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Five Changes That Could Affect Your 2010 Tax Bill

Five tax changes you should know about before filing your 2010 taxesThere's a lot you can be doing now to reduce the taxes you pay next year, based on tax changes for 2011. But did you know it's not too late to reduce the taxes you pay this year, when you file your 2010 return? Here are five changes affecting exclusions, deductions, credits or other tax breaks to help you slash your tax bill for 2010.

1. Inflation Adjustments. While inflation has been low, there have still been some increases to tax brackets. This means you were able to earn more in 2010 than in 2009 without being pushed into a higher tax bracket for 2010.

There have also been adjustments to various income limits on eligibility to claim certain exclusions, deductions and tax credits. For example, the income limits have been adjusted for the retirement savers credit, the exclusion for interest on U.S. savings bonds redeemed for higher education and the earned income credit. Just because you didn't qualify on last year's return doesn't mean you won't qualify in 2010.2. Extended Tax Breaks. Dozens of important tax breaks that expired at the end of 2009 have been extended for 2010. These include the above-the-line deductions for tuition and fees and the $250 educator deduction, the option to deduct state and local sales taxes instead of state and local income taxes for those who itemize, and the deduction for mortgage insurance premiums.

Because Congress did not okay these extensions until late in 2010, the IRS needs more time to adapt their systems. Taxpayers claiming these above-the-line deductions or who itemize their personal deductions cannot e-file before February 14.

Note: Not all expired rules were extended. Don't look for these 2009 breaks on your 2010 return: an additional standard deduction for real estate taxes and net disaster losses, an exclusion from income for some unemployment benefits, and a sales tax deduction on new car purchases.

3. Deferral for Roth IRA Conversion Income. If you converted a traditional IRA to a Roth IRA in 2010, you can automatically defer half of the income from the conversion to 2011 and half to 2012 by not reporting the income on your return. However, if you want to include the income in 2010 -- because it can be offset by a net operating loss or for some other reason -- you can choose to do so.

4. No Phase-Outs for High-Income Taxpayers. In the past, if your income exceeded certain limits, your personal exemptions and itemized deductions were reduced. In 2010, there is no such reduction, so you can enjoy all of the write-offs you're entitled to.

5. Alternative Minimum Tax (AMT) Relief. The AMT exemption for 2010 is increased to $72,450 for taxpayers filing jointly, $47,450 for single taxpayers and those filing as head of households, and $36,225 for married couples filing separately; this keeps more taxpayers from having to pay this tax. What's more, nonrefundable personal credits -- such as the dependent care credit, the credit for buying a hybrid car and the home energy property credit -- can be used to offset not only regular tax but also the AMT.

If, for any reason, you can't file your 2010 by April 18, 2011, just ask for a filing extension to avoid late filing penalties. This will give you until Oct. 17, 2011, to file the return and avoid late-filing penalties. Use IRS Form 4868, which can be filed electronically or by paper. But the filing extension does not give you more time to pay your taxes, so pay as much as you think you'll owe.

Barbara Weltman is an attorney and author of books such as J.K. Lasser's 1001 Deductions and Tax Breaks and The Complete Idiot's Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day®and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter, @BarbaraWeltman.

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