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Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.

• CCH Tax Briefing: 2012 Federal Budget Proposals
• CCH Tax Briefing: 2010 Tax Year-in-Review
• CCH Tax Briefing: 2010 Tax Relief/Job Creation Act
• CCH Tax Briefing: Sunsetting Benefits of the Economic Growth and Tax Relief Reconciliation Act of 2001
• CCH Tax Briefing: Small Business Jobs Act of 2010 (H.R. 5297)
• CCH Tax Briefing: Education/Jobs/Medicaid Assistance Act of 2010
• CCH Tax Briefing: Homebuyer Assistance and Improvement Act of 2010
• CCH Tax Briefing: Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010
• CCH Tax Briefing: Health Care Reform Act
• CCH Tax Briefing: 2010 Hiring Incentives to Restore Employment Act

Wealthier Taxpayers to Benefit from Full Phaseout of Income Restrictions for Itemized Deductions and Exemptions, CCH Explains

Other Taxpayers Still Benefit from Above-the-line and Enhanced Standard Deductions  

(RIVERWOODS, ILL., January 2011) – High-income taxpayers may be able to reduce their taxes even further with the repeal of the itemized deduction income restrictions, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

“Previously, many high-income taxpayers were forced to take the standard deduction because their earnings restricted the amount of the itemized deductions they could claim,” said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA . “However, with income restrictions lifted, they are now able to claim all allowable itemized deductions to further reduce their taxes.”

Historically, the number of itemized deductions and personal exemptions a taxpayer could claim phased out as their income increased. However, the Bush-era tax cuts began to steadily chip away at the phase out. As a result, in 2010, high-income taxpayers are not required to reduce the amount of their itemized deductions or exemptions when their adjusted gross income (AGI) exceeds a certain amount.

The repeal was phased in over a five-year period starting in 2006 and set to expire after 2010, bringing back income limits on the amount of itemized deductions and exemptions taxpayers could take based on their income. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act), however, has extended the repeal for two years, through 2012.

Allowable Itemized Deductions

While the income restrictions have been lifted for claiming itemized deductions, other restrictions remain. For example, miscellaneous itemized deductions can only be taken to the extent they exceed 2 percent of a taxpayer’s AGI. Miscellaneous itemized deductions generally fall into one of three categories:

1. Unreimbursed employee expenses that are paid or incurred by the taxpayer during the year in carrying out their trade or business as an employee and are ordinary and necessary. Examples of this include business use of a home or car; business travel and entertainment expenses (with entertainment and meal expenses generally only deductible up to 50 percent);
2. Tax preparation fees . This can include costs for using a professional tax preparer or online tax preparation software programs. Taxpayers deduct this in the year in which they pay the fee; and
3. Other expenses . Several other expenses also can be deducted subject to the 2-percent of AGI limit, including expenses to produce or collect income that is included in the taxpayer’s gross income or for managing property to produce such income, as well as investment fees and expenses.

While most itemized deductions are considered miscellaneous, several other common deductions are not and they also are not subject to the 2-percent floor. These include:

• Interest, including for investments and mortgages as well as mortgage points;
• Medical and dental expenses (exceeding 7.5 percent of AGI);
• Certain taxes, including state and local income taxes, real estate taxes, personal property taxes and state and local sales taxes and qualified motor vehicle taxes;
• Charitable contributions; and
• Personal casualty and theft losses.

All itemized deductions are claimed on Form 1040 Schedule A. However, this is one of the tax forms that the IRS has announced will be affected by last-minute tax law changes. As a result, taxpayers claiming itemized deductions will need to wait to file their tax returns until mid to late February once the IRS has programmed its systems and provided updated forms.

(For detail on the average itemized deductions taken by taxpayers, see the chart in Release 29.)

Deciding Whether to Itemize or Take the Standard Deduction

Taxpayers need to choose whether they want to itemize or take the standard deduction. Generally, people choose to itemize if their itemized deductions exceed their standard deduction. For 2010, the standard deduction is $5,700 for single filers ($11,400 for joint filers).

However, certain taxpayers, including nonresident aliens and dual-status aliens, are not eligible to take the standard deduction and must itemize deductions.

“In the past, wealthier people tended to itemize because they had more deductions,” said Luscombe. “On the other hand, the standard deduction often helps people at lower income levels by giving them a greater deduction than they’d be able to realize through itemizing.”

In addition to the normal standard deduction, taxpayers may also be eligible for a larger deduction if they or their spouse is blind or was born before January 2, 1946, or both. The extra amounts for age and blindness can be claimed on Form 1040 or 1040A.

Additional standard deductions for disaster losses, real estate taxes and new motor vehicle taxes expired at the end of 2009. In special circumstances, a taxpayer may claim an additional standard deduction in 2010 for a 2009 disaster where the loss was realized in 2010 or for a 2009 vehicle purchase where the tax was paid in 2010. Additionally, taxpayers qualifying for the deduction for new car sales and use taxes can take it in this section of Form 1040 even if they itemize – but they can’t take an itemized deduction for sales taxes, only for state and local income taxes.

Additional Deductions Available to Taxpayers Who Don’t Itemize

Several other deductions are available to taxpayers who don’t itemize. These include:

• IRA deductions – The maximum deduction for an Individual Retirement Account (IRA) is $5,000 for 2010 or $6,000 for individuals 50 and older making a catch-up contribution. Contributions for 2010 can be made up to the April 18, 2011 tax return due date;
• Student loan interest – The 2010 Tax Relief Act extended the above-the-line deduction for student loan interest up to $2,500 annually through 2012. The deduction is phased out for individuals with a modified adjusted gross income (AGI) of more than $60,000, and more than $120,000 for joint filers;
• Tuition and fees – Set to expire in 2009 but extended through 2011 as part of the 2010 Tax Relief Act, up to $4,000 can be deducted subject to reduction at AGI levels above $65,000 ($130,000 for joint filers) and is not available if AGI exceeds $80,000 ($160,000 for joint filers). This must be coordinated with other educational exclusions and cannot be used if claiming the American Opportunity Tax Credit or Lifetime Learning Credit for the same student; and
• Educator expenses – Also extended through 2011, eligible educators can deduct up to $250 per year for unreimbursed expenses incurred in connection with books, supplies (other than non-athletic supplies for courses in health or physical education), computer equipment and supplementary materials used in the classroom.

All of the above are available on Form 1040 or 1040A. As with taxpayers claiming itemized deductions, taxpayers claiming the tuition and fees or the teachers’ classroom expense deductions also will need to wait to file their tax returns until mid to late February once the IRS has programmed its systems and provided updated forms.

The following deductions are available only on Form 1040:

• Expenses for reservists, performing artists, fee-basis government officials – Normally, expenses related to an occupation are taken as itemized deductions or are subtracted from income on a business return, but there are exceptions for these narrow classes. See Form 2106 for details.
• Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs) – The deduction for HSAs is taken on line 25. Taxpayers with an MSA must indicate the deduction by writing in “MSA” and the amount on the dotted line next to line 36.
• Moving expenses related to a new job – To qualify, the taxpayer’s new workplace must be at least 50 miles farther from their old home than was their previous workplace.
• Deductions for the self-employed – One-half of self-employment taxes are deductible. The self-employed also can deduct health insurance premiums and contributions to Keogh, SEP and SIMPLE retirement plans from their gross income.
• Early withdrawal penalties – Taxpayers who earned interest that they later forfeited because of a premature withdrawal penalty can use the loss to reduce their gross income.
• Alimony – Alimony is deductible, including back alimony, in the year when it is actually paid. Property settlements and child support are normally non-deductible.
• Write-in deductions – In addition to the deduction for MSAs, a variety of deductions that apply to only a small number of people are entered on the dotted line next to line 36 of Form 1040 and included in the total. For example, taxpayers who signed over a check for jury duty pay to their employer (who paid them normal salary during jury service) would claim the deduction on line 36 and identify it as “Jury Pay.” A complete list of write-in deductions for line 36 is in the Form 1040 instructions.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (www.wolterskluwer.com).

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