Tax Law Changes : Tax-Year 2010 Individuals

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Affordable Care Act Tax Provisions

Información en Español: Disposiciones del Acta del Cuidado de Salud de Bajo Precio

The Affordable Care Act was enacted on March 23, 2010. It contains some tax provisions that take effect this year and more that will be implemented during the next several years. The following is a list of provisions now in effect; additional information will be added to this page as it becomes available.

Small Business Health Care Tax Credit

This new credit helps small businesses and small tax-exempt organizations afford the cost of covering their employees and is specifically targeted for those with low- and moderate-income workers. The credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. Learn more by browsing our page on the Small Business Health Care Tax Credit for Small Employers.

Changes to Flexible Spending Arrangements

Effective Jan. 1, 2011, the cost of an over-the-counter medicine or drug cannot be reimbursed from Flexible Spending Arrangements or health reimbursement arrangements unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan. A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs). Employers and employees should take these changes into account as they make health benefit decisions for 2011.

For more information, see news release IR-2010-95, Notice 2010-59, Revenue Ruling 2010-23 and our questions and answers.

FSA and HRA participants can continue using debit cards to buy prescribed over-the-counter medicines, if requirements are met. For more information, see news release IR-2010-128 and Notice 2011-5.

IRS partners can spread the word to their clients with the help of a Health Plan Changes flyer and a drop-in article, Does your Healthcare Program need a checkup?

Health Coverage for Older Children

Health coverage for an employee's children under 27 years of age is now generally tax-free to the employee. This expanded health care tax benefit applies to various work place and retiree health plans. These changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit. This also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return. Learn more by reading our news release or this notice.

Excise Tax on Indoor Tanning Services — First Quarterly Payment Due Nov. 1, 2010

A 10-percent excise tax on indoor UV tanning services went into effect on July 1, 2010. The first payment of the tax was due Monday, Nov. 1. Payments are made along with Form 720, Quarterly Federal Excise Tax Return. The tax doesn't apply to phototherapy services performed by a licensed medical professional on his or her premises. There's also an exception for certain physical fitness facilities that offer tanning as an incidental service to members without a separately identifiable fee. For more information on the tax and how it will be administered, see our news release, video, questions and answers and legal guidance.

Employer-Provided Health Coverage — Not Taxable; Reporting Requirement Optional in 2011

Starting in tax year 2011, the Affordable Care Act requires employers to report the value of the health insurance coverage they provide employees on each employee's annual Form W-2. However, to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with this requirement, the IRS will defer the reporting requirement for 2011, making that reporting by employers optional in 2011.

The revised Form W-2 for 2011 is now available in draft for viewing. This is the W-2 that most employees will receive in early 2012. The draft form includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan.

This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee's income, and it is not taxable.

For information, see our news release, draft form and guidance.

Adoption Credit

The Affordable Care Act raises the maximum adoption credit to $13,170 per child, up from $12,150 in 2009. It also makes the credit refundable, meaning that eligible taxpayers can get it even if they owe no tax for that year. In general, the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney's fees and travel expenses. Income limits and other special rules apply. In addition to filling out Form 8839, Qualified Adoption Expenses, eligible taxpayers must include with their 2010 tax returns one or more adoption-related documents.

For more information, see our news release, questions and answers, flyer, Notice 2010-66, Revenue Procedure 2010-31 and Revenue Procedure 2010-35.

Qualified Therapeutic Discovery Project Program

This program was designed to provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support U.S. jobs and increase U.S. competitiveness. Applicants were required to have their research projects certified as eligible for the credit or grant. IRS guidance describes the application process.

Submission of certification applications began June 21, 2010, and applications had to be postmarked no later than July 21, 2010, to be considered for the program. Applications that were postmarked by July 21, 2010, were reviewed by both the Department of Health and Human Services (HHS) and the IRS. All applicants were notified by letter dated October 29, 2010, advising whether or not the application for certification was approved. For those applications that were approved, the letter also provided the amount of the grant to be awarded or the tax credit the applicant was eligible to take.

The IRS published the names of the applicants whose projects were approved as required by law. Listings of results are available by state.

Learn more by reading the IRS news release, the news release issued by the U.S. Department of the Treasury, the page on the HHS website and our questions and answers.

Group Health Plan Requirements

The Affordable Care Act establishes a number of new requirements for group health plans. Interim guidance on changes to the nondiscrimination requirements for group health plans can be found in Notice 2011-1, which provides that employers will not be subject to penalties until after additional guidance is issued. Other information on requirements is available on the websites of the Departments of Health and Human Services and Labor and in additional guidance.

Medicare Part D Coverage Gap "donut hole" Rebate

The Affordable Care Act provides a one-time $250 rebate in 2010 to assist Medicare Part D recipients who have reached their Medicare drug plan's coverage gap. This payment is not taxable. This payment is not made by the IRS. More information can be found at www.medicare.gov.

Additional Requirements for Tax-Exempt Hospitals

The Affordable Care Act adds requirements in the Internal Revenue Code that tax-exempt hospitals must meet to maintain their tax-exempt status. More information can be found in Notice 2010-39, which solicits written comments on the application of the new requirements. Comments must have been submitted by July 22, 2010.

Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers

The Affordable Care Act created an annual fee payable beginning in 2011 by certain manufacturers and importers of brand name pharmaceuticals. More information can be found in Notice 2010-71, which provides proposed guidance and solicits comments on the new fee, and on Form 8947, Report of Branded Prescription Drug Information.

Modification of Section 833 Treatment of Certain Health Organizations

The Affordable Care Act amended section 833 of the Code, which provides special rules for the taxation of Blue Cross and Blue Shield organizations and certain other organizations that provide health insurance. Guidance can be found in Notice 2011-04, which provides procedures for a taxpayer to obtain automatic consent to change its method of accounting for unearned premiums.

Limitation on Deduction for Compensation Paid by Certain Health Insurance Providers

The Affordable Care Act amended section 162(m) of the Code to limit the compensation deduction available to certain health insurance providers. The amendment goes into effect for taxable years beginning after Dec. 31, 2012, but may affect deferred compensation attributable to services performed in a taxable year beginning after Dec. 31, 2009. Initial guidance on the application of this provision can be found in Notice 2011-2, which also solicits comments on the application of the amended provision.

For More Information

For tips, fact sheets, questions and answers, videos and more, see our Affordable Care Act of 2010: News Releases, Multimedia and Legal Guidance page.

Last Updated: December 27, 2010

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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.

Earned Income for Additional Child Tax Credit
For 2010, the amount your earned income must exceed to claim the additional child tax credit remains the same.

Expansion of Adoption Credit
For 2010, the maximum adoption credit and maximum exclusion from income under your employer's adoption assistance program have increased. The credit is now refundable.

New Rules for Children of Divorced or Separated Parents
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 or similar form.

Last Updated: November 14, 2010

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COBRA Premium Assistance

There are changes to the COBRA premium assistance provisions. To be eligible for COBRA premium assistance, you must be a qualified beneficiary as a result of an involuntary termination that occurred during the period beginning on September 1, 2008, and ending on May 31, 2010 (a 5 month extension of the original period). In addition, you are eligible for the premium assistance for a maximum period of 15 months (increased from 9 months) after the first month for which the premium assistance applies to you. There are also special rules for individuals who lost their health coverage because of a reduction in work hours. For more information on COBRA premium assistance, see Publication 502.

Last Updated: November 11, 2010

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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.

Last Updated: November 09, 2010

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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 (Form 1040A or 1040). To take the deduction as an itemized deduction, use Schedule A (Form 1040).

Last Updated: November 09, 2010

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Earned Income Credit (EIC)

2010 Changes

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.

Last Updated: October 28, 2010

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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).

Last Updated: November 09, 2010

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Education-Related Tax Changes

Education Savings Bond Exclusion
Modified adjusted gross income phaseout amounts have increased for 2010.

Expanded Definition of Qualified Expenses for Qualified Tuition Programs
For tax years 2009 and 2010, the definition of qualified higher education expenses from a qualified tuition program is expanded.

Hope and American Opportunity Credits for 2010
The American opportunity credit is available for 2010, but not the Hope credit.

Last Updated: November 13, 2010

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Health/Medical-Related Tax Changes

Archer Medical Savings Accounts (MSAs)
For 2010 and 2011, the minimum annual deductible, maximum annual deductible, and the maximum out-of-pocket expenses limit have increased.

Health Flexible Spending Arrangements (FSAs)
A special rule allows amounts in a health FSA to be distributed to reservists ordered or called to active duty.

Health Savings Accounts (HSAs)
The minimum/maximum annual deductible, out-of-pocket expenses, and maximum contribution amounts have increased for 2010 and 2011.

Long-Term Care Premiums
For 2010, the maximum amount of qualified long-term care premiums includible as medical expenses has increased.

Last Updated: November 17, 2010

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Income Averaging for Farmers and Fisherman

Exxon Valdez litigation. If you received qualified settlement income made up of interest and punitive damages in connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska), you may treat this settlement payment as income from a fishing business for the purpose of income averaging. You are eligible to make this election only if you are a plaintiff in the civil action or you were a beneficiary of the estate of your spouse or a close relative who was such a plaintiff from whom you acquired the right to receive qualified settlement income. See the Instructions for Schedule J (Form 1040).

Averaging farming and fishing income. The four items discussed below are effective for tax years beginning after July 22, 2008. However, you may apply any of these provisions to tax years beginning after December 31, 2003, and before July 23, 2008, if those provisions are consistently applied in each tax year. For more information, see Treasury Decision (T.D.) 9417, 2008-37 I.R.B. 693.

Farming and fishing business. If you operate both a farming and fishing business, you combine the income, gains, deductions, and losses from both businesses to figure the amount of income eligible for income averaging.

Lessors of fishing boats. You are treated as being in a fishing business if you lease a boat and your lease payments are based on a share of the catch (or a share of the proceeds from the sale of the catch) from the lessee's use of the boat, but only if this manner of payment is determined under a written lease agreement entered into before the lessee begins significant fishing activities resulting in the catch.

Crew members on fishing boats. Crew members on a commercial fishing vessel are engaged in the fishing business for purposes of income averaging if their compensation is based on a share of the boat's catch or a share of the proceeds from the sale of the catch. The compensation of such a crew member is treated as income from a fishing business, whether or not he or she is treated as an employee for employment tax purposes.

Merchant Marine Capital Construction Fund (CCF) deposits. If you reduced your taxable income on Form 1040, line 43, or Form 1040NR, line 41, by any amount deposited into a CCF account, take into account the CCF reduction in figuring taxable income for income averaging purposes. Also, the CCF reduction is generally treated as a deduction attributable to your fishing business in figuring elected farm income. However, if any taxable income (without regard to the carryback of any net operating or net capital loss) from the operation of agreement vessels in the fisheries of the United States or in the foreign or domestic commerce of the United States is not attributable to your fishing business, that amount does not reduce elected farm income.

Last Updated: November 09, 2010

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Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion

2010

The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2010 to $290 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.

Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.

  • The cost of qualified long-term care services during the period.
  • The dollar amount for the period ($290 per day for any period in 2010).

See section C of Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, and its instructions for more information.

Last Updated: November 11, 2010

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Increased Standard Deduction

2010 Changes

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.

Last Updated: November 09, 2010

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Information on Home/Residence-Related Tax Changes

First-Time Homebuyer Credit and Repayment of the Credit
If you are a first-time homebuyer you may be able to claim a one-time tax credit.

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.

Special Rule for Uniformed or Foreign Service Members, Peace Corps Employees and Volunteers, and Employees of the Intelligence Community
If you serve in one of these groups and sell your main home, you may be able to exclude the gain from income even if you don't meet the 5-year ownership and use test.

Last Updated: November 12, 2010

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Itemized Deductions

2010

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.

Last Updated: November 09, 2010

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Personal Exemption Amount

2010 Changes

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.

Last Updated: November 09, 2010

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Qualified Transportation Fringe Benefits

For calendar year 2010, the monthly exclusion for commuter highway vehicle transportation and transit passes is $230. The monthly exclusion for qualified parking is $230

For calendar year 2010, the exclusion for reasonable expenses of qualified bicycle commuting is $20 multiplied by the number of qualified bicycle commuting months during that year. Reasonable expenses include the purchase of a bicycle and bicycle improvements, repair, and storage. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your residence and place of employment and you do not receive any of the other qualified transportation fringe benefits. You are not entitled to this exclusion if the reimbursement for bicycle commuting is made under a compensation reduction agreement.

Last Updated: October 13, 2010

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Residential Energy Credits

2010

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.

Last Updated: November 09, 2010

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Social Security and Medicare Taxes

2010 Changes

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.

2011 Changes

The maximum amount of wages subject to the social security tax for 2011 is $106,800. There is no limit on the amount of wages subject to the Medicare tax.

Last Updated: November 16, 2010

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Special Limitation Period for Retroactively Excluding Military Retirement Pay

If you retire from the armed services based on years of service and are later given a retroactive service-connected disability rating by the VA, your retirement pay for the retroactive period is excluded from income up to the amount of VA disability benefits you would have been entitled to receive. You can claim a refund of any tax paid on the excludable amount (subject to the statute of limitations) by filing an amended return on Form 1040X for each previous year during the retroactive period.

Generally, under the statute of limitations a claim for credit or refund must be filed within 3 years from the time a return was filed or 2 years from the time the tax was paid, whichever period expires later. However, if you receive a retroactive service-connected disability rating determination, the statute of limitations is extended for 1 year beginning on the date of the determination. The extension applies to claims for credit or refund filed after June 17, 2008, and does not apply to any tax year that began more than 5 years before the date of the determination.

Example. You retired in 2005 and receive a pension based on your years of service. On August 6, 2010, you receive a determination of service-connected disability retroactive to 2005. Generally, you could claim a refund for the taxes paid on your pension for 2007, 2008, and 2009. However, under the special limitation period, you can also file a claim for 2006 as long as you file the claim by August 5, 2011. You cannot file a claim for 2005 because that tax year began on January 1, 2005, which is more than 5 years before date of the determination.

Last Updated: October 25, 2010

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Standard Mileage Rate

2010

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 Expenses.

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.

Last Updated: October 25, 2010

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Wage Threshold for Household Employees

2009 Changes

The social security and Medicare wage threshold for household employees is $1,700 for 2009. This means that if you pay a household employee cash wages of less than $1,700 in 2009, you do not have to report and pay social security and Medicare taxes on that employee's 2009 wages. For more information, see Social security and Medicare wages in Publication 926, Household Employer's Tax Guide.

2010 Changes

The social security and Medicare wage threshold for household employees remains at $1,700 for 2010. This means that if you pay a household employee cash wages of less than $1,700 in 2010, you do not have to report and pay social security and Medicare taxes on that employee's 2010 wages. For more information, see Social security and Medicare wages in Publication 926, Household Employer's Tax Guide.

Last Updated: December 29, 2009

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Upcoming Tax Dates

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If you received $20 or more in tips during July, report them to your employer - Details

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