Last year was a year of big transitions for more of us than usual, thanks to the challenging economy. If you were one of those affected, the changes in your life could have an impact on your tax return.
Here are some tips designed to alert you to the tax implications of some of the more common 2010 transitions. If one of these fits your circumstances, take this as a cue to do further research or talk to a tax professional about your situation.
Did you change jobs? Some job-hunting expenses, including travel to interviews, are deductible as miscellaneous itemized deductions. If you moved to take a new job, your moving expenses may be deductible if the new job is at least 50 miles farther from home than your old one. Unfortunately, unemployment benefits and severance pay are taxable.
Did your income drop substantially? You may be eligible for tax breaks that you didn't qualify for in the past, such as the Savers Credit, which gives a tax break for retirement savings contributions for those with incomes below $27,750 (single) or $55,500 (married filing jointly). Check out the Earned Income Credit, too, especially if you have dependent children.
Did you start a business or work as an independent contractor? Your expenses are likely deductible, including the cost of any equipment you bought. One disadvantage of being the owner is that you have to pay self-employment tax — both the employer and employee share of Social Security and Medicare taxes. One advantage is that you can deduct retirement plan contributions. In fact, you have until April 18 to make a contribution to a Simplified Employee Pension, or SEP, that can be deducted on your 2010 return. If you're new at reporting business income, this could be a good year to get advice from a tax pro.
Did you sell your home at a loss or lose it in foreclosure? Bad news: A loss on the sale of your residence is not deductible. If your lender forgave part of what you owed on your mortgage, that's considered income to you. However, it's generally not taxable if the property was your home.
Did you refinance for the second, third or more time? Be sure to deduct points paid on the last refinancing if you were carrying those costs forward from prior years.
Did you help out family members? If your grown children returned to the nest after losing their jobs, you might be able to claim them again as dependents, depending on their ages and income. The income limit for most adults is $3,650, whether or not they live with you. If the grandkids moved in and you're now their main support, you may qualify for even more benefits.
Did you have a tax milestone birthday? If you turned 59 ½ you're now eligible to withdraw from your retirement plans without penalty. Of course, that doesn't mean it's a good idea to do it. If you turned 70 ½ last year, be sure to take your 2010 required minimum distributions from retirement accounts by April 1.
Did you marry, divorce or lose your spouse? Because filing status is based on marital status, a change affects exemptions, standard deduction, tax rates and the income limitations for many deductions and credits. Your income may have changed, too. That makes this an ideal time to consult a tax professional even if you return to being a do-it-yourselfer next year.
Still looking for a way to save a few bucks on your taxes? It's not too late. If you or your spouse had earned income last year, you can contribute to an IRA, which may be deductible. Even if you don't qualify for a traditional IRA deduction, you may be able to contribute to a Roth IRA, making future earnings tax-free, not just tax-deferred. You can set aside up to $6,000 apiece if you are 50 or older ($5,000 if you are younger) each year. April 18 is the contribution deadline for the 2010 tax year.
Haven't done your tax return yet? You've got plenty of company. Through February, filings were running about 3 percent behind last year. The IRS couldn't even accept some 1040 forms until mid February because of last-minute congressional tinkering with the tax law. Since then, brokerage firms and mutual fund companies have been sending out corrected 1099 forms, reclassifying dividend income and annoying the early filers. Aren't you glad you waited?
Helen Huntley is former St. Petersburg Times personal finance editor and currently a fee-only financial adviser with Holifield Huntley Financial Advisers in St. Petersburg (holifield huntley.com).