In 2001, the Bush administration passed into law, temporary tax cuts that were to lapse in 2009. However, when the Obama administration took over, they repealed and made changes to part of the Bush tax cuts and these changes had a significant effect on the 2010 tax year. Besides the repealed Bush tax cuts, the Obama administration also introduced many changes to the tax code under the stimulus package. These many changes to the tax code between 2009 and 2010 have made tax returns in both years a nightmare.
As the head of the National Taxpayer Advocate, Nina Olson stated that the 2010 tax year was one of the worst tax seasons ever. Reports from government watchdog organizations such as the Government Accountability Office (GOA) and the Treasury Inspector General for Tax Administration (TIGTA) have also revealed major flaws in the tax returns for the two years in question, with mistakes being made by both taxpayers and the IRS itself. Therefore, as the 2011 tax year draws neigh, it is important to reflect on some of the mistakes of 2010 tax year and possibly improve on the upcoming tax year.
First Time Home Owners Credit
One of the major complications for the 2010 tax year was handling the First-Time Home Owners Credit. This credit that lapsed in 2010 had several changes over the time that it was in effect, and these changes have brought quite some confusion. The taxpayers who took the credit in 2008 were to repay the $7,500.00 credit to the IRS starting in 2010 in installments of $500.00 for a period of 15 years. However, those who took the credit in 2009 and 2010 were not required to make any repayments. Those who took the credit in the later two years also got a higher credit of $8,000.00. According to a report from TIGTA, the IRS overpaid taxpayers by $513 million through wrongly allocating the homeowners credits. The complications of the credit also resulted in many taxpayers’ tax refunds being delayed for a while. The taxpayers mainly affected were those who took the 2008 credit and had either sold their homes and/or those who took less than the credit cap for that year.
The Earned Income Tax Credit (EITC)
The other area that brought errors in 2009 and 2010 tax returns was the EITC, formerly known as the Making Work Pay credit. In 2009, the IRS reported errors of $6.4 million relating to this credit. The TIGTA also reported a high error rate for the 2010 tax year for this credit. Looking into the 2011 tax year, taxpayers will need to ensure that they follow the guidelines for qualification and follow the rules provided when claiming this credit.
Unemployment Benefits
Unemployment Benefits was another area that had many errors in the 2010 tax year. The errors were mainly brought about by the changes in handling the benefits in 2009 and 2010. In 2009, the benefits were not wholly included in the income for taxation purposes. However, in the 2010 tax year, the whole unemployment benefits were to be included in the income section and the relevant taxes were required to be paid.
Roth IRA Conversions
The Roth IRA conversions were another area that brought confusion in the 2010 tax year. For the first time, taxpayers who earned over $100,000.00 in incomes were allowed to convert their traditional IRA accounts into Roth IRA accounts in 2010. For one to do this, he or she was expected to pay taxes on the balance on one’s IRA account in order to move funds to a Roth IRA. Many taxpayers in this income bracket went for the conversions. However, there was also a window provided until September 2011, technically, to re-characterize the IRA account. Re-characterizing the account means reversing the conversion by transferring funds from the Roth IRA account back to a traditional IRA account. The complications of conversions and re-characterizations brought quite some confusion to taxpayers in the 2010 tax year and are expected to affect many as they report their 2011 taxes in year 2012.
These are some of the areas that taxpayers will need to look out for when filing their 2011 tax returns. Furthermore, there are several new tax reliefs and changes to the tax code that affect the 2011 tax year and taxpayers will need to look out for these new tax changes as well.
