Good News/Bad News—A 1040 Update

Good News/Bad News—A 1040 Update
Gray Easterling

In the January 21 online edition of the Wall Street Journal, there was reference to a Smart Money article on the 2010 Form 1040. The story included highlights of “what’s new” for the 2010 filing season. First good news is that we have until April 18th to file the return because of a District of Columbia holiday. Another helping of good news is that there is no phase out of itemized deductions or exemptions in 2010. In recent years, if your income exceeded certain limits, your itemized deductions—mortgage interest, state and local income and property taxes and charitable donations—plus personal exemptions were reduced or eliminated. With the extension of the Bush tax cuts, these reductions were done away with for 2010, 2011 and 2012. In 2010, expenses connected to adoptions will earn you an increased tax credit—$13,170—which is $1,020 more than 2009. Also, this credit is now refundable.

Here’s something I really like. Self employed individuals can deduct health insurance premiums when calculating self employment income as well as taxable income. The result will be a lower SE tax but unfortunately, this calculation is good for 2010 only, unless Congress extends the ruling for future years. Tthose who claimed a new homebuyer tax credit in 2008 will have to start repaying that credit on the 2010 tax return. One fifteenth (1/15) of the credit is repaid each year. If you claimed the max credit in 2008 ($7,500) you will add $500 to your tax bill in 2010, using Form 5405. In another real estate-related change, you will not be able to deduct state and local property taxes unless you itemize your deductions in 2010, unlike 2008 and 2009. Deductions for sales taxes on new vehicle purchases are gone as are the exclusions for a portion of unemployment benefits. If you think any of these might apply, sit down with your tax advisor and confirm your suspicions.

Income taxes will come into play when planning for retirement income. When you allocate savings between tax-deferred accounts—IRA’s, 401k’s, etc—and regular or “non-qualified” savings and investment accounts, you have to consider where you are going to take distributions from and what the tax consequence will be. Here is what I am writing about. If you take a distribution from an IRA, you will generally pay tax at ordinary income tax rates on the distribution. If you want to net $10,000 and you are in the 20% tax bracket, your gross distribution would be $12,500. If you structure your non-qualified account in a tax efficient manner, you should be able to take $10,000 out for a $10,000 need. There is a $2,500 difference in the remaining account balances, which, over time, could make a difference in the longevity of your available resources. Think about this and consult with your financial and tax advisors so that your retirement assets work to your benefit.

Think about this observation that I found in a recent daily meditation booklet. If you pass a bus stop every day and every morning and you see people getting on the bus, are you witnessing a miracle, or is it just action at a bus stop? Consider this. The miracle is not the bus and its consistent appearance. The miracle is the waiting by the people at the bus stop. Waiting requires faith, and even a little faith is a miracle. To believe in the past or present is not hard, but to have hope for what is not yet come to pass, that only comes by living in the light of a world to come, by living in anticipation of meeting and greeting our Lord and Savior. Have you bought your ticket?

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