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    Most small business owners know that hiring the right people is essential to their success. However, small businesses often face hiring challenges that don't affect larger organizations. Here are some of the most common hiring challenges facing small businesses today, as well as tips for overcoming them.
  • Missed the deadline to file your Schedule C business tax return? Here are your next steps. May 8, 2017
    For most small business taxpayers filing schedule C with their personal income tax return, the filing deadline has now passed. If you haven't already filed your return or requested an extension, it's now too late to do so. However, you can minimize the damage and the associated expense by following these simple steps.
  • 5 Great Ways to Invest Your Tax Refund April 18, 2017
    Preparing a tax return is no one's favorite task, but most people will have to submit one every year. Fortunately, if you are entitled to a tax refund, filing your tax return ends in an exciting reward. Although it may be tempting to use your tax refund to purchase something frivolous, such as a new […]
  • Is your small business maximizing its deductions? 5 things to capitalize on this tax season April 5, 2017
    When you own a small business, tax season can be a stressful time. However, you can lower your tax liability by maximizing the small business tax deductions you claim against your income. Here are five small business deductions you need to remember when you prepare your taxes this year.
  • Avoid becoming a victim to scams this tax season with these 4 tips March 29, 2017
    It's tax season, and small business taxpayers everywhere are vulnerable to scams. A tax scam can come in many different forms, but the goals are usually similar. Scammers want to find a way to benefit financially, so they may try to steal your identity, your tax refund or important account information. In other cases, a […]
  • How Accurate Financial Reporting Contributes to Small Business Success and Growth November 16, 2016
    Although accounting-related tasks are an integral part of the management of every business, few business owners enjoy the time they spend dealing with their books. Most business owners would rather focus on their products and service, as perhaps they should. Nonetheless, having access to current financial information is essential in order to ensure the success […]
  • Keeping Your Business' Financial Records Safe September 20, 2016
    Regardless of the size of your business, you are likely to accumulate a lot of financial records as you operate. Because you may need to refer to these documents for financial planning, collection or tax purposes in the future, it is important to keep them safe and organized. Follow the steps below to create a […]
  • How to Get Financing for Your Small Business September 12, 2016
    Whether you are just starting your small business or you are looking for a way to expand in a new market, finding the right sources of financing is essential to your success. However, unless you are independently wealthy, getting the money you need may be challenging. To find financing for your small business, use the […]
  • How to Keep Seasonal Businesses Thriving Year-Round September 9, 2016
    Owning and operating a seasonal business presents challenges that are not encountered by owners of traditional businesses. One of the most notable issues involves fluctuations in cash flow. During the business's high season, your productivity increases and you bring in high levels of revenue. During the off-season, however, cash flow slumps and financial problems can […]
  • How Escalating Minimum Wage Impacts Small Business August 8, 2016
    The topic of minimum wage increases has been discussed extensively in the media, in political forums and in private debates. While some lawmakers want to leave the minimum wage as it is, others are pushing to increase it in order to improve the financial situation of the working poor. In fact, several cities in the […]

Archive for the ‘Federal Tax News’ Category

IRS Voluntary Worker Classification Settlement Program

Tuesday, September 27th, 2011

IRS detailed new program for employers to receive relief from payroll taxes otherwise owed for agreeing to prospectively treat workers as employees. To be eligible, employer must have filed Form 1099s for each worker for past 3 years, and not be currently under audit. In exchange for agreement to treat workers as employees, employer will be liable for 10% of liability due for most recent tax years, as determined under reduced rates of?Code Sec. 3509 , but won’t be liable for penalties and interest and won’t be subject to audit for employment tax issues. Employer participating in program will agree to extend period of limitations on assessment of employment taxes for three years for first, second and third calendar years beginning after date on which employer has agreed under program to begin treating workers as employees. Those who are accepted into program will execute closing agreement with IRS and pay full amount due at same time.

The 2010 Tax Relief Act

Friday, December 17th, 2010

Early this morning, the U.S. House of Representatives passed a tax bill extending the so-called Bush-era tax cuts as well as making law a first-ever reduction in the payroll tax, albeit for only a one-year period. Following is a summary of the major provisions of the bill.

Tax Cuts Extended for Two Years

The income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35% (instead of moving to 15%, 28%, 31%, 36% and 39.6%). Additionally, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% (instead of dropping to 167%) of the 15% tax bracket for individual filers.

Preferential Rates For Capital Gains and Qualified Dividends Extended for Two Years

Long-term capital gain rate will continue to be taxed at a maximum rate of 15%.

Temporary Employee/Self-Employed Payroll Tax Cut for 2011

Under current law, employees pay a 6.2% Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay 12.4% Social Security self-employment taxes on all their self-employment income up to the same threshold. For 2011, the 2010 Tax Reform Act gives a two-percentage-point payroll/self-employment tax holiday for employees and self-employeds. As a result, employees will pay only 4.2% Social Security tax on wages and self-employment individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to the threshold.

Tax Breaks for Individuals Retroactively Reinstated and Extended Through 2011

The $250 above-the-line deduction for certain expenses of elementary and secondary school teachers;

The election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes; the above-the-line deduction for qualified tuition and related expenses;

The rule allowing premiums for mortgage insurance to be deductible as interest that is qualified residence interest and;

The tax credit for energy-efficient improvements to existing homes.

Business Standard Mileage and Other Rates Increase for 2011

Monday, December 6th, 2010

IRS has announced that the optional mileage allowance for owned or leased autos is 51? per mile for business travel after 2010. That’s 1? more than the 50? allowance for business mileage during 2010. Further, the 2011 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19? per mile, 2.5? more per mile than the 16.5? for 2010. The mileage rate for driving an auto for charitable use during 2011 will remain unchanged at 14? per mile (a statutory rate that’s not adjusted for inflation).

Highlights of the Small Business Jobs Act of 2010

Monday, September 27th, 2010

The House and Senate passed the “Small Business Jobs Act of 2010″ and the President signed the bill today. Here are some highlights from the bill:

Dollar amounts for “Section 179″ Expensing Liberalized

For tax years beginning in 2010, the 2010 Small Business Act increases the maximum Code Sec. 179 expensing amount from $250,000 to $500,000

Qualified Real Property Expensing

For any tax year beginning in 2010 or 2011, a taxpayer can elect to treat up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) as expensing-eligible property. (Certain types of property, such as that used for lodging, would not be eligible.) (Code Sec. 179(f)(1) ) The dollar cap applies to the aggregate cost of qualified real property. This change applies to property placed in service after Dec. 31, 2009, in tax years beginning after that date.

Automobile/Truck Depreciation Limits Increase by $8,000.

Depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos is subject to dollar limits that are annually adjusted for inflation. The 2010 Small Business Act boosts the first year business-auto write-off by $8,000 (i.e., from $3,060 to $11,060 for autos and from $3,160 to $11,160 for light trucks or vans) for vehicles that are qualified property for bonus depreciation purposes (i.e., are new and acquired and placed in service in 2010).

Deduction for Start-Up Expenses Increased

For tax years beginning in 2010, the deduction for startup expenses under Code Sec. 195 is increased from $5,000 to $10,000 and the phaseout threshold is increased from $50,000 to $60,000.

Special One-Year 2010 Self-Employment Tax Break

For tax years beginning after Dec. 31, 2009, but before Jan. 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer can be taken into account (i.e., can be deducted) in computing net earnings from self-employment.

First-Time Homebuyer Credit has Expired as of May 1, 2010

Sunday, April 18th, 2010

Absent further Congressional action, both the regular $8,000 first-time homebuyer credit and the reduced $6,500 credit for long-term residents will generally expire for homes purchased after April 30.

The current provision extended the first-time homebuyer credit to apply to a principal residence bought before May 1, 2010; it also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. Certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

For purchases after Nov. 6, 2009, a taxpayer(s) may claim the homebuyer credit if the taxpayer(s) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that the taxpayer buys the subsequent principal residence. The maximum allowable homebuyer credit for such taxpayers, who are treated as first time homebuyers for purposes of the first-time homebuyer credit, is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

IRS & Massachusetts Extending Certain Filing and Payment Deadlines

Saturday, April 3rd, 2010

The Internal Revenue Service has announced that it is postponing until May 11, 2010 certain deadlines for taxpayers who reside or have business in the presidentially-declared disaster areas in Massachusetts due to severe storms and flooding beginning March 12, 2010. This includes the April 15 deadline for filing 2009 individual income tax returns, making income tax payments, and making 2009 contributions to an individual retirement account (IRA). In addition, the IRS will waive the failure to deposit penalties for employment excise deposit due on or after March 12, 2010 and on or before March 29, 2010, as long as the deposits were made by March 29, 2010.

In response to the IRS’ tax deadline extension, the Massachusetts Department of Revenue has announced that the new filing deadline for state tax returns will be midnight May 11, 2010.

Federally-declared disaster areas include Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk, and Worcester Counties.

Affected Taxpayers

The affected taxpayers are individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet certain tax deadlines are in the covered disaster area, are also entitled to relief. Also, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Tax Relief

Affected taxpayers have until May 11, 2010 to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after March 12, 2010, and on or before May 11, 2010. Affected taxpayers also have until May 11, 2010 to perform other time-sensitive actions that are due to be performed on or after March 12 and on or before May 11.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Form 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise deposits due on or after March 12, 2010, and on or before March 29, 2010, provided the taxpayer made these deposits by March 29, 2010.

Casualty Losses

Affected taxpayers in a federally-declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation ?Massachusetts/Severe Storms and Flooding? at the top of the form so that the IRS can expedite the processing of the refund.

Abatement Requests

An affected taxpayer who receives a penalty notice from the IRS may request the IRS to abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

Hiring Incentives to Restore Employment (HIRE) Act of 2010

Thursday, April 1st, 2010

The President recently signed into law the ?Hiring Incentives to Restore Employment Act of 2010?. The centerpiece of this Act is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. In addition to these new hiring incentives, the HIRE Act also includes a one-year extension of the enhanced small business expensing option under Code Sec. 179 . Both of these provisions are extremely important to many businesses.

Payroll tax holiday and up-to-$1,000 credit for employers who hire unemployed workers

To help stimulate the hiring of workers by the private sector, the new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800?the maximum amount of wages subject to Social Security taxes?by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after March 18 receive the exemption for payroll taxes. Some additional features of the new hiring incentive include:

1. The tax benefit of the new incentive is immediate. It puts money into a business’ cash flow immediately, since the tax is simply not collected in the first place.

2. The tax benefit generally applies only to private-sector employment, including nonprofit organizations?public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.

3. There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010. There is no double dipping.

4. An employer can’t claim the new tax breaks for hiring family members.

5. A worker who replaces another employee who performed the same job for the employer isn’t eligible for the benefit, unless the prior employee left the job voluntarily or for cause.

6. For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn’t been employed for more than 40 hours during the 60-day period ending on the date the employment begins.

The incentive isn’t biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker. The payroll tax holiday doesn’t apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.

The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03.

Extension of enhanced small business expensing

The new law gives a one-year lease on life to enhanced expensing rules, which allow qualifying businesses the option to currently deduct the cost of business machinery and equipment, instead of recovering it via depreciation over a number of years. For tax years beginning in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009. Had the HIRE Recovery Act not been passed and signed into law, these dollar limits would have dropped this year to $134,000 and $530,000 respectively.

Tax Changes Affecting Small Business in the 2010 Health Reform Legislation

Thursday, April 1st, 2010

Following are the provisions of the landmark health reform legislation as it relates to small businesses.

Tax credits to certain small employers that provide insurance

The new law provides small employers with a tax credit (i.e., a dollar-for-dollar reduction in tax) for nonelective contributions to purchase health insurance for their employees. The credit can offset an employer’s regular tax or its alternative minimum tax (AMT) liability.

Small business employers eligible for the credit

To qualify, a business must offer health insurance to its employees as part of their compensation and contribute at least half the total premium cost. The business must have no more than 25 full-time equivalent employees (?FTEs?), and the employees must have annual full-time equivalent wages that average no more than $50,000. However, the full amount of the credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of less than $25,000.

Years the credit is available

The credit is initially available for any tax year beginning in 2010, 2011, 2012, or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is health insurance coverage purchased from an insurance company licensed under state law. For tax years beginning after 2013, the credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for two years. The maximum two-year coverage period does not take into account any tax years beginning in years before 2014. Thus, an eligible small employer could potentially qualify for this credit for six tax years, four years under the first phase and two years under the second phase.

Calculating the amount of the credit

For tax years beginning in 2010, 2011, 2012, or 2013, the credit is generally 35% (50% for tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums. The credit phases out as firm-size and average wages increase. Tax-exempt small businesses meeting these requirements are eligible for payroll tax credits of up to 25% for tax years beginning in 2010, 2011, 2012, or 2013 (35% in tax years beginning after 2013) of the employer’s nonelective contributions toward the employees’ health insurance premiums.

Special rules

The employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an eligible small employer pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the other 50% of the premium cost.

Self-employed individuals, including partners and sole proprietors, two percent shareholders of an S corporation, and five percent owners of the employer are not treated as employees for purposes of this credit. Any employee with respect to a self-employed individual is not an employee of the employer for purposes of this credit if the employee is not performing services in the trade or business of the employer. Thus, the credit is not available for a domestic employee of a sole proprietor of a business. There is also a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members. Thus, no credit is available for any contribution to the purchase of health insurance for these individuals and the individual is not taken into account in determining the number of full-time equivalent employees or average full-time equivalent wages.

Most small businesses exempted from penalties for not offering coverage to their employees

Although the new law imposes penalties on certain businesses for not providing coverage to their employees (so-called ?pay or play?), most small businesses won’t have to worry about this provision because employers with fewer than 50 employees aren’t subject to the ?pay or play? penalty. For businesses with at least 50 employees, the possible penalties vary depending on whether or not the employer offers health insurance to its employees. If it does not offer coverage and it has at least one full-time employee who receives a premium tax credit, the business will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment. So, for example, an employer with 51 employees who doesn’t offer health insurance to his employees will be subject to a penalty of $42,000 ($2,000 multiplied by 21). Employers with at least 50 employees that offer coverage but have at least one full-time employee receiving a premium tax credit will pay $3,000 for each employee receiving a premium credit (capped at the amount of the penalty that the employer would have been assessed for a failure to provide coverage, or $2,000 multiplied by the number of its full-time employees in excess of 30). These provisions take effect Jan. 1, 2014.

The ?Cadillac tax? on high-cost health plans

The new law places an excise tax on high-cost employer-sponsored health coverage (often referred to as ?Cadillac? health plans). This is a 40% excise tax on insurance companies, based on premiums that exceed certain amounts. The tax is not on employers themselves unless they are self-funded (this typically occurs at larger firms). However, it is expected that employers and workers will ultimately bear this tax in the form of higher premiums passed on by insurers.

Here are the specifics: The new tax, which applies for tax years beginning after Dec. 31, 2017, places a 40% nondeductible excise tax on insurance companies and plan administrators for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage. An additional threshold amount of $1,650 for single coverage and $3,450 for family coverage will apply for retired individuals age 55 and older and for plans that cover employees engaged in high risk professions. The tax will apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans will be disregarded in applying the tax. The dollar amount thresholds will be automatically increased if the inflation rate for group medical premiums between 2010 and 2018 is higher than the Congressional Budget Office (CBO) estimates in 2010. Employers with age and gender demographics that result in higher premiums could value the coverage provided to employees using the rates that would apply using a national risk pool. The excise tax will be levied at the insurer level. Employers will be required to aggregate the coverage subject to the limit and issue information returns for insurers indicating the amount subject to the excise tax.

Tax Changes Affecting Individuals in the 2010 Health Reform Legislation

Thursday, April 1st, 2010

Following is a summary of the landmark healthcare legislation as it affects Individuals.

Individual Mandate

The new law contains an ?individual mandate??a requirement that U.S. citizens and legal residents have qualifying health coverage or be subject to a tax penalty. Under the new law, those without qualifying health coverage will pay a tax penalty of the greater of: (a) $695 per year, up to a maximum of three times that amount ($2,085) per family, or (b) 2.5% of household income over the threshold amount of income required for income tax return filing. The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment. Exemptions will be granted for financial hardship, religious objections, American Indians, those without coverage for less than three months, aliens not lawfully present in the U.S., incarcerated individuals, those for whom the lowest cost plan option exceeds 8% of household income, those with incomes below the tax filing threshold (in 2010 the threshold for taxpayers under age 65 is $9,350 for singles and $18,700 for couples), and those residing outside of the U.S.

Premium assistance tax credits for purchasing health insurance

The centerpiece of the health care legislation is its provision of tax credits to low and middle income individuals and families for the purchase of health insurance. For tax years ending after 2013, the new law creates a refundable tax credit (the ?premium assistance credit?) for eligible individuals and families who purchase health insurance through an Exchange. The premium assistance credit, which is refundable and payable in advance directly to the insurer, subsidizes the purchase of certain health insurance plans through an Exchange. Under the provision, an eligible individual enrolls in a plan offered through an Exchange and reports his or her income to the Exchange. Based on the information provided to the Exchange, the individual receives a premium assistance credit based on income and IRS pays the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an Exchange, the premium payments are made through payroll deductions.

The premium assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) that are not eligible for Medicaid, employer sponsored insurance, or other acceptable coverage. The credits will be available on a sliding scale basis. The amount of the credit will be based on the percentage of income the cost of premiums represents, rising from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.

Higher taxes on high-income taxpayers

High-income taxpayers will be hit with a double whammy: a tax increase on wages and a new levy on investments.

Higher Medicare payroll tax on wages

The Medicare payroll tax is the primary source of financing for Medicare’s hospital insurance trust fund, which pays hospital bills for beneficiaries, who are 65 and older or disabled. Under current law, wages are subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed people pay both halves of the tax (but are allowed to deduct half of this amount for income tax purposes). Unlike the payroll tax for Social Security, which applies to earnings up to an annual ceiling ($106,800 for 2010), the Medicare tax is levied on all of a worker’s wages without limit.

Under the provisions of the new law, which take in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital insurance tax, but single people earning more than $200,0000 and married couples earning more than $250,000 will be taxed at an additional 0.9% (2.35% in total) on the excess over those base amounts. Employers will collect the extra 0.9% on wages exceeding $200,000 just as they would withhold Medicare taxes and remit them to the IRS. Companies wouldn’t be responsible for determining whether a worker’s combined income with his or her spouse made them subject to the tax. Instead, some employees will have to remit additional Medicare taxes when they file income tax returns, and some will get a tax credit for amounts overpaid. Self-employed persons will pay 3.8% on earnings over the threshold. Married couples with combined incomes approaching $250,000 will have to keep tabs on their spouses’ pay to avoid an unexpected tax bill. It should also be noted that the $200,000/$250,000 thresholds are not indexed for inflation, so it is likely that more and more people will be subject to the higher taxes in coming years.

Medicare payroll tax extended to investments

Under current law, the Medicare payroll tax only applies to wages. Beginning in 2013, a Medicare tax will, for the first time, be applied to investment income. A new 3.8% tax will be imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000 (unindexed). Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). Net investment income is reduced by properly allocable deductions to such income. However, the new tax won’t apply to income in tax-deferred retirement accounts such as 401(k) plans. Also, the new tax will apply only to income in excess of the $200,000/$250,000 thresholds. So if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax. Because the new tax on investment income won’t take effect for three years, that leaves more time for Congress and the IRS to tinker with it. So we can expect lots of refinements and ?clarifications? between now and when the tax is actually rolled out in 2013.

Floor on medical expenses deduction raised from 7.5% of adjusted gross income (AGI) to 10%

Under current law, taxpayers can take an itemized deduction for unreimbursed medical expenses for regular income tax purposes only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI. The new law raises the floor beneath itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. The AGI floor for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Limit reimbursement of over-the-counter medications from HSAs, FSAs, and MSAs

The new law excludes the costs for over-the-counter drugs not prescribed by a doctor from being reimbursed through a health reimbursement account (HRA) or health flexible savings accounts (FSAs) and from being reimbursed on a tax-free basis through a health savings account (HSA) or Archer Medical Savings Account (MSA), effective for tax years beginning after Dec. 31, 2010.

Increased penalties on nonqualified distributions from HSAs and Archer MSAs

The new law increases the tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

Limit health flexible spending arrangements (FSAs) to $2,500

An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent coverage in employer health plans

Effective on the enactment date, the new law extends the general exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the tax year. This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise tax on indoor tanning services

The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized adoption credit and adoption assistance rules

For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011 The adoption assistance exclusion is also increased by $1,000.

Expanded College Tuition Tax Credits

Thursday, April 1st, 2010

The American Opportunity Credit Helps Pay for First Four Years of College.

More parents and students can use a federal education credit to offset part of the cost of college. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Here are some of its key features:
? Tuition, related fees and required course materials, such as books, generally qualify.
? The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000.
? The credit is reduced or eliminated for taxpayers with incomes above certain income levels.
? Forty percent of the credit is refundable.
? Married persons filing separate returns don?t qualify.
? The credit is only allowed for the first four tax years of a post-secondary education.