. But unlike 2009, when you would lose part of your deduction for personal exemptions if your adjusted gross income (AGI) was more than a certain amount, in 2010 you will not lose any part of your deduction for personal exemptions, regardless of the amount of your AGI.

Social Security and Medicare Taxes

The maximum amount of wages subject to the social security tax for 2010 is $106,800. There is no limit on the amount of wages subject to the Medicare tax.