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Wednesday, October 6, 2010

Low Inflation Adds Up To Meager Cost-Of-Living Adjustments for 2010


On October 15, 2009, the IRS released various rates, limits and other inflation-indexed amounts for 2010. Not surprisingly, given low inflation (deflation in some cases), many amounts will be the same for 2010 as they are in 2009. Those that are increasing are doing so by only small increments.

Individual Income Taxes

The income tax brackets will change minimally. For example, the top of the 10% bracket increases by only $0 to $50, depending on filing status, for 2010. The top of the 33% bracket increases by only $700 ($350 for married filing separately). These low increases mean that taxpayers who are fortunate enough to earn more in 2010 could more easily be pushed into a higher tax bracket.

2010 ordinary income tax bracket

Tax rate

Single

Head of household

10%

             $0 - $8,375

            $0 - $11,950

15%

     $8,375 - $34,000

    $11,950 - $45,550

25%

   $34,000 - $82,400

  $45,550 - $117,650

28%

 $82,400 - $171,850

$117,650 - $190,550

33%

$171,850 - $373,650

$190,550 - $373,650

35%

         Over $373,650

         Over $373,650

 

2010 ordinary income tax bracket

Tax rate

Married filing
jointly or surviving
spouse

Married filing
separately

10%

$0 - $16,750

$0 - $8,375

15%

$16,750 - $68,000

$8,375 - $34,000

25%

$68,000 - $137,300

$34,000 - $68,650

28%

$137,300 - $209,250

$68,650 - $104,625

33%

$209,250 - $373,650

$104,625 - $186,825

35%

Over $373,650

Over $186,825

Additionally, the personal and dependency exemption will remain at $3,650 for 2010. The sting will be less, however, for higher-income taxpayers, because the income-based personal exemption phaseout that may have reduced their exemptions in previous years is, under 2001 legislation, eliminated for 2010. These taxpayers may enjoy additional relief, because the itemized deduction phaseout is also eliminated for 2010.

Education- and Child-related Breaks

Most education- and child-related tax breaks are limited based on the taxpayer's modified adjusted gross income (MAGI), and the MAGI phaseout ranges remain the same or increase only slightly for 2010, depending on the break. Taxpayers whose MAGIs are within the applicable phaseout range are eligible for a partial break; breaks are eliminated for those whose MAGIs exceed the top of the range.

For example, the MAGI phaseout ranges for the American Opportunity education credit remain the same for 2010: $160,000 - $180,000 for married couples filing jointly, $80,000 - $90,000 for other filers. The MAGI phaseout ranges for the Lifetime Learning credit also remain the same for 2010: $100,000 - $120,000 for joint filers, $50,000 - $60,000 for other filers. Keep in mind that, if your MAGI is too high for you to qualify for these credits, your children may qualify.

The MAGI phaseout range for the adoption credit, on the other hand, increases slightly (by $340) to $182,520 - $222,520 for 2010. The maximum adoption credit increases by only $20, to $12,170. Check with your tax advisor for information on other education- and child-related breaks of interest to you.

Retirement Plans

Retirement-plan-related limits will generally remain the same for 2010. According to the IRS, since the cost-of-living index for the quarter ended September 30, 2009, was less than that for the quarter ended September 30, 2008, and under the law a reduced index can't reduce limits.

 

Type of limitation

2010 limit

Elective deferrals to 401(k), 403(b),
457(b)(2), and 457(c)(1) plans

$16,500

Annual benefit for defined benefit plans

$195,000

Contributions to defined contribution plans

$49,000

Contributions to SIMPLEs

$11,5000

Contributions to IRAs

$5,000

Catch-up contributions to 401(k), 403(b),
457(b)(2), and 457(c)(1) plans

$5,500

Catch-up contributions to SIMPLEs

$2,500

Catch-up contributions to IRAs

$1,000

Compensation for benefit purposes for
qualified plans and SEPs

$245,000

Compensation for SEP coverage

$550

Highly compensated employee threshold

$110,000

Social Security taxable wage base

$106,800

MAGI phaseout ranges apply to the deductibility of contributions to traditional IRAs if the taxpayer (or his or her spouse) participates in an employer-sponsored retirement plan. Taxpayers with MAGIs within the applicable range can deduct a partial contribution; those with MAGIs exceeding the top of the range can take no deduction.

For married taxpayers filing jointly who both participate in an employer-sponsored plan, the phaseout range remains the same for 2010: $89,000 - $109,000. If only one spouse participates, the phaseout range increases by $1,000, to $167,000 - $177,000. For single and head-of-household taxpayers participating in an employer-sponsored plan, the phaseout range also increases by $1,000, to $56,000 - $66,000.

If you (or your spouse) participate in an employer-sponsored plan and your income exceeds the applicable MAGI limit, you can make nondeductible IRA contributions up to the applicable IRA contribution limit (reduced by any Roth IRA contributions you make).

You can contribute to a Roth IRA regardless of whether you participate in an employer-sponsored plan, but MAGI limits do apply. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution if it exceeds the top of the range. For married taxpayers filing jointly, the 2010 phaseout range increases by $1,000, to $167,000 - $177,000. For single and head-of-household taxpayers, the phaseout range remains the same: $105,000 - $120,000.

Gift and Estate Taxes

The annual gift tax exclusion will remain at $13,000 for 2010. Even if inflation rates had been higher, this amount likely would have remained the same because it's increased only in $1,000 increments and it just increased from $12,000 to $13,000 for 2009.

Uncertainty about what will happen with other gift and estate tax exemptions remains. Under current law, the estate tax and generation-skipping transfer taxes are scheduled to be repealed for 2010, and the gift tax is scheduled to remain, with a $1 million exemption but at a lower, 35% rate. It's expected that Congress will pass legislation by the end of this year repealing the repeal, perhaps extending the $3.5 million estate and GST tax exemption and top 45% rate for 2010.

Smart Tax Planning will be Especially Important

The minimal inflation adjustments for 2010 could mean higher taxes for those whose income increases even slightly next year. So smart tax planning will be especially important. You may be able to implement year end tax strategies now that can help you avoid being pushed into a higher tax bracket next year. And you won't want to wait until the end of next year to start thinking about planning for your 2010 taxes. Instead, start planning January 1, 2010.

 

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