Changes to 1040 for this year...2010 - 2009 form 1040

Tax preparers will find the following section-by-section, line-by-line look at key tax law changes on the 2009 Form 1040 a great start to understanding how the rules have changed. (For a rundown of new rules and regulations that may impact your client's 2009 returns, see the accompanying story, New Rulings Impact 2009 Form 1040.)

Filing Status and Exemptions
The changes on Form 1040 start at the top, with a revised definition of a qualifying child dependent [Code Sec. 152(c)]. The revised rules apply both for dependency exemption purposes as well as for purposes of qualifying for head of household filing status.

In addition, a noncustodial parent claiming an exemption for a child can no longer attach pages from a divorce decree or separation agreement executed after 2008 to back up the claim. The noncustodial parent must attach Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a similar statement signed by the custodial parent releasing the claim to the exemption.

Income
Line 7, Wages, salaries, tips, etc. Military differential payments made after 2008 to former employees while they are on active duty for more than 30 days in the Armed Forces or other uniformed are now treated as wages [Code Sec. 3401(h)]. These payments should be included in box 1 of Form W-2.

Line 19, Unemployment compensation. As a general rule, gross income includes any unemployment compensation benefits received under the laws of the United States or any state. However, for 2009 only, the first $2,400 of unemployment compensation benefits received are excluded from gross income by the recipient [Code Sec. 85(c)].

Line 20, Social Security benefits. During 2009, Social Security recipients received a bonus in the form of a $250 economic recovery payment [2009 ARRA §2201]. The economic recovery payment is tax free and should not be included in income. Moreover, although the payment was made by the Social Security Administration, it should not be included in the amount of Social Security benefits on Line 20a. However, in the case of a working senior, the economic recovery payment will reduce the amount of the Making Work Pay credit otherwise allowable (see below).

Tax and Credits

Line 40, Itemized deductions or standard deduction.

Standard Deductions. As was the case in 2008, taxpayers claiming the standard deduction are entitled to additional standard deduction amounts for real estate tax payments or disaster losses. The additional real property tax deduction can be claimed for up to $500 ($1,000 for married couples filing jointly) of real estate taxes of the type that would be allowable as itemized deduction [Code Sec. 63(c)(7)] . The disaster loss deduction is equal to the difference between personal casualty losses and personal casualty gains attributable to a federally declared disaster [Code Sec. 63(c)(8)].

Also, for 2009, eligible taxpayers can claim an additional standard deduction amount for new motor vehicle taxes [Code Sec. 63(c)(9)] The deduction is limited to the tax on up to $49,500 of the purchase price of a qualified motor vehicle, subject to a phase-out for higher-income taxpayers.

Taxpayers claiming an additional standard deduction amount must check the box on Line 40b and complete the following:

NEW SCHEDULE L. Ironically, with the growing number of "add-ons," the standard deduction, which was intended to provide simplicity, has become nearly as complex as itemizing deductions. Taxpayers claiming any of the additional standard deduction amounts must complete new Schedule L, Standard Deduction for Certain Filers. At 21 lines, the new schedule is only slightly shorter than 30-line Schedule A for itemizers. In addition, taxpayers claiming any additional standard deduction amounts cannot use simplified Form 1040-EZ.
Itemized Deductions. The new motor vehicle sales tax deduction also shows up as a new entry (Line 7) on Schedule A, Itemized Deductions, along with an accompanying worksheet. The itemized deduction for motor vehicle sales taxes is subject to the same rules and limitations as the standard deduction add-on.

Taxpayers claiming personal casualty or theft losses on Line 20 of Schedule A face some new rules. For 2009, the per-casualty deduction floor is increased from $100 to $500 [Code Sec. 165(h)(1)]. In addition, net disaster losses are deductible without regard to whether aggregate net casualty losses exceed 10% of adjusted gross income (AGI) [Code Sec. 165(h)(3)]. For purposes of applying the 10% limitation to other personal casualty or theft losses, losses deductible as a disaster loss are ignored. This has the effect of treating net disaster losses as a deduction separate from all other non-disaster casualty and theft losses. These deductions are computed on a revised version of Form 4684, Casualties and Thefts.

Line 45, Alternative minimum tax. ARRA increased the individual AMT exemption amounts for tax years beginning in 2009 to (1) $70,950, in the case of married individuals filing a joint return and surviving spouses; (2) $46,700 in the case of other unmarried individuals; and, (3) $35,475 in the case of married individuals filing separate returns [Code Sec. 55]. Also for tax years beginning in 2009, ARRA allows an individual to offset the entire regular tax liability and alternative minimum tax liability by nonrefundable personal credits.

Line 49, Education credits. For 2009, a modified version of the Hope Scholarship credit (aka the American Opportunity credit) may be claimed for expenses paid for any of the first four years of a student's post-secondary education [Code Sec. 25A]. The maximum credit is $2,500 per eligible student (100% of the first $2,000 of qualified expenses and 25% of the next $2,000 of qualified expenses, subject to a phase-out for higher income taxpayers. For 2009, the definition of qualified expenses is expanded to include course materials in addition to tuition and fees. Up to 40% of the otherwise allowable credit is refundable (unless the taxpayer claiming the credit is subject to the "kiddie tax"). The modified credit is calculated on a revised version of Form 8863, Education Credits (American Opportunity, Hope, and Lifetime Learning Credits).

Lines 52 and 53, Other credits. A number of new or improved energy-related tax credits can be claimed for 2009. These include

The nonbusiness energy property credit (Form 5695) [Code Sec. 25C].
The residential energy efficient property credit (Form 5695)[Code Sec. 25D].
The credit for qualified plug-in electric vehicles (Form 8834) [Code Sec. 30].
The alternative motor vehicle credit (Form 8910) [Code Sec. 30B].
The alternative fuel vehicle refueling property credit (Form 8911) [Code Sec. 30C].
The credit for new qualified plug-in electric drive motor vehicles (Form 8936) [Code Sec. 30D].
The plug-in conversion credit (Form 8910) [Code Sec. 30B].
These credits are computed on the appropriate forms and entered on Lines 52 and 53 of Form 1040.

Other Taxes

Line 60, Total tax. Taxpayers frequently must add additional taxes to the income tax computed in the Tax and Credit section of the forms. Some of these taxes, like self-employment tax, have separate lines on Form 1040, but others must be computed off the form and included in the total tax on Line 60.

For 2009, some higher-income taxpayers who received the new COBRA premium subsidy must recapture all or part of the subsidy as an additional tax. Eligible individuals who became entitled to COBRA coverage during 2009 because of an involuntary termination of employment received the subsidy in the form of a 65% reduction in the otherwise required premium for health care continuation coverage. However, a recapture rule applies for taxpayer's with modified AGI above $125,000 ($250,000 for joint return filers). The full amount of the subsidy is recaptured for taxpayers with modified AGI of more than $145,000 ($290,000 for joint filers). The recapture amount should be entered on the dotted line next to Line 60 and identified as COBRA. The amount should be included in the total tax entered on Line 60.

Any recapture of the new first-time homebuyer credit is also included in the total tax on Line 60 (see also Line 67 below).

Payments

Line 63, Making work pay and government retiree credits. While most wage earners received the benefit of the Making Work Pay credit through reduced withholding during the year, all eligible taxpayers will still have to compute the credit on their 2009 returns. The credit is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 in the case of a joint return). The credit is phased out when AGI is more than $75,000 ($150,000 for joint filers). Here again, the 2009 Form 1040 contains something new.

NEW SCHEDULE M. This new page-long form is used to calculate the Making Work Pay credit, which is then entered as a payment on Line 63 of Form 1040.
Certain payments and credits for government retirees reduce the Making Work Pay credit. These reductions are calculated on Schedule M.

Line 64, Earned income credit. ARRA increased the EITC credit percentage for families with three or more qualifying children to 45% for 2009 and 2010 [Code Sec. 32]. Thus, for 2009 taxpayers with three or more qualifying children may claim a credit of 45% percent of earnings up to $12,570, resulting in a maximum credit of $5,656.50. The Act also increased the threshold phase-out amounts for married couples filing joint returns to $5,000 above the threshold phase-out amounts for other filers for 2009 and 2010. For 2009, the maximum credit of $3,043 for one qualifying child is available to joint filers with earnings between $8,950 and $21,420. The credit begins to phase down for joint filers at a rate of 15.98% earnings above $21,420. The credit is phased down to $0 at earnings of $40,463.

Line 65, Additional child tax credit. To the extent the child credit (Line 51) exceeds a taxpayer's tax liability, the taxpayer is eligible for a refundable credit (the additional child tax credit). As a general rule, the refundable credit is calculated using the earned income formula, under which the refundable credit is equal to 15% of earned income in excess of a threshold dollar amount. The threshold dollar amount is indexed for inflation. The threshold dollar amount for 2009 was originally set at $12,550 for 2009, but was reduced to $3,000 by the American Recovery and Reinvestment Act [Code Sec. 24]. The additional child credit is treated as a payment of tax on Line 65 of Form 1040.

Line 66, Refundable education credit. This line is used to claim the refundable portion of the American Opportunity credit (see Line 49 above). The refundable portion of the credit is calculated on revised Form 8863.

Line 67, First-time homebuyer credit. Last, but far from least, taxpayers who purchased a new home during 2009 may be eligible for a first-time homebuyer credit [Code Sec. 36]. The maximum credit amount is $8,000 ($4,000 for a married individual filing separately) for homes purchased after December 31, 2008, and before December 1, 2009. The credit phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase. The credit is refundable and is treated as a payment of tax on Line 67 of the 2009 Form 1040. Note, however, that a taxpayer may elect to treat a home purchased in the eligible period in 2009 as if purchased on December 31, 2008, for purposes of claiming the credit on the 2008 tax return. The first time homebuyer credit is calculated on a revised version of Form 5405, First-Time Homebuyer Credit and Repayment of the Credit.

As its name implies, Form 5405 is also used to calculate recapture of a first-time homebuyer credit claimed for 2008. For homes purchased in 2008, recapture is required ratably over 15 years beginning with the second year taxable year after the year the home was purchased. Consequently, ratable recapture won't kick in until 2010. However, recapture is also required if the home is sold or otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase. Any repayment amount is entered as an additional tax on Line 60 of Form 1040 with the caption "FTHCR" entered on the dotted line.

Note: Ratable recapture does not apply to homes purchased in 2009; however, recapture is required if the home is sold or ceases to be a principal residence within 36 months of purchase.

Refund
As in prior years, taxpayers can direct that all or part of a tax refund be directly deposited to a checking or savings account or to a TreasuryDirect® online account to buy U.S. Treasury marketable securities and savings bonds. Starting with the 2009 return, taxpayers can use a refund to buy up to $5,000 of U.S. Series I Savings Bonds without setting up a TreasuryDirect® account. Amounts requested must be in multiples of $50.