Tax Changes for Health Insurance Buyers, Home Buyers and the Unemployed
Kathy Kristof

Welcome to tax season -- the most dreaded time of year.

It's not just that preparing a tax return is time-consuming and costly -- although it's clearly both. The Internal Revenue Service estimates that it takes roughly 23 hours and costs about $300, on average, to compile and file a Form 1040.

There is also the stress of not knowing whether you've claimed all of the deductions and credits you're due, or made some dumb mistake that could have tax authorities on your tail.

"If we go too small we feel cheated and resentful, and if we claim too much we may feel jittery and anxious, looking over our shoulder for the tax man in the trench coat," said Brad Klontz, a financial psychologist and co-author of "Mind Over Money: Overcoming the Money Disorders That Threaten Our Financial Health."

Every year there are changes, whether to regulations or to your own circumstances. It's rare to be able to simply put new numbers on the same old lines.

This year there are some particularly vexing issues, said Mark Luscombe, senior tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

Health Insurance

If you buy health insurance and you're self-employed, there's a new write-off that could save you a serious chunk of change. It allows you to deduct your health insurance premiums against your self-employment taxes.

Health insurance premiums have been deductible against income taxes for years. But this break -- valid only for 2010 -- allows you to subtract this cost from the income that's subject to Social Security taxes too. That can save roughly 15.3 percent on your annual health premium cost. So, if you pay $500 a month in premiums, you'll save about $918 in tax.

Unfortunately, figuring out where to claim this deduction isn't easy. Apparently because it's so short-lived, no one bothered to include it on the 1040 or even the IRS Schedule SE, where your Social Security and Medicare taxes are calculated, Luscombe said. You need to write it in on the SE form, putting the cost in brackets on Line 3 to show that you've subtracted it from your otherwise taxable self-employment earnings.

Along the same lines: If you got laid off and received subsidized COBRA health insurance coverage through a former employer but managed to earn more than $125,000 as a single or $250,000 as a married couple for the year, you need to pay the subsidy back. How? Hire a tax accountant. The process is confusing, and you've earned enough to share the wealth. The good news is that tax preparation services are tax deductible.

Home Buyers

A first-time home buyer's tax credit allows those who bought a home during early 2010 to claim a credit of up to $8,000 or 10 percent of the purchase price, whichever is less. Those who were longtime homeowners but moved can claim up to $6,500 in tax credits if they happened to buy during the right months. To claim either credit, taxpayers need to fill out a Form 5405.

But because homebuyer breaks were revamped several times during the course of two years, the trigger dates and rules determining who qualifies and what documentation is required are complicated, to say the least.

Generally speaking, if you bought a home between November 2009 and May 2010, you might qualify for some kind of credit. If you are in this situation, it would be prudent to call the free IRS help line at (800) 829-1040 or seek help from a qualified professional.

If you do claim one of these homebuyer credits, you won't be able to file your return electronically because the IRS needs you to submit home closing documents aimed at deterring the sort of widespread fraud that hit the first-time home buyer program in its first year.

In addition, if you bought a home during 2008 to take advantage of the first iteration of this break -- the credit was revised four times -- you didn't really get a credit. You got a loan. Taxpayers who claimed the $7,500 tax break for a 2008 home purchase must start repaying the money with their 2010 returns. That also requires you fill out a Form 5405.

Unemployment Benefits

One more change: During 2009, the federal government opted to give unemployed workers a break by excluding $2,400 of their unemployment benefits from tax. That exclusion has expired, so every dollar of unemployment benefits received in 2010 is subject to income taxes.

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