2010 INFLATION ADJUSTMENTS (INDIVIDUAL TAXPAYERS)

Standard Deduction Amounts. The standard deduction amounts specified by §63(c) are adjusted annually for inflation. The standard deduction for married taxpayers filing a joint return is specified by law to be twice the standard deduction for single taxpayers [§63(c)(2)]. After adjustment, the 2010 standard deduction amounts will be as follows (2009 amounts for comparison):

2010 a 2009 a

Single individual $ 5,700$ 5,700

Married, filing joint and Surviving spouse 11,400 11,400

Head of household 8,400 8,350

Married, filing separate 5,700 5,700

Additional Standard Deductions for Elderly and Blind. For a taxpayer (and spouse) who is elderly (age 65 or over) or blind, the following applies [§63(f)]:

1.Unmarried Taxpayer: An additional $1,400 (unchanged from 2009) standard deduction is allowed ($2,800 for a taxpayer who is both elderly and blind).

2.Married Taxpayer: An additional $1,100 (unchanged from 2009) standard deduction is allowed ($2,200 for a taxpayer who is both elderly and blind).

Limitation for Dependents. If an individual may be claimed as a dependent on another taxpayer’s return, the basic standard deduction is limited [§63(c)(5)]. For dependents with earned income (but total income less than the basic standard deduction), a slightly increased standard deduction (of up to $250) is available. Both the limited standard deduction ($500) and the additional earned income standard deduction ($250) are indexed annually for inflation. In 2010, a dependent’s basic standard deduction is limited to the lesser of:

1.The basic standard deduction for single taxpayers ($5,700); or

2.The greater of:

a.$950 (unchanged from 2009); or

b.The dependent’s earned income plus $300 (unchanged from 2009).

Exemption Amount. After adjustment for inflation, the 2010 exemption amount will be $3,650 (unchanged from 2009). The 1989 exemption amount of $2,000 is used as the base.

Exemption Phaseout and Overall Limitation on Itemized Deductions. The exemption phaseout (§151(d)(3)) and the overall limitation on itemized deductions (§68) – which have been part of the Internal Revenue Code since 1990 – terminate on December 31, 2009. As a result, neither of these “stealth taxes” will impact 2010 tax returns.

Annual Gift Tax Exclusion

Since 1999, the annual gift tax exclusion is subject to an inflation adjustment, with any increase rounded down to the nearest $1,000 multiple. For 2010, the annual gift tax exclusion will be $13,000 (unchanged from 2009).

2010 Tax Rate Schedules. The 2010 tax rate schedules are as follows:

Single [§1(c)]:

If taxable income is: The tax is:

Not over $8,375 ...... 10% of taxable income.

Over $8,375 but not over $34,000 . . . . .$837.50, plus 15% of the excess over $8,375.

Over $34,000 but not over $82,400 . . . .$4,681.25, plus 25% of the excess over $34,000.

Over $82,400 but not over $171,850 . . . $16,781.25, plus 28% of the excess over $82,400.

Over $171,850 but not over $373,650 . .$41,827.25, plus 33% of the excess over $171,850.

Over $373,650 ...... $108,421.25, plus 35% of the excess over $373,650.

Head of Household [§1(b)]:

If taxable income is: The tax is:

Not over $11,950 ...... 10% of taxable income.

Over $11,950 but not over $45,550 . . . .$1,195.00, plus 15% of the excess over $11,950.

Over $45,550 but not over $117,650 . . . $6,235.00, plus 25% of the excess over $45,550.

Over $117,650 but not over $190,550 . . $24,260.00 plus 28% of the excess over $117,650.

Over $190,550 but not over $373,650 . .$44,672.00, plus 33% of the excess over $190,550.

Over $373,650 ...... $105,095.00, plus 35% of the excess over $373,650.

Married, Filing Joint and Surviving Spouse [§1(a)]:

If taxable income is: The tax is:

Not over $16,750 ...... 10% of taxable income.

Over $16,750 but not over $68,000 . . . .$1,675.00, plus 15% of the excess over $16,750.

Over $68,000 but not over $137,300 . . .$9,362.50, plus 25% of the excess over $68,000.

Over $137,300 but not over $209,250 . . $26,687.50, plus 28% of the excess over $137,300.

Over $209,250 but not over $373,650 . .$46,833.50, plus 33% of the excess over $209,250.

Over $373,650 ...... $101,085.50, plus 35% of the excess over $373,650.

Married, Filing Separate [§1(d)]:

If taxable income is: The tax is:

Not over $8,375 ...... 10% of taxable income.

Over $8,375 but not over $34,000 . . . . .$837.50, plus 15% of the excess over $8,375.

Over $34,000 but not over $68,650 . . . .$4,681.25, plus 25% of the excess over $34,000.

Over $68,650 but not over $104,625 . . . . $13,343.75, plus 28% of the excess over $68,650.

Over $104,625 but not over $186,825 . . .$23,416.75, plus 33% of the excess over $104,625.

Over $186,825 ...... $50,542.75, plus 35% of the excess over $186,825.

Estates and Trusts [§1(e)]:

If taxable income is: The tax is:

Not over $2,300 ...... 15% of taxable income.

Over $2,300 but not over $5,350 ...... $345.00, plus 25% of the excess over $2,300.

Over $5,350 but not over $8,200 ...... $1,107.50, plus 28% of the excess over $5,350.

Over $8,200 but not over $11,200 . . . . . $1,905.50, plus 33% of the excess over $8,200.

Over $11,200 ...... $2,895.50 plus 35% of the excess over $11,200.

Unearned Income of Minor Children

Net Unearned Income. For 2010, net unearned income is computed as follows [§1(g)(4)]:

Unearned Income

Less:$950 (unchanged from 2009)

Less:The greater of:

(1)$950 of the standard deduction (or $950 of itemized deductions) [unchanged from

2009]

OR

(2)The amount of allowable deductions that are directly connected with the

production of the unearned income

Equals: Net Unearned Income

If net unearned income is $-0- (or negative), the child’s tax is computed without regard to this provision.

Election To Place Unearned Income on Parent’s Return. If certain requirements are met, a parent may elect to include the unearned income of a minor child on their return (using Form 8814). In 2010, the §1(g)(7) election can be made if a child has gross income (exclusively from interest and dividends) between $950 and $9,500 (unchanged from 2009) and the other requirements of §1(g)(7)(A) are met.

Alternative Minimum Tax Exemption. Minor children with unearned income face a reduced alternative minimum tax (AMT) exemption amount [§59(j)]. In general, the AMT exemption is limited to the child’s earned income plus $5,000 (but no more than the AMT exemption for single taxpayers). The $5,000 amount is subject to an annual inflation adjustment and rounded to the nearest $50 multiple. In 2010, the addition to earned income will be $6,700 (unchanged from 2009).

Child Tax Credit

The $1,000 child tax credit is refundable to the extent of 15 percent of the taxpayer’s earned income in excess of $10,000. The $10,000 earned income floor is adjusted for inflation each year and rounded to the nearest $50 multiple. Although normally this $10,000 earned income floor is adjusted for inflation each year and rounded to the nearest $50 multiple, the American Recovery and Reinvestment Act of 2009 reduced this threshold to $3,000 for 2009 and 2010.

Earned Income Credit

The earned income tax credit (EITC) authorized by §32 is determined by multiplying an inflation-adjusted maximum amount of earned income by a specified credit percentage (based on the number of qualifying children). The credit is reduced by a specified percentage of income over an inflation-adjusted phaseout amount. For married taxpayers filing a joint return, the phaseout base amount is normally increased by $3,000 (after adjustment for inflation). However, the American Recovery and Reinvestment Act (ARRA) of 2009, the $3,000 base amount is increased to $5,000 in 2009 and 2010 and this amount is adjusted for inflation in 2010. In addition, the ARRA of 2009 added an additional taxpayer category (three or more children) with a credit base of 45 percent. The income used for this phaseout is the greater of a taxpayer’s AGI or earned income. Finally, “investment” income in excess of a specified inflation-adjusted target disqualifies an individual from the EITC [§32(i)(1) and (2)].

The maximum earned income and phaseout base amounts (which are to be used for inflation adjustment purposes) are specified in §32(b)(2). Base amounts determined in the inflation calculations are then rounded to the nearest $10 multiple. The inflation-adjusted disqualified income amount is rounded down to the nearest $50 multiple.

The earned income tax credit percentages and phaseout percentages are specified in §32(b)(1). The earned income base amounts and phaseout information are as follows for 2010:

Tax Number of Earned Income Credit Maximum Phaseout Phaseout Phaseout Ends

Year Qualifying Children Base Amount Percentage Credit Base Percentage at Income of

2010 Married, Filing Joint:

No children $ 5,980 7.65 $ 457 $12,490 7.65 $ 18,470

One child 8,970 34.00 3,050 21,460 15.98 40,545

Two children 12,590 40.00 5,036 21,460 21.06 45,372

Three or more children 12,590 45.00 5,666 21,460 21.06 48,362

Other Taxpayers:

No children $ 5,980 7.65 $ 457 $ 7,480 7.65 $ 13,460

One child 8,970 34.00 3,050 16,450 15.98 35,535

Two children 12,590 40.00 5,036 16,450 21.06 40,363

Three or more children 12,590 45.00 5,666 16,450 21.06 43,352

In 2010, the §32(i) disqualified income amount will be $3,100 (unchanged from 2009).

Adoption Expenses Credit and Employer-Provided Adoption Assistance Exclusion

Specified adoption expenses qualify for a tax credit. The tax credit covers the first $10,000 of adoption expenses paid by a taxpayer. The available credit is phased out ratably over a range of $40,000 for taxpayers whose modified AGI exceeds $150,000. Both the $10,000 ceiling on qualified expenses and the $150,000 modified AGI phaseout target are adjusted annually for inflation (and rounded to the nearest $10 multiple). In 2010, the first $12,170 of adoption expenses will qualify for the credit (up from $12,150 in 2009) and the credit will begin to phase out when a taxpayer’s AGI exceeds $182,520 (up from $182,180 in 2009). If employers provide adoption assistance, an income exclusion is available to the employee. In 2010, the total income exclusion available is $12,170 per child (up from $12,150 in 2009).

Educational Savings Bonds

This tax exclusion is subject to a phaseout which is tied to the taxpayers modified AGI. After adjustment for inflation, the AGI base amounts for 2010 and 2009 are:

2010 2009 a

Married, filing joint$105,100 $104,900

Single (including Head of household)$ 70,100 $ 69,950

American Opportunity and Lifetime Learning Credits

The American Recovery and Reinvestment Act of 2009 replaced the HOPE scholarship credit [§25A(b)] with the American Opportunity tax credit for 2009 and 2010 [§25A(i)].

Phaseout of Credits. Both education credits are subject to a phaseout that is tied to the taxpayer’s modified AGI [§25A(d)(3)]. The phaseout bases differ for 2009 and 2010. The American Opportunity credit amount is phased out beginning when the taxpayer’s modified AGI reaches $80,000 ($160,000 for married taxpayers filing jointly). These amounts are not adjusted for inflation. The lifetime learning credit phaseout is adjusted for inflation annually. For 2010, the lifetime learning credit will be phased out beginning when the taxpayer’s modified AGI reaches $50,000 ($100,000 for married taxpayers filing jointly). These amounts are unchanged from 2009.

Education Loan Interest

Up to $2,500 of interest expense paid on qualified education loans may be deducted for AGI. The deduction is subject to a phaseout for taxpayers whose modified AGI [§221(b)(2)(C)] exceeds specified targets. After adjustment for inflation, the AGI base amounts for 2010 and 2009 are:

2010 2009 a

Married, filing joint$120,000 $120,000

Single (including Head of household)$ 60,000 $ 60,000

Qualified Transportation Fringe Benefits

Qualified transportation fringe benefits consist of expenses related to (1) transportation in a commuter highway vehicle between the employee's residence and the place of employment, (2) a transit pass, and (3) qualified parking. Statutory dollar limits are placed on the exclusion amount. Categories 1. and 2., above, are combined and limited to a maximum of $100 per month. Category 3. has a separate limit of $175 per month. Both of these dollar limits are adjusted annually for inflation and rounded down to the nearest multiple of $5. After adjustment for inflation, the 2010 and 2009 limitations are:

2010 2009 a

Commuter vehicle/transit pass$ 120 $ 120

Qualified parking$ 230 $ 230

Medical Savings Accounts

Medical savings accounts are available to employees covered under a “high-deductible” plan of a small employer and to certain self-employed individuals. The “high-deductible” plan definition includes amounts that are adjusted for inflation. For 2010, a “high-deductible” plan is a health plan with the following deductibles and limitations on out-of-pocket expenses:

1.Individual Coverage. An annual deductible of at least $2,000 and not more than $3,000 (unchanged from 2009) and maximum out-of-pocket expenses for covered benefits not exceeding $4,050 (up from $4,000 in 2009).

2.Family Coverage. An annual deductible of at least $4,050 and not more than $6,050 (up from $4,000 and $6,050 in 2009) and maximum out-of-pocket expenses for covered benefits not exceeding $7,400 (up from $7,350 in 2009).

Health Savings Accounts

Health savings accounts (HSA) can be established by individuals who are covered by a high deductible health plan and not covered under any other health plan which is not a high deductible health plan [§223(c)]. The Tax Relief and Health Care Act of 2006 made several changes to the HSA provisions (including changing the inflation adjustment year-end from August 31st to March 31st). Inflation-adjusted figures for 2009 were released by the Internal Revenue Service in May 2009 (Rev. Proc. 2009-29). In 2010, a high deductible health plan is one with an annual deductible of at least $1,200 for individual coverage ($2,400 for family coverage) and maximum out-of-pocket expenses of $5,950 for individual coverage ($11,900 for family coverage). The 2009 amounts are $1,150, $2,300, $5,800, and $11,600, respectively.

The maximum annual contribution to a health savings account is the sum of the limits determined separately for each month, based on status, eligibility and health plan coverage as of the first day of the month. For 2010, the maximum monthly contribution for eligible individuals with self-only coverage under a high deductible health plan is 1/12 of $3,050 (up from $3,000 in 2009). For eligible individuals with family coverage under a high deductible health plan, the maximum monthly contribution is 1/12 of $6,150 (up from $5,950 in 2009).

Long-Term Care Insurance Premiums

Long-term care insurance premiums that do not exceed specified dollar limits based on the insured’s age qualify as a medical expense. The dollar limits are adjusted for inflation by comparing the medical care component of each August’s CPI-U to the August 1996 CPI-U medical care component. Any increase is rounded to the nearest $10 multiple. After adjustment for inflation, the 2010 limitations will be as follows (2009 amounts for comparison):

Insured’s Age Before Close of Tax Year 2010 2009 a

40 or less $ 330 $ 320

41 to 50 $ 620 $ 600

51 to 60 $1,230 $1,190

61 to 70 $3,290 $3,180

More than 70 $4,110 $3,980

Long-Term Care Insurance Benefits

Section 7702B allows an income exclusion for long-term care benefits received by an individual. The exclusion is the greater of a daily rate (adjusted annually for inflation) or the actual cost of the care. In 2010, the daily exclusion rate will be $290 (up from $280 in 2009).

Traditional IRA Contribution Limits and Income Phaseouts

Any individual under age 70½ can establish an individual retirement account (IRA). The contribution ceiling is the lesser of (1) a statutory dollar limit ($5,000 in 2009, increased to $6,000 for those age 50 or older), or (2) 100% of the individual’s compensation for that year. The tax treatment of a contribution will depend on whether the taxpayer is an active participant in a qualified retirement plan.

The $5,000 statutory dollar limit [§219(b)(5)] is adjusted annually for inflation and rounded down to the nearest $500 multiple. In 2010, the statutory dollar limit remains at $5,000.

If the taxpayer is not an active participant, then the contribution is fully deductible. If the taxpayer is an active participant, then the IRA contribution deduction in 2010 is phased out beginning at modified AGI of $56,000 for single taxpayers or heads of household (up from $55,000 in 2009), $89,000 for a married taxpayer filing a joint return (unchanged from 2009), and $-0- for a married taxpayer filing separately. The phaseout range is $20,000 for married taxpayers filing a joint return and $10,000 for all others. If the taxpayer is not an active participant, but his or her spouse is an active participant, the contribution deduction in 2010 is phased out proportionally for modified AGI between $167,000 and $177,000 (up from between $166,000 and $176,000 in 2009).

Roth IRA Contribution Limits and Income Phaseouts

Introduced by Congress to encourage retirement savings, individuals may make nondeductible contributions to a Roth IRA (whose earnings and distributions are tax-free). The contribution ceiling is the lesser of (1) a statutory dollar limit ($5,000 in 2010, no change from 2009), or (2) 100% of the individual’s compensation for that year. Roth IRA contributions are subject to income limits. In 2010, the maximum annual contribution to a Roth IRA is phased out beginning at modified AGI of $105,000 for single taxpayers or heads of households (unchanged from 2009), $167,000 for married taxpayers filing a joint return (up from $166,000 in 2009), and $-0- for a married taxpayer filing separately.

Section 179 Amount and Phaseout Base

Section 179 allows taxpayers to expense business property that normally would be capitalized and depreciated. The Small Business and Work Opportunity Tax Act of 2007 increased the maximum amount of MACRS property that can be expensed to $125,000 and increased the acquisition cost ceiling (above which the expense amount is phased-out) to $500,000. Both these amounts are adjusted for inflation (with the expense limit rounded to the nearest $1,000 multiple and the phaseout amount rounded to the nearest $10,000 multiple).

For 2008, the Economic Stimulus Act of 2008 provided a one year increase in the maximum amount of MACRS property that can be expensed (to $250,000) and the acquisition cost ceiling (to $800,000) [§179(b)(7)]. The American Recovery and Reinvestment Act of 2009 provided an extension of these amounts through calendar year 2009. In 2010, these amounts will return to the inflation-adjusted amounts stipulated by the Small Business and Work Opportunity Tax Act of 2007.

In 2010, the maximum §179 expense election will be $134,000 and this amount will be subject to a phaseout once property placed in service exceeds $530,000. Absent a legislative change, the expense amount and acquisition cost ceiling will return to their pre-2003 amounts ($25,000 and $200,000, respectively) in 2011.

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