There are many changes in the tax rules this year, with the promise of much more to come. Here are some of the 2010 changes that could affect you.
* Deductions. The 2001 tax law gradually restored the full deduction for personal exemptions and itemized deductions for higher-income taxpayers. Effective this year, high-income taxpayers are entitled to the full $3,650 deduction for each personal exemption they take, and there will be no income-based reduction in their total itemized deductions.
As with most other provisions in the 2001 tax law, this change ends after December 31, 2010, and itemized deductions and personal exemptions will again be limited for high-incomers in 2011.
* RMDs. For 2010, annual minimum distributions from most retirement plans are once again required for those aged 70½ and older. In 2009, these required minimum distributions (RMDs) were suspended.
2010 distributions must be taken by December 31, 2010. Taxpayers who turn 70½ in 2010 may choose to delay taking their first distribution until April 1, 2011.
* Roth conversions. Prior to this year, taxpayers with adjusted gross income over $100,000 were not allowed to convert a traditional IRA to a Roth IRA. A provision from a 2006 law went into effect January 1, 2010, repealing the income limit for Roth conversions.
Roth IRAs have two major benefits over the traditional IRA. Qualifying distributions are tax-free, and no annual distributions are required once you reach age 70½.
The major drawback to converting a traditional IRA to a Roth IRA is the fact that the conversion is taxable. But if you convert in 2010, you can elect to report half of the income on your 2011 tax return and half on your 2012 tax return.