Despite the availability of professional tax preparation services, an estimated 40% of Americans do their own taxes. The typical do-it-yourself filer needs about 24 hours to complete the task, according to the IRS.
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Commercially available software undoubtedly makes the job a lot easier, but no brand is guaranteed to be infallible. Thus, it's important for do-it-yourself filers to keep up as best they can with relevant changes to the tax code as a safeguard against errors in their tax prep software. Here are four of the most important changes to know about as you prepare your 2010 return.
1. Smaller Deductions for Business and Medical Mileage
You can't write off the cost of a daily commute by car, but you can deduct other work-related mileage you're not reimbursed for. This year, for example, you'd get 50 cents a mile for driving from, say, Boston to New York City and back for a trade show. That's five cents less per mile than you'd have gotten for the same trip in 2009.
At 16.5 cents a mile, the deduction for operating your car for medical reasons is 7.5 cents less than last year. However, driving for charitable purposes is still deductible at 14 cents per mile, just like last year.
2. Better Limits on Deductions for Property Damage or Loss Due to Theft
For damaged or stolen property to be deductible, the loss amount must now only exceed $100, compared with $500 in 2009. The "10% of AGI" rule still generally applies though.
Remember, AGI is the sum of all your income - such as wages, interest and alimony received - minus certain adjustments, such as IRA contributions, student loan interest you've paid and moving expenses.
3. Deduction for Taxes and Fees on New Motor Vehicle Purchases
Did you buy a new car, light truck, motor home or motorcycle between February 17 and December 31 of 2009? If so, in 2010 you can deduct state, local, and excise taxes related to the purchase. If your state has no sales tax, you can instead deduct other taxes or fees the purchase generated. A neat feature of this deduction is you can use it to increase your standard deduction or take it as a regular itemized deduction, whichever works out best for you.
There are a couple limitations to know about. First, the deduction is only good on up to $49,500 of the purchase price. Second, it's phased out at certain levels of modified adjusted gross income (MAGI) - between $250,000 and $260,000 for joint filers and from $125,000 to $135,000 for other taxpayers. MAGI is your AGI plus certain deductions such as those for student loans, IRA contributions and higher education costs.
4. Bigger Deductions for Long-Term Care (LTC) Insurance Premiums
IRS rules allow LTC insurance policy owners to deduct more of their premiums in 2010 than in 2009. For example, those ages 51 to 60 can claim up to $1,230 in LTC insurance premiums this year, compared with $1,190 last year - about a 3% increase. Similar increases have been approved for other age groups as well: 40 and under, 41-50, 61-70 and 71 or over. At $330, the deduction is smallest for the 40-and-under age group. It rises progressively to a maximum of $4,110 for those ages 71 or over.
Other Tax Law Changes
As you can probably imagine, the government has tinkered with the tax rules quite a bit more than this article describes. To see what other potentially beneficial changes have been made, check out a list called "Tax Changes for Individuals" at the IRS website. Who knows what other sorts of breaks you might unearth?