What it means for your take-home pay, investments, and more.

After weeks of heated Congressional negotiations on Capitol Hill, a tax bill has finally been cleared for President Obama’s signature. The bill temporarily extends the 2001 and 2003 federal income tax rate cuts, extends unemployment insurance for 13 months, provides new payroll tax breaks, reinstates the estate tax, and more.

The good news:

-The new law will give taxpayers a bit of clarity—and an opportunity to plan with relative confidence knowing that the playing field won’t change dramatically, at least for two years. But beyond that, an increase in the Medicare tax for upper-income Americans is slated for 2013. And more changes are likely in the future, given the pressure to raise revenues to reduce the deficit, and talk of sweeping tax reform. “Passage of this tax bill ensures that individuals at all income levels won’t face an automatic tax increase in January, The bill provides taxpayers with some certainty, but Congress will be back at the table having the same debate in two years”

So what can you do now?

-Let’s take a look at how the new law may impact you in four key areas: your take-home pay, your investments, your estate and gifting plans, and, if you’re over age 70½, qualified charitable distributions from your IRA. We’ll summarize what’s changed, and what you should be thinking about for both year-end and longer-term tax planning.

One important caveat: An extension of the minimum required distribution (MRD) suspension is not part of the new tax law, so retirees must take applicable MRDs for 2010 or face a hefty penalty.

How it affects your take-home pay NEW—Payroll tax relief:

There is now a 2 percentage point reduction in an employee’s share of the Social Security portion of the FICA tax, from 6.2% to 4.2%, in 2011. So, if you make $80,000 a year, you could take home an additional $1,600 a year in 2011.

What to consider now:

− Increase any tax-advantaged retirement account contributions: If you are not already maximizing pretax contributions to your 401(k) plan, 403(b) plan, or other workplace savings plan, consider increasing your payroll deduction by 2%, or at least enough to garner the full company match. In 2010 and 2011 you can contribute up to $16,500 to 401(k) plans (up to $22,000 if you’re 50 or

older), and $5,000 to IRAs ($6,000 for ages 50 and older). Fidelity believes this is a smart plan of action, unless you have high interest-rate credit card debt. If so, consider using the extra money from the payroll tax relief to pay down your plastic first.

What to consider going forward:

− Automatic increases in your workplace savings plan: If you are still not maximizing your workplace savings contributions, consider increasing automatic payroll deductions in 2011. Extended—2001 and 2003 income tax cuts: The new tax law provides a two-year extension of the 2001 and 2003 Bush-era income tax cuts (through 2012), regardless of a person’s income level. This means there will be no change in the income tax rates for the next two years although the alternative minimum tax (AMT) patch extends only through 2011 and is not indexed for inflation in 2011.

What to consider now:

− A Roth IRA conversion: You may want to consider converting a traditional IRA or other eligible retirement balance to a Roth IRA1 before December 31, 2010. For conversions made in 2010, because of a special one-time tax rule, you can elect to either pay the entire tax bill on your 2010 return or pay it over the next two years by splitting the taxable income generated evenly between

your 2011 and 2012 tax returns. The extension of the current tax rates may make the latter a better option. However, although spreading out the tax bill from your conversion over two years may sound appealing, there are other considerations to take into account, so you should carefully weigh the pros and cons.

− Your income and deductions: Tax advisers often suggest that those who itemize deductions should defer income into future tax years while accelerating deductions into the current tax year. While you may end up with virtually the same tax bill, you would pay it at a later date. In the meantime, you may be able to benefit from the use of that money. Since tax rates will stay the same next year, this popular year-end tax move may be helpful in 2010 and 2011 as well, with

one important exception. If you are or may be subject to the AMT, you may be better off doing the opposite. As always, you should consult your tax adviser. And don’t dally: You only have until December 31, 2010, to make these moves.

Extended—AMT relief:

There is now a two-year extension (through 2011) of the AMT “patch”.

-How it affects your investments

Extended—Capital gains tax: The top rate on long-term capital gains will remain at 15% for the next two years.

Extended—Qualified dividends tax: .

The top rate for qualified dividends—those on certain stocks held

longer than 60 days—will remain at 15% for the next two years.

What to consider now:

− Employ an effective tax-loss harvesting strategy: Tax-loss harvesting is the practice of selling investments that have lost value to offset current-and future-year capital gains. Unlike one-time or occasional-loss sales, however, a systematic tax-loss harvesting strategy requires diligent

investment tracking and detailed tax accounting.

− Exploit the 0% capital gains rate: You also may have the opportunity to eliminate taxes on the

capital gains you realize from taxable accounts. In 2010, taxpayers in the 10% and 15% federal income tax brackets can realize long-term capital gains (and qualified dividends) without triggering capital gains taxes. (In 2010, the 15% bracket tops out at $68,000 of taxable income for married couples filing jointly.) The result: If your taxable income falls into the two lowest tax brackets, selling stocks held longer than a year may be a highly tax-efficient way to generate cash flow. If you’re retired, this strategy may be most advantageous if you have a relatively high proportion of your retirement assets in taxable accounts.

What to consider going forward:

− Plan ahead for future tax increases: No one can predict how or when tax rates might rise or what form proposed tax reforms may take. But at least one new tax is already slated to hit the net investment income of upper-income taxpayers in 2013: an additional 3.8% Medicare tax, which will affect married couples filing jointly with a modified adjusted gross income (MAGI) of more than $250,000 ($200,000 for single filers). The tax will apply to the lesser of net investment

income or MAGI over the threshold. Investment income would include income from interest, dividends, capital gains, annuities, rents, and royalties.

− It’s not too soon to begin preparing for this 2013 tax change. You’ll want to consider maximizing savings in tax-advantaged accounts such as IRAs and 401(k)s, because withdrawals from them will not be included when determining investment income for the new Medicare tax. Further, qualifying Roth IRA withdrawals aren’t considered investment income or an addition to your MAGI

under current law—possibly making conversions and contributions to Roth-type accounts more relevant for the near term. If you don’t have a Roth IRA, you may want to consider converting to one.

How it affects small businesses and the self-employed

NEW—Business Expensing: The new law provides for 100% expensing of qualified capital investments in 2011 and 50% expensing in 2012.

How it affects estate planning and gifting

NEW—Estate tax rate and exclusion: The new law reinstates the estate tax in 2011 and 2012 at a maximum rate of 35% with a $5 million exemption per person. This compares to a 45% maximum rate and $3.5 million exclusion in 2009. The new rules will sunset after 2012. Beginning in 2013, there will be a $1 million per person exclusion with a 55% estate and gift tax rate unless further legislation is enacted. Here are some additional estate tax changes you should know about:

− Portability. New portability rules allow any unused exemption to be passed to a surviving spouse, so a married couple can exempt up to $10 million.

− Estates of decedents who died in 2010.

The new law gives executors of these estates a choice: distribute assets to heirs estate-tax-free but with a carryover basis (generally the original purchase price), or step up the basis to the market value (generally at time of death) and pay the

35% rate on anything above the $5 million exemption. A step-up in basis means the value of an appreciated asset is readjusted at a higher market value for tax purposes upon inheritance versus what the value of the asset was when it was originally purchased.

− Gift Tax exemption. The new law reunifies the federal estate tax exemption and the federal gift tax exemption. This means that the new lifetime gift tax exemption is $5 million per person ($10 million per couple) beginning in 2011. Taxable gifts made in 2011 and 2012 will be taxed at the rate of 35%.

− Generation Skipping Transfer Tax (GSTT). Beginning in 2011, the generation skipping transfer tax exemption will also be $5 million per person ($10 million per couple) with a 35% tax rate.

Note: The GSTT is not portable.

− Extension of time for certain filings. The new law extends the time to file certain estate and gift tax returns to nine months after the enactment of the new law.

What to consider now:

− Make tax-smart charitable year-end contributions if you haven’t already. For this year, given the stock market’s gains, donating long-term appreciated securities may be a particularly tax-savvy strategy. As a general rule, donations of long-term appreciated securities (either stock or mutual funds) directly to a qualified charity are deductible at their fair market value on the date of contribution, and you don’t pay capital gains taxes on the donated security. For those considering

a major gift in 2010 (or 2011), combining a charitable gift with a Roth IRA conversion may help offset the tax cost of the conversion and perhaps allow you to convert a larger amount at a lower tax cost.

− Consider generation skipping transfers. The generation skipping transfer tax remains repealed for 2010. Individuals thinking of making gifts to grandchildren, gifts that would otherwise be subject to GST tax, have until December, 31, 2010, to complete these gifts.

− Weigh the tax elections for 2010 estates. Executors of 2010 estates over $5 million with highly appreciated assets should consider whether it may be better to subject the estate to the new law or choose the zero estate tax law of 2010. If you choose the former, the first $5 million of estate assets will be exempt from federal estate taxes, but any amount above $5 million may be subject

to estate tax. However, the entire estate will receive a full step up in basis. If the latter is chosen, no federal estate tax will be assessed on the estate, but all of the estate assets may not receive a step-up in basis. In this case, the executor can allocate $3 million in basis adjustments for assets passing to a surviving spouse, and another $1.3 million in basis adjustments to property passing

to a non-spouse. This is a complex decision. Contact your attorney or tax adviser,

Representative to understand your options.

What to consider going forward:

− Set up a meeting with your tax adviser or estate planning attorney to review your estate plan and make any necessary changes.

− Consider a Grantor Retained Annuity Trust (GRAT): A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust that pays a fixed annuity to the grantor for a defined period, then pays the remainder to a non-charitable beneficiary. Contrary to expectations, the new law did not restrict GRATs. And, with the increased gift tax exemption, a grantor can now potentially put even more money into a GRAT without having to pay gift taxes. Current low interest rates are also beneficial

to GRATs, because they help increase the value of the annuity while lowering the value of the remainder interest. So, the grantor may potentially use even less of the new gift tax exemption. As always, consult your Fidelity representative or speak with your attorney or tax adviser before making any decisions.

How it affects retirees Extended—qualified charitable distributions (QCDs) from IRAs: The new tax law extends provisions of the Pension Protection Act of 2006 that allow investors age 70½ or older to make a qualified distribution

of up to $100,000 from an IRA directly to a qualified charity for both 2010 and 2011.

Not extended—Minimum Required Distribution (MRD) suspension: The new tax law does not extend the 2009 suspension of MRDs. Retirees are generally required to take MRDs from their retirement accounts for the year in which they turn 70½, and all subsequent years, by December 31. Failure to comply with

this IRS regulation could result in a 50% penalty on the amount that should have been distributed.

What to consider now:

− Make sure you take an MRD in 2010. If you’re 70½ or over, take a moment to ensure you’ve met your MRD obligation for 2010. If you were born before July 1, 1939, your 2010 MRD deadline is December 31, 2010. If you were born between July 1, 1939, and June 30, 1940, your deadline is April 1, 2011. Just remember, you’ll have to take two MRDs in 2011 (one for 2010 and one for 2011).

− Think about QCDs and MRDs together. Qualified charitable distributions from IRAs made directly to qualifying charities count toward any MRD. For example, if you have a $75,000 MRD for 2010, you can make an IRA distribution of up to $100,000 directly to a qualifying charity and $75,000 of that $100,000 is counted as your MRD.

− One other important note: Any QCDs made through January 2011 can count towards your 2010 MRD, but if you already took your MRD in 2010, it appears you cannot take advantage of the QCD this year. However, if you still have to take your 2010 RMD, you may make a 2010 QCD and have it count toward your MRD even if you don’t complete it until next year.

What to consider going forward:

− QCDs will count as MRDs in 2011, so you may want to consider making two QCDs: one in 2010 and one in 2011.

− Talk to your tax adviser about IRA strategies for 2011. If you are a high-net-worth investor with high IRA balances, next year may be a tax-efficient time to give away some of that money.

1. A distribution from a Roth IRA is tax free and penalty free provided that the five-year aging requirement has been satisfied and at

least one of the following conditions is met: you reach age 59½, die, become disabled, or make a qualified first-time home purchase.

• January 17— Birthday of Martin Luther King, Jr.
• February 21— Washington’s Birthday
• April 15— District of Columbia Emancipation Day
• May 30— Memorial Day
• July 4— Independence Day
• September 5— Labor Day
• October 10— Columbus Day
• November 11— Veterans’ Day
• November 24— Thanksgiving Day
• December 26— Christmas Day

The start of the 2011 filing season will begin in January for the majority of taxpayers. However, last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.

Taxpayers will need to wait to file if they are within any of the following three categories:

• Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
• Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
• Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

For those falling into any of these three categories, the delay affects both paper filers and electronic filers.

The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure a smooth tax season.

Updated information will be posted on IRS.gov. This will include an updated copy of Schedule A as well as updated state and local sales tax tables. Several other forms used by relatively few taxpayers are also affected by the recent changes, and more details are available on IRS.gov.

In addition, the IRS reminds employers about the new withholding tables released Friday for 2011. Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. The IRS also reminds employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov before year’s end.

Another great honor from Franklin University was achieved by Nancy in late June, 2010.

As part of the Star Awards program, I am pleased to announce that you will receive a Silver Certificate in recognition of your superior teaching … Your nomination was based on your work in the courses you teach, as well as the evaluation you received from students in your classes.

We once again congratulate her on all of her accomplishments and look forward to hearing more as she continues teaching at Franklin University!

The Robert L Bailey Teaching Award is determined each trimester by Franklin’s graduating glass. Students select a faculty member who challenged them intellectually and guided them in finding the significance of course content as it related to them both professionally and personally. The graduate and undergraduate faculty members receiving the most nominations are identified for this honor, and also receive a monetary award.

“In recognition of being selected by graduating students as the undergraduate faculty member who had the most significant influence on their educational experience.”

Robert L. Bailey, retired CEO and Chairman of State Auto Insurance Companies, is a past Chairman of Franklin’s Board of Trustees.

Any economic recovery payment you receive during 2009 is not taxable.

These $250 payments are being made to most people who:

Receive social security benefits
Supplemental security income (SSI)
Railroad retirement benefits
Veterans disability compensation
Pension benefits
Live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the
U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.

If you are married and you and your spouse both meet these requirements, each of you may get a $250 payment. If you are entitled to a payment, you will get it automatically. You do not need to apply for it.

Making Work Pay and Government Retiree Credits

Two new credits you may be able to take for 2009 are the: Making work pay credit, and Government retiree credit.

Making work pay credit.
You may be able to take this credit if you have earned income from work. Even if your federal income tax withholding is reduced during 2009 because of the credit, you must claim the credit on your return to benefit from it.

You cannot take the credit if: Your modified AGI is $95,000 ($190,000 if married filing jointly) or more, You are a nonresident alien, or You can be claimed as a dependent on someone else’s return. The credit is 6.2% of your earned income but cannot be more than $400 ($800 if married filing jointly).

The credit will be reduced if:
You receive a $250 economic recovery payment (described earlier) during 2009, Your modified AGI is more than $75,000 ($150,000 if married filing jointly), or You take the government retiree credit discussed next.

Government retiree credit.
You can take this credit if you receive a pension or annuity payment in 2009 for service performed for the U.S. Government or any U.S. state or local government (or any instrumentality of one or more of these) and the service was not covered by social security. The credit is $250 ($500 if married filing jointly and both you and your spouse receive a qualifying pension or annuity). However, you cannot take the credit if you receive a $250 economic recovery payment during 2009. If you file a joint return, both you and your spouse receive a qualifying pension or annuity, and both of you receive an economic recovery payment, no government retiree credit is allowed; if only one of you receives an economic recovery payment, the credit is $250. Social security number. To take either credit, you must include your social security number (if filing a joint return, the number of either you or your spouse) on your return. A social security number does not include an identification number issued by the IRS. Schedule M. Generally, you will use new Schedule M (Form 1040A or 1040) to figure both the making work pay credit and the government retiree credit. Both credits are refundable, which means they are treated like payments you made and may give you a refund even if you had no tax withheld from your pay or your pension. If you are filing Form 1040EZ, you can take the making work pay credit on that form and do not have to file Schedule M.

Deduction for Sales and Excise Taxes Imposed on Purchase of New Motor Vehicles

In 2009, you can deduct the state or local sales and excise taxes imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010. A qualified motor vehicle includes a passenger automobile, light truck, or motorcycle, the original use of which begins with that purchaser and that has a gross vehicle weight rating of 8,500 pounds or less. A qualified motor vehicle also includes a motor home, the original use of which begins with that purchaser. The amount of tax you are able to deduct is limited to the tax that is imposed on the first $49,500 of the purchase price of the vehicle. The deduction is phased out over a $10,000 range that begins when modified adjusted gross income is more than $125,000 ($250,000 if married filing a joint return). No deduction is allowed when modified adjusted gross income is equal to or more than $135,000 ($260,000 if married filing a joint return). The new deduction can be used to increase the amount of your standard deduction or you can take it as an itemized deduction (if you are not electing to take the state and local general sales tax deduction).

Alternative Minimum Tax (AMT)

The following changes to the AMT went into effect for 2009.
AMT exemption amount increased. The AMT exemption amount has increased to $46,700 ($70,950 if married filing jointly or qualifying widow(er); $35,475 if married filing separately). AMT exemption amount for a child increased. The AMT exemption amount for a child whose unearned income is taxed at the parent’s tax rate has increased to $6,700. Qualified motor vehicle tax allowed against AMT. If you claim a regular tax deduction for any state or local sales or excise tax on the purchase of a new motor vehicle, that tax is also allowed as a deduction for the AMT. Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 exempt from AMT. Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 is not an item of tax preference and therefore is not subject to the AMT. A refunding bond is treated as issued on the date of the issuance of the refunded bond (or, in the case of a series of refundings, the original bond). However, tax-exempt interest on a specified private activity bond issued in 2009 or 2010 to currently refund a private activity bond issued after 2003 and before 2009 is not an item of tax preference. Alternative tax net operating loss deduction (ATNOLD). The 90% limit on the ATNOLD does not apply to the portion of an ATNOLD attributable to any 2008 or 2009 loss you elected to carry back more than 2 years under section 172(b)(1)(H) of the Internal Revenue Code.

2009 Child’s Investment Income

The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900 for 2009.

Earned Income for Additional Child Tax Credit

For 2009, the amount your earned income must exceed to claim the additional child tax credit is reduced to $3,000.

For 2010, the amount your earned income must exceed to claim the additional child tax credit is $3,000.

Adoption Benefits Increased

For 2009, the maximum adoption credit has increased to $12,150. Also, the maximum exclusion from income for benefits under your employer’s adoption assistance program has increased to $12,150. These amounts are phased out if your modified AGI is between $182,180 and $222,180. You cannot claim the credit or exclusion if your modified AGI is $222,180 or more.

Residential Energy Credits

Nonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2009. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.

Limitation.

The total amount of credit you can claim in 2009 and 2010 is limited to $1,500.

Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.

Standard Mileage Rate

For 2009, the standard mileage rate for the cost of operating your car for business use is 55 cents per mile.

Medical- and move-related mileage

For 2009, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 24 cents per mile.

Charitable-related mileage

For 2009, the standard mileage rate for the cost of operating your car for charitable purpose remains 14 cents per mile.

Standard Deduction Increased

2009 Changes
The standard deduction for people who do not itemize their deductions on Schedule A (Form 1040) is, in most cases, higher for 2009 than it was for 2008. In addition to the annual increase due to inflation adjustments and the increase allowed for the deduction for certain real estate taxes and a net disaster loss, your 2009 standard deduction is increased by any state or local sales tax imposed on the purchase of a qualified motor vehicle after February 16, 2009, and before January 1, 2010.

Itemized Deductions

If your AGI is above a certain amount, you may lose part of your itemized deductions. In 2009, this amount is increased to $166,800 ($83,400 if married filing separately). See the instructions for Schedule A (Form 1040), line 29, for more information on figuring the amount you can deduct.

Personal Exemptions 2009 Changes

The amount you can deduct for each exemption has increased to $3,650 for 2009. You lose part of the benefit of your exemptions if your AGI is above a certain amount. The amount at which the phaseout begins depends on your filing status. For 2009, the phaseout begins at:

$125,100 for married persons filing separately,
$166,800 for single individuals,
$208,500 for heads of households, and
$250,200 for married persons filing jointly or qualifying widow(er)s.
For 2009, each exemption cannot be reduced to less than $2,433.

Health Savings Accounts (HSAs)

2010
High Deductible Health Plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,200 ($2,400 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,950 ($11,900 for family coverage).

Limits on contributions. The maximum HSA contribution increases to $3,050 ($6,150 for family coverage).

2009
High Deductible Health Plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,150 ($2,300 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,800 ($11,600 for family coverage).

Limits on contributions. The maximum HSA contribution increases to $3,000 ($5,950 for family coverage). The maximum additional contribution for individuals age 55 or older increases to $1,000.

Earned Income Credit

2009 Changes
The following paragraphs explain the changes to the credit for 2009.
Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2009 is:

$3,043 if you have one qualifying child,
$5,028 if you have two qualifying children,
$5,657 if you have three or more qualifying children, or
$457 if you do not have a qualifying child.

Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2009. You may be able to take the credit if:

You have three or more qualifying children and you earn less than $43,279 ($48,279 if married filing jointly) You have two qualifying children and you earn less than $40,295 ($45,295 if married filing jointly), You have one qualifying child and you earn less than $35,463 ($40,463 if married filing jointly), or You do not have a qualifying child and you earn less than $13,440 ($18,440 if married filing jointly). The maximum amount of adjusted gross income (AGI) you can have and still get the credit also has increased. You may be able to take the credit if your AGI is less than the amount in the above list that applies to you. Investment income amount increased.The maximum amount of investment income you can have and still get the credit has increased to $3,100 for 2009. Advance payment of the credit. If you get advance payments of the credit from your employer with your pay, the total advance payments you get during 2009 can be as much as $1,826.

2010 Changes
Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2010 is:

$3,050 if you have one qualifying child,
$5,036 if you have two qualifying children,
$5,666 if you have three or more qualifying children, or
$457 if you do not have a qualifying child.

Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2010. You may be able to take the credit if:

You have three or more qualifying children and you earn less than $43,352 ($48,362 if married filing jointly), You have two qualifying children and you earn less than $40,363 ($45,373 is married filing jointly), You have one qualifying child and you earn less then $35,535 ($40,545 if married filing jointly), or You do not have a qualifying child and you earn less then $13,460 ($18,470 if married filing jointly). Investment income amount. The maximum amount of investment income you can have and still get the credit is still $3,100 for 2010.

Advance payment of the credit. If you get the advance payments of the credit from your employer with your pay, the total advance payments you get during 2010 can be as much as $1,830.

Qualified Alternative Fuel Motor Vehicles (QAFMV) are powered solely by alternative fuels, such as compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen and any liquid at least 85 percent of the volume of which consists of methanol. Vehicles powered by a combination of an alternative fuel and a petroleum-based fuel may qualify for a reduced credit. Purchases of new vehicles with special equipment, as well as ones converted for alternative power, may qualify.

A credit also is available for certain new qualified heavy hybrid vehicles with a gross vehicle weight rating in excess of 8,500 pounds. A qualifying heavy hybrid motor vehicle draws propulsion energy from onboard sources of stored energy which are both an internal combustion or heat engine using consumable fuel, and a rechargeable energy storage system. This credit should be not confused with the alternative motor vehicle credit for qualified hybrid passenger automobiles and light trucks.

Expanded Definition of Qualified Expenses for Qualified Tuition Programs
The definition of qualified higher education expenses for tax-free distributions from a qualified tuition program is expanded to include amounts paid in 2009 or 2010 for the purchase of computer software, any computer or related peripheral equipment, fiber optic cable related to computer use, and Internet access (including related services) that are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.

Hope and Lifetime Learning Credits – 2009 and 2010 Changes
For tax years 2009 and 2010, the following changes have been made to the Hope credit. The modified credit is also referred to as the American opportunity tax credit.

• The maximum amount of the Hope credit increases to $2,500 per student. The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Exception. For 2009, if you claim a Hope credit for a student who attended a school in a Midwestern disaster area, you can choose to figure the amount of the credit using the previous rules. However, you must use the previous rules in figuring the credit for all students for which you claim the credit.

• The Hope credit can now be claimed for the first four years of post-secondary education. Previously the credit could be claimed for only the first two years of post-secondary education.

• Generally, 40% of the Hope credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes. However, none of the credit is refundable if the taxpayer claiming the credit is a child (a) who is under age 18 (or a student who is at least age 18 and under age 24 and whose earned income does not exceed one-half of his or her own support), (b) who has at least one living parent, and (c) who does not file a joint return.

• The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” For this purpose, the term “course materials” means books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
  For 2009, the amount of your lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a lifetime learning credit if your modified AGI is $60,000 or more ($120,000 or more if you file a joint return). For more information, see chapter 3 in Publication 970.

Student Loan Interest Deduction – 2009
For 2009, the amount of the student loan interest deduction is phased out (gradually reduced) if your filing status is married filing jointly and your modified adjusted gross income (AGI) is between $120,000 and $150,000. You cannot take the deduction if your modified AGI is $150,000 or more. For all other filing statuses, your student loan interest deduction is phased out if your modified AGI is between $60,000 and $75,000. You cannot take a deduction if your modified AGI is $75,000 or more. For more information, see chapter 4 in Publication 970.

Tuition and Fees Deduction
Students in Midwestern disaster areas. For tax years beginning in 2008 and 2009, the definition of qualified education expenses for the tuition and fees deduction is expanded for students attending an eligible educational institution in Midwestern disaster areas in the states of Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska, and Wisconsin. See Table 3-2 near the end of chapter 3 in Publication 970, Tax Benefits for Education, for a list of counties. For more information about the tuition and fees deduction, see chapter 6 in Publication 970.

Education Savings Bond Exclusion – 2009
For 2009, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (AGI) is between $104,900 and $134,900. You cannot take the exclusion if your modified AGI is $134,900 or more. For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $69,950 and $84,950. You cannot take the exclusion if your modified AGI is $84,950 or more

Residential Energy Credits – 2009
Nonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2009. This property can include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel. Limitation. The total amount of credit you can claim in 2009 and 2010 is limited to $1,500. Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, and qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same

Standard Mileage Rate – 2009
For 2009, the standard mileage rate for the cost of operating your car for business use is 55 cents per mile. Medical and move-related mileage: For 2009, the standard mileage rate for the cost of operating your car for medical reasons or as part of a deductible move is 24 cents per mile. Charitable-related mileage: For 2009, the standard mileage rate for the cost of operating your car for charitable purposes remains 14 cents per mile.

Unemployment Compensation
For any tax year beginning in 2009, you can exclude from gross income $2,400 of unemployment compensation you received during the year.

Maximum Tax Rate on Qualified Dividends and Net Capital Gain Reduced
For tax years beginning after 2007, the 5% maximum tax rate on qualified dividends and net capital gain (the excess of net long-term capital gain over net short-term capital loss) is reduced to 0%. The 15% maximum tax rate on qualified dividends and net capital gain has not changed.

Itemized Deductions – 2009
If your AGI is above a certain amount, you may lose part of your itemized deductions. In 2009, this amount is increased to $166,800 ($83,400 if married filing separately).

Exclusion on Sale of Main Home by Surviving Spouse
For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse’s death. However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of such death, and during the 2-year period ending on the date of such death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion.

First-Time Homebuyer Credit
If you are a first-time homebuyer, you may be able to claim a one-time tax credit equal to the lesser of:

• $7,500 ($8,000 if you purchased your home in 2009), but only half of that amount if married filing separately, or

• 10% of the purchase price of your home.
  You may be able to claim the credit if:

• You purchased your main home in the United States after April 8, 2008, and before December 1, 2009, and

• You (and your spouse if married) did not own any other main home during the 3-year period ending on the date of purchase.
  If you constructed your main home, you are treated as having purchased it on the date you first occupied it.

  Who cannot claim the credit

  You cannot claim the credit if any of the following apply:

• Your modified adjusted gross income is $95,000 or more ($170,000 or more if married filing jointly).

• You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. See Form 8859. This rule does not apply for a home purchased in 2009.

• Your home financing comes from tax-exempt mortgage revenue bonds. This rule does not apply for a home purchased in 2009.

• You are a nonresident alien

• Your home is located outside the United States

• You sell the home, or it ceases to be your main home, before the end of 2008

• You acquired your home by gift or inheritance

• You acquired your home from a related person. A related person includes:

• Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.)

• A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation

• A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interests
  Repayment of credit

  Homes purchased in 2008
  You generally must repay the credit over a 15-year period in 15 equal installments. The repayment period begins in 2010 and you must include the first installment as additional tax on your 2010 tax return. If your home ceases to be your main home before the 15-year period is up, you must include all remaining annual installments as additional tax on the return for the tax year that happens. This includes situations where you sell the home, you convert it to business or rental property, or the home is destroyed, condemned, or disposed of under threat of condemnation.

  Homes purchased in 2009
  You must repay the credit only if the home ceases to be your main home within the 36-month period beginning on the purchase date. This includes situations where you sell the home, you convert it to business or rental property, or the home is destroyed, condemned, or disposed of under threat of condemnation. You repay the credit by including it as additional tax on the return for the year the home ceases to be your main home. If the home continues to be your main home for at least 36 months beginning on the purchase date, you do not have to repay any of the credit.

New Rule for Employees and Volunteers of the Peace Corps
If you or your spouse is an employee, enrolled volunteer, or volunteer leader of the Peace Corps, you may be able to exclude from income a gain from selling your main home, even if you did not live in it for 2 years during the 5-year period ending on the date of sale. Generally, you can elect to have the 5-year test period for ownership and use suspended for up to 10 years during any period you or your spouse serve outside the United States (on qualified official extended duty if an employee). This provision applies to a sale of a main home in tax years beginning after 2007. Similar benefits already apply to members of the uniformed services or Foreign Service or employees of the intelligence community.

Alternative Minimum Tax (AMT) – 2009 Changes
The following changes to the AMT went into effect for 2009.

• AMT exemption amount increased
  The AMT exemption amount has increased to $46,700 ($70,950 if married filing jointly or qualifying widow(er); $35,475 if married filing separately).

• AMT exemption amount for a child increased
  The AMT exemption amount for a child whose unearned income is taxed at the parent’s tax rate has increased to $6,700.

• Certain credits still allowed against AMT
  The special rule that allows the credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, mortgage interest credit, and the District of Columbia first-time homebuyer credit to be applied against the AMT was scheduled to expire at the end of 2008. However, Congress has extended the special rule through 2009, so those credits can be applied against the AMT for 2009. This special rule is also expanded to include the personal use part of the alternative motor vehicle credit. It also applies to the nonbusiness energy property credit.

• Qualified motor vehicle tax allowed against AMT
  If you claim the standard deduction for the regular tax and it includes any state or local sales or excise tax on the purchase of a qualified motor vehicle, that tax is also allowed as a deduction for the AMT.

• Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 exempt from AMT
  Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 is not an item of tax preference and therefore is not subject to the AMT. A refunding bond is treated as issued on the date of the issuance of the refunded bond (or, in the case of a series of refundings, the original bond). However, tax-exempt interest on a specified private activity bond issued in 2009 or 2010 to currently refund a private activity bond issued after 2003 and before 2009 is not an item of tax preference.

Definition of Qualifying Child Revised
For 2009, the following changes have been made to the definition of a qualifying child.

• To be your qualifying child, the child must be younger than you.

• A child cannot be your qualifying child if he or she files a joint return, unless the return was filed only as a claim for refund.

• If the parents of a child can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as a qualifying child unless that person’s AGI is higher than the highest AGI of any parent of the child.

• Your child is a qualifying child for purposes of the child tax credit only if you can and do claim an exemption for him or her

Child’s Investment Income – 2008
Increase in age of children whose investment income is taxed at parent’s rate. The rules regarding the age of a child whose investment income may be taxed at the parent’s tax rate have changed for 2008. These rules continue to apply to a child under age 18 at the end of the year but, beginning in 2008, will also apply in certain cases to a child who either:

• Was age 18 at the end of 2008 and did not have earned income that was more than half of the child’s support, or

• Was a full-time student over age 18 and under age 24 at the end of 2008 and did not have earned income that was more than half of the child’s support.
  A student is a child who during any part of 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time, on-farm training course given by a school or a state, county, or local government agency. A school includes a technical, trade, or mechanical school. It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet.

  Form 8615 is used to figure the child’s tax. These rules also apply to parents who elect onForm 8814 to report their child’s income on the parents’ return.

  Increase in investment income amount. The amount of taxable investment income these children can have without it being subject to tax at the parent’s rate has increased to $1,800 for 2008.

  2009
  The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900 for 2009.

Adoption Benefits Increased – 2009
For 2009, the maximum adoption credit has increased to $12,150. Also, the maximum exclusion from income for benefits under your employer’s adoption assistance program has increased to $12,150. These amounts are phased out if your modified AGI is between $182,180 and $222,180. You cannot claim the credit or exclusion if your modified AGI is $222,180 or more.

Earned Income for Additional Child Tax Credit – 2009
For 2009, the amount your earned income must exceed to claim the additional child tax credit is reduced to $3,000.

Decreased Estimated Tax Payment for Qualified Individuals With Small Businesses
For 2009, qualified individuals with small businesses may be eligible to make smaller estimated tax payments. If you qualify, your required annual payment for 2009 is the smaller of 90% of the tax shown on your 2008 tax return or 90% of the tax shown on your 2009 tax return. You must check box F in Part II on Form 2210 or box C on Form 2210-F to certify that you qualify.

You are a qualified individual if:

• More than 50% of your gross income was from a business that had an average of fewer than 500 employees in 2008, and

• Your adjusted gross income in 2008 was less than $500,000 ($250,000 if you are filing married filing separately for 2009).

Economic Recovery Payment
Any economic recovery payment you receive during 2009 is not taxable. These $250 payments are being made to most people who:

• Receive social security benefits, supplemental security income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits, and

• Live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.
  If you are married and you and your spouse both meet these requirements, each of you may get a $250 payment.

  If you are entitled to a payment, you will get it automatically. You do not need to apply for it.

  Making Work Pay and Government Retiree Credits

  Two new credits you may be able to take for 2009 are the:

• Making work pay credit, and

• Government retiree credit.
  Making work pay credit. You may be able to take this credit if you have earned income from work. Even if your federal income tax withholding is reduced during 2009 because of the credit, you must claim the credit on your return to benefit from it.

  You cannot take the credit if:

• Your modified AGI is $95,000 ($190,000 if married filing jointly) or more,

• You are a nonresident alien, or

• You can be claimed as a dependent on someone else’s return.
  The credit is 6.2% of your earned income but cannot be more than $400 ($800 if married filing jointly). The credit will be reduced if:

• You receive a $250 economic recovery payment (described earlier) during 2009,

• Your modified AGI is more than $75,000 ($150,000 if married filing jointly), or

• You take the government retiree credit discussed next.
  Government retiree credit. You can take this credit if you receive a pension or annuity payment in 2009 for service performed for the U.S. Government or any U.S. state or local government (or any instrumentality of one or more of these) and the service was not covered by social security. The credit is $250 ($500 if married filing jointly and both you and your spouse receive a qualifying pension or annuity). However, you cannot take the credit if you receive a $250 economic recovery payment during 2009. If you file a joint return, both you and your spouse receive a qualifying pension or annuity, and both of you receive an economic recovery payment, no government retiree credit is allowed; if only one of you receives an economic recovery payment, the credit is $250.

  Social security number. To take either credit, you must include your social security number (if filing a joint return, the number of either you or your spouse) on your return. A social security number does not include an identification number issued by the IRS.

  Schedule M. Generally, you will use new Schedule M (Form 1040A or 1040) to figure both the making work pay credit and the government retiree credit. Both credits are refundable, which means they are treated like payments you made and may give you a refund even if you had no tax withheld from your pay or your pension. If you are filing Form 1040EZ, you can take the making work pay credit on that form and do not have to file Schedule M.

Depreciation and Section 179 Expense – 2009
Section 179 limits. The maximum section 179 expense deduction you can elect for qualified section 179 property you placed in service in tax years that begin in 2009 remains at $250,000 ($285,000 for qualified enterprise zone property and qualified renewal community property). This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $800,000

Depreciation limits on business vehicles. The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2009 is $2,960 ($10,960 for automobiles for which the special depreciation allowance applies). The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2009 is $3,060 ($11,060 for trucks or vans for which the special depreciation allowance applies).

IRS Commissioner Doug Shulman encouraged taxpayers to take advantage of several new tax credits and deductions this filing season and announced a major enhancement to the Free File program that will allow nearly all taxpayers to e-file for free and accelerate their refunds.

“With so many people facing financial difficulties, we want taxpayers to get all the tax credits they’re entitled to as quickly as they can,” Shulman said. “In addition, we are creating new protections to help people trying to meet their tax obligations. The IRS will do everything it can to help during these tough times.”

Help for People Who Owe Taxes

With many people facing additional financial difficulties, the IRS is taking several additional steps to help people who owe back taxes.

“We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today,” Shulman said. “We want to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.”

On a wide range of situations, IRS employees have flexibility to work with struggling taxpayers to assist them with their situation. Depending on the circumstances, taxpayers in hardship situations may be able to adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action.

The IRS reminds taxpayers who are behind on tax payments and need assistance to contact the phone numbers listed on their IRS correspondence. There could be additional help available for these taxpayers facing unusual hardship situations.

Among the areas where the IRS can provide assistance:

Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may be able to suspend collection without documentation to minimize burden on the taxpayer.

Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.

Additional Review for Offers in Compromise on Home Values: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate.

Prevention of Offer in Compromise Defaults: Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.

Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.