1. Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes. The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to tax.
2. Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip–splitting arrangement with fellow employees.
3. Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.
4. Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income.

For more information see IRS Publication 531, Reporting Tip Income and Publication 1244 which are available at http://www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676)

General rules. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the donee organization showing its name, plus the date and amount of the contribution. It’s not sufficient to maintain other written records, such as a log of contributions.

For a contribution of property other than money, you generally must maintain a receipt from the donee organization showing its name, the date and location of the contribution, and a detailed description (but not the value) of the property. You need not obtain a receipt for a property donation, however, if circumstances make obtaining a receipt impracticable. In that case, you must maintain a reliable written record of the contribution. The information required in such a record depends on factors such as the type and value of property contributed.

Stricter substantiation requirements apply in the case of charitable contributions with a value of $250 or more. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization. You must have the receipt in hand by the time you file your return (or by the due date, if earlier) or you won’t be able to claim the deduction.

The acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the donee provided any goods or services in consideration for the contribution, and a good faith estimate of the value of any such goods or services. If you received only “intangible religious benefits,” such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and so doesn’t reduce the charitable deduction available.

If you make separate contributions of less than $250, you won’t be subject to the requirement to get a written receipt, even if the sum of the contributions to the same charity total $250 or more in a year. Also, if you have contributions withheld from your wages, the deduction from each payment of wages is treated as a separate contribution for purposes of the $250 threshold.

In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property with a value of more than $5,000, and to attach an appraisal summary to the tax return. A qualified appraisal isn’t required for publicly-traded securities for which market quotations are readily available. A partially completed appraisal summary and the maintenance of certain records are required for (1) nonpublicly-traded stock for which claimed deduction is greater than $5,000 and no more than $10,000, and (2) certain publicly-traded securities for which market quotations are not readily available. A qualified appraisal is required for gifts of art valued at $20,000 or more. IRS may also request that you provide a photograph.

If an item has been appraised at $50,000 or more, you can ask IRS to issue a “Statement of Value” which can be used to substantiate the value.

Recordkeeping for contributions for which you receive goods or services. If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But your contribution is fully deductible if:

• you received free, unordered items from the charity that cost no more than $9.60 in 2010 ($9.50 in 2009) in total;
• you gave at least $48.00 in 2010 ($47.50 in 2009) and received only token items (bookmarks, key chains, calendars, etc.) that bear the charity’s name or logo and cost no more than $9.60 in 2010 ($9.50 in 2009) in total; or
• the benefits that you received are worth no more than 2% of your contribution and no more than $96 in 2010 ($95 in 2009).

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services. Be sure to keep these statements.

Cash contribution made through payroll deductions. A contribution that you make by withholding from your wages may be substantiated by a pay stub, Form W-2, or other document furnished by your employer that shows the amount withheld for the purpose of a payment to a charity. You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn’t provide goods or services in return for contributions made by payroll deduction.

The deduction from each wage payment of wages is treated as a separate contribution for purposes of the $250 threshold.

Substantiating contributions of services. Although you can’t deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed and when you performed them, and the organization for which you performed the services. Keep receipts, canceled checks, and other reliable written records relating to the services and expenses.

As discussed above, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn’t know how much those expenses were. However, you can satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return, and a description and good-faith estimate of the value of those goods or services.

Please call me if you have any questions about these rules. Together we can make sure that you’ll get all the deductions to which you’re entitled come next filing deadline.

2.    Exemption for the child,

3.    Earned income credit (EIC),

4.    Child tax credit (CTC),

5.    Credit for child and dependent care expenses,

6.    Credits or deductions for qualified education expense, and

7.    Deductions for medical and dental expenses.

Head of household filing status

An individual who is considered unmarried and has a qualifying child may be eligible to use head of household as his or her filing status. It generally is more favorable than the single filing status.

An unmarried taxpayer may qualify as a head of household by maintaining as his home a household that is the principal place of abode for more than half the year of a qualifying child of the taxpayer.  However, the taxpayer won’t qualify as a head of household if the qualifying child is married at the close of the taxpayer’s tax year and isn’t a dependent of the taxpayer because he filed a joint return, or because he isn’t a U.S. citizen or resident, or both

A “qualifying child” is an individual who: (1) bears a specified relationship to the taxpayer including being a grandchild of the taxpayer; (2) has the same principal place of abode as the taxpayer for more than one-half of that tax year; (3) hasn’t attained a specified age (see below); and (4) hasn’t provided over one-half of his or her own support for the calendar year in which the taxpayer’s tax year begins

An individual meets the age requirement in (3), above, if he:

… hasn’t attained the age of 19 as of the close of the calendar year in which the tax year of the taxpayer begins;

… is a student who hasn’t attained the age of 24 as of the close of that calendar year; or

… is permanently and totally disabled at any time during the calendar year

Exemption for the child

A grandparent who has a child living with him or him may be able to claim the child as a dependent and, if so, qualify for other tax breaks, as noted below.

A taxpayer is entitled to a deduction equal to the exemption amount for each person who qualifies as his “dependent.”  A person generally qualifies as the taxpayer’s dependent if the person is the taxpayer’s qualifying child (see above) or qualifying relative

Earned income credit

A grandparent who is working and has a qualifying child living with him or her may be able to take the EIC, even if the grandparent is 65 years of age or older. This could generate a refund even if the grandparent owes little or no tax.

An eligible individual (see below) is allowed an EIC equal to the credit percentage of earned income (up to an “earned income amount”) for the tax year). The EIC for a tax year (determined under IRS tables) can’t be more than the excess (if any) of (1) the credit percentage of the earned income amount, over (2) the phaseout percentage of AGI (or earned income, if greater) over a phaseout amount

An individual who has a “qualifying child” for the tax year is an eligible individual. A “qualifying child” for EIC purposes means a qualifying child of the taxpayer, as defined for the dependency exemption in (see above), but without the requirement that the child not have provided more than half his own support.

Child tax credit

A grandparent who is raising a grandchild may be able to take the CTC and, under specific circumstances, the additional CTC. The latter may provide a refund even if no federal income taxes are owed.

For 2010, individuals may claim a maximum $1,000 CTC for each qualifying child (see above) the taxpayer can claim as a dependent. The child must be under 17 and a U.S. citizen or resident alien.

The amount of the allowable credit is reduced (not below zero) by $50 for each $1,000 (or fraction thereof) of modified AGI (AGI increased by excluded foreign, possession, and Puerto Rico income) above: $110,000 for joint filers; $75,000 for unmarried individuals; and $55,000 for marrieds filing separately.

The CTC is refundable, but only to the extent of the greater of: (1) 15% of taxable earned income above $3,000 for 2010; or (2) for a taxpayer with three or more qualifying children, the excess of his social security taxes for the tax year over his earned income credit for the year. (IRS calls the amount of the CTC that’s refundable (on Form 8812) the “additional child tax credit.”

Credit for child and dependent care expenses

This credit may be available if a grandparent pays someone to care for a qualifying individual, i.e., a dependent under age 13, or his or her spouse or a dependent who is physically or mentally not able to care for himself or herself, while the grandparent works or looks for work

The credit for 2010 is 35% of employment-related expenses for taxpayers with AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but not below 20%. The maximum amount of employment-related expenses that may be used to compute the credit for 2010 is $3,000 for one qualifying individual, or $6,000 for two or more qualifying individuals

Qualified education expense

There are several tax breaks that may be available to a grandparent who pays his or her grandchild’s education costs. These include:

… Education credits. An individual taxpayer may claim an income tax credit for the Hope scholarship tax credit (renamed the American opportunity tax credit (AOTC) for 2010) and the Lifetime Learning credit for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouses, and their dependents. The AOTC is available in 2010 for qualified expenses of the first four years of undergraduate education; the Lifetime Learning credit is available for qualified expenses of any post-high school education at “eligible educational institutions.” Both credits can’t be claimed in the same tax year for expenses of any one student, and it phases out for higher-income taxpayers. For tax years beginning in 2010, individuals may elect a personal, partially refundable tax credit equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period. Taxpayers may elect a Lifetime Learning credit equal to 20% of up to $10,000 of qualified tuition and related expenses paid during the tax year. The maximum credit is $2,000. Unlike the AOTC/Hope credit, which is available for the qualifying expenses of each qualifying student, the Lifetime Learning credit is available only per taxpayer.

… Coverdell Education Savings Accounts (CESAs). Taxpayers can contribute up to $2,000 per year to CESAs in 2010, formerly called education IRAs, for beneficiaries under age 18 (and, in 2010, special needs beneficiaries of any age). The account is exempt from income tax, and distributions of earnings from CESAs are tax-free if used for qualified education expenses

… Qualified Tuition Programs (QTPs) —529 Plans. A person can make nondeductible cash contributions to a QTP/529 plan on behalf of a designated beneficiary. The earnings on the contributions build up tax-free, and distributions from a QTP are excludable to the extent used to pay for qualified higher education expenses

… Higher Education Exclusion for Savings Bond Income. Qualified U.S. savings bond income is excluded if redemption proceeds don’t exceed qualified higher education expenses. The exclusion phases out at higher levels of modified adjusted gross income. Qualified higher education expenses are tuition and fees required for the enrollment or attendance of taxpayer, taxpayer’s spouse or any dependent for whom taxpayer is allowed a dependency exemption, at an eligible educational institution, e.g., most colleges, junior colleges, nursing schools and vocational schools

… Above-the-Line Deduction for Higher-Education Expenses (before 2010). For tax years beginning before 2010, eligible individuals may deduct higher education expenses—i.e., “qualified tuition and related expenses” of the taxpayer, his spouse, or dependents—as an adjustment to gross income to arrive at adjusted gross income. The higher education deduction can’t exceed: $4,000 for taxpayers whose modified AGI for the tax year doesn’t exceed $65,000 ($130,000 for a joint return); $2,000 for taxpayers whose modified AGI exceeds $65,000 ($130,000 for a joint return), but doesn’t exceed $80,000 ($160,000 for a joint return); and zero for other taxpayers.

… Deduction for Interest on Qualified Education Loans. Qualifying individuals may claim an above-the-line deduction for up to $2,500 of interest paid on a qualified higher education loan, i.e., any debt incurred by the taxpayer solely to pay qualified higher education expenses that are: (1) incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the debt was incurred; (2) paid or incurred within a reasonable period of time before or after the debt is incurred; and (3) attributable to education furnished during a period when the recipient was an eligible student (as defined for the AOTC/Hope credit purposes, i.e., at least a half-time student).

Medical and dental expenses

An individual who itemizes can deduct the amount by which certain unreimbursed medical and dental expenses paid during the year for himself or herself, his or her spouse, and his or her dependents exceed 7.5% of his adjusted gross income.

The midterm elections have changed the Congressional landscape, with Republicans winning control of the House of Representatives and picking up seats in the Senate. Even so, it’s still to early to know exactly how this will affect open tax issues for 2010 and 2011.

Specifically, when the “lame-duck” Congress returns this month, it must decide whether to “patch” the alternative minimum tax (AMT) for 2010 (increase exemption amounts, and allow personal credits to offset the AMT), as it has done in past years. It also must decide whether to retroactively extend a number of tax provisions that expired at the end of 2009. These include, for example, the research credit for businesses, 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, and the additional standard deduction for State and local real property taxes.

In addition, Congress must decide whether to extend the Bush tax cuts for some or all taxpayers. They and other Bush-era tax rules expire at the end of this year. Without Congressional action, individuals will face higher tax rates on their income, including capital gains. Also, unless Congress changes the rules, the estate tax, which isn’t in effect this year, will return next year with a 55% top rate.

In short, year-end planning-which always involves some educated guesswork-is a bigger challenge this year than in past years.

That said, we have compiled a checklist of actions that can help you save tax dollars if you act before year-end. These moves may benefit you regardless of what the lame-duck Congress does on the major tax questions of the day. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

Year End Moves for Individuals

·Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget that you cannot set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids (2010 is the last year that FSAs can be used for nonprescription drugs).

·Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

·Increase your withholding if you are facing a penalty for underpayment of federal estimated tax. Doing so may reduce or eliminate the penalty.

·Take an eligible rollover distribution from a qualified retirement plan before the end of 2010 if your are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2010. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2010, but the withheld tax will be applied pro rata over the full 2010 tax year to reduce previous underpayments of estimated tax.

·Make energy saving improvements to your main home, such as putting in extra insulation or installing energy saving windows or buying and installing an energy efficient furnace, and qualify for a 30% tax credit. The total (aggregate) credit for energy efficient improvements to the home in 2009 and 2010 is $1,500. Unless Congress acts, this tax break won’t be around after this year. Additionally, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home (this break stays on the books through 2016).

· Convert your traditional IRA into a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion will increase your adjusted gross income for 2010. However, you will have the choice of when to pay the tax on the conversion. You can either (1) pay the tax on the conversion when you file your 2010 return in 2011, or (2) pay half the tax on the conversion when you file your 2011 return in 2012, and the other half when you file your 2012 return in 2013.

· Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2011, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.

Take required minimum distributions (RMD) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. A temporary tax law change waived the RMD requirement for 2009 only, but the usual withdrawal rules apply full force for 2010. So individuals age 70 1/2 or older generally must take the required distribution amount out of their retirement account before the end of 2010 to avoid the penalty. If you turned age 70 1/2 in 2010, you can delay the required distribution to 2011, but if you do, you will have to take a double distribution in 2011-the amount required for 2010 plus the amount required for 2011. Think twice before delaying 2010 distributions to 2011-bunching income into 2011 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels.

·Make annual exclusion gifts before year end to save gift tax (and estate tax if it is reinstated). You can give $13,000 in 2010 or 2011 to an unlimited number of individuals free of gift tax. However, you can’t carry over unused exclusions from one year to the next. The transfers also may same family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year End Moves for Business Owners

·Hire a worker who has been unemployed for at least 60 days before year end if you are thinking of adding to payroll soon. Your business will be exempt from paying the employer’s 6.2% share of the Social Security payroll tax on the formerly unemployed new-hire for the remainder of 2010. Plus, if you keep that formerly unemployed new-hire on the payroll for a continuous 52 weeks, your business will be eligible for a nonrefundable tax credit of up-to-$1,000 after the 52-week threshold is reached. This credit will be taken on the business’s 2011 tax return. In order to be eligible, the formerly unemployed new-hire’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Put new business equipment and machinery in service before year-end to qualify for 50% bonus first-year depreciation allowance. Unless Congress acts, this bonus depreciation allowance won’t be available for property placed in service after 2010. Make expenses qualifying for the $500,000 business property expensing option. The maximum amount you can expense for a tax year beginning in 2010 is $500,000 of the cost of qualifying property placed in service for that tax year. The $500,000 amount is reduced by the amount by which the cost of qualifying property placed in service during 2010 exceeds $2 million. Also, within the overall $500,000 expensing limit, you can expense up to $250,000 of qualified real property (certain qualifying leasehold improvements, restaurant property, and retail improvements). Note that at tax return time, you can choose not to use expensing (or bonus depreciation) for 2010 assets. This is something to consider if tax rates go up for 2011 and future years, and you’d rather have more deductions after 2010 than for 2010.

·Set up a self-employed retirement plan if you are self-employed and haven’t done so yet.

·Increase your basis in a partnership or S corporation if doing so will enable you to deduct a loss from it for this year. A partner’s share of partnership losses is deductible only to the extent of his partnership basis as of the end of the partnership year in which the loss occurs. An S corporation shareholder can deduct his pro-rata share of an S corporation’s losses only to the extent of the total of his basis in (a) his S corporation stock, and (b) debt owed to him by the S corporation.

·Consider whether to defer cancellation of debt (COD) income from the reacquisition of an applicable debt instrument in 2010. The business can elect to elect to have the cancelled COD income included in gross income ratably over five tax years beginning with the fourth tax year following the tax year in which the repurchase occurs (i.e., beginning with 2014).

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Guidance addresses tax breaks for hiring new employees. Employers are exempted from paying the employer 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to newly hired qualified individuals. These are workers who: (1) begin employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011, (2) certify by signed affidavit, under penalties of perjury, that they haven’t been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer; (3) do not replace other employees of the employer (unless those employees left voluntarily or for cause), and (4) aren’t related to the employer under special definitions. The payroll tax relief applies only for wages paid from Mar. 19, 2010 through Dec. 31, 2010.

Employers also may qualify for an up-to-$1,000 tax credit for retaining qualified individuals. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

The IRS had issued guidance on these tax breaks in the form of frequently asked questions (FAQs). Updated FAQs explain: when an employee is considered to begin work; how the exemption can be claimed for a new hire who replaces a prior employee; that the exemption can be taken for someone who was self-employed for the entire 60-day lookback period; that minors may sign the HIRE Act employee affidavit (Form W-11); and what counts as wages for the retention credit.

Regulations on election to defer COD income. For debt discharges in tax years ending after Dec. 31, 2008, a taxpayer may elect to have any cancellation of debt (COD) income from the reacquisition of an applicable debt instrument after Dec. 31, 2008, and before Jan. 1, 2011, included in gross income ratably over five tax years. The IRS has issued two sets of regulations on this rule: one applies to C corporations, the other applies to partnerships and S corporations. The regulations cover many complicated issues that arise with the election. For example, the C corporation regulations cover topics such as acceleration of deferred cancellation of debt (COD) income and deferred original issue discount deductions, and the calculation of earnings and profits as a result of making an election.

Relief for homeowners with corrosive drywall. The IRS is allowing individuals with corrosive drywall to apply a safe harbor formula to treat the costs of repairing the defective drywall as a casualty loss. The safe harbor applies for original and amended federal income tax returns filed after Sept. 29, 2010. Reported problems have occurred with certain imported drywall installed in homes between 2001 and 2008. Homeowners have reported blackening or corrosion of copper electrical wiring and copper components of household appliances, as well as the presence of sulfur gas odors. In the case of any individual who pays to repair damage to his personal residence or household appliances that results from corrosive drywall, the IRS won’t challenge his treatment of damage resulting from corrosive drywall as a casualty loss (which might otherwise be difficult to achieve under the regular rules) if the loss is determined and reported under the safe harbor rule. A taxpayer who does not have a pending claim for reimbursement may claim as a loss all unreimbursed amounts paid during the tax year to repair damage to his personal residence and household appliances resulting from corrosive drywall. A taxpayer who has a pending claim (or intends to pursue reimbursement) may claim a loss for 75% of the unreimbursed amount paid during the tax year to repair damage to the taxpayer’s personal residence and household appliances that resulted from corrosive drywall.

Over-the-counter drug costs will no longer be reimbursable. Effective Jan. 1, 2011, unless prescribed or insulin, the cost of over-the-counter medicines cannot be reimbursed from flexible spending arrangements (FSA), health reimbursement arrangements (HRA), Health Savings Accounts (HSA) and Archer Medical Savings Accounts (Archer MSA). The IRS has issued guidance explaining that an individual may be reimbursed for over-the counter medicines or drugs, so long as the individual obtains a prescription for the medicines or drugs. It also makes clear that expenses incurred for over-the-counter medicines or drugs purchased without a prescription before Jan. 1, 2011 may be reimbursed tax-free at any time by an employer-provided plan, including an FSA or HRA, under the terms of the employer’s plan.

Simplified per diem rates lowered effective Oct. 1, 2010. Reimbursements of an employee’s business travel costs (lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified substantiation is provided and the daily rate doesn’t exceed the federal per diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates vary by travel destination, employers can make reimbursements at the simplified “high-low” per diem rates, which assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas. The IRS has issued the “high-low” simplified per diem rates for post-Sept. 30, 2010, travel. An employer may reimburse up to $233 for high-cost localities ($168 for lodging and $65 for M&IE) and $160 for other localities ($108 for lodging and $52 for M&IE). The list of high-cost areas is also updated.

Read more: http://kiplinger.com/columns/ask/archive/new-rules-for-flexible-spending-accounts.html?si=1#ixzz12XFW6KPN
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What are job hunting expenses. Expenses of seeking new employment can encompass a broad range of items. Some of the more common expenses for which deductions have been allowed are:

• the cost of resumes, including postage for sending them to prospective employers;
• job counselling and referral fees;
• employment agency fees;
• telephone charges related to seeking new employment;
• local as well as out-of-town travel for interviews, to the extent not reimbursed by the prospective employer.

Nondeductible items include a loss incurred on forfeiture of a deposit for a home in an area where a new job was anticipated, and a real estate broker’s commission on the sale of a home in connection with a move to a new job location.

For job-search expenses to be deductible, you must be looking for employment in the same trade or business in which you are engaged. For this purpose, a corporation’s secretary-treasurer seeking a position as assistant to the vice president of finance at another corporation was seeking employment in the same trade or business. But an artist seeking work in the business end of the art field was held to be looking for a job in a new trade or business. And IRS says any job in the private sector is a new trade or business for a retired military officer.

Accepting temporary employment in another line of work won’t affect your deduction for expenses in searching for permanent employment in your regular line of work. But job hunting costs aren’t deductible if you are looking for a job in a new trade or business, even if you find employment as a result of the search.

First time job seekers. IRS says that job hunting expenses incurred in seeking employment for the first time are not deductible. This rule can be tough on students and others entering the job market for the first time. But it may be possible to avoid the impact of this rule through an internship or other employment during the student’s senior year. In addition to looking good on a resume, this type of work experience can be a trade or business in which the student is engaged (thus avoiding the first time job seeking rule).

Reentry into job market. If an individual is temporarily unemployed, expenses of seeking employment in the field in which he or she was previously employed are deductible. But IRS takes the position that if there is a substantial time break between earlier employment and the current search, you cannot deduct the expenses of looking for a job. Thus, if there has been a gap of several years since the last employment, for example, to take care of small children or to return to school to pursue post-graduate studies, the cost of seeking employment is not deductible.

Other limitations on deductibility. Deductible expenses in seeking employment are claimed as miscellaneous itemized deductions. As a result, individuals who take the standard deduction cannot claim such expenses. In addition, miscellaneous itemized deductions are deductible only to the extent that, in the aggregate, they exceed 2% of your adjusted gross income. Thus, unless your job hunting costs are large or you have other significant miscellaneous deductions, you may not be able to derive any tax benefit from these expenses.

I hope that this overview of the tax treatment of job search expenses is helpful. If you have any specific questions, or need additional information regarding this or other tax related matters, please feel free to call me

Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service in during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. The Small Business Jobs Act also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.

Extension of 50% bonus first-year depreciation. Before the Small Business Jobs Act, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (as well as 2011 for certain aircraft and long production period property).

Boosted deduction for start-up expenditures. The Small Business Jobs Act allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

100% exclusion of gain from the sale of small business stock Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Small Business Jobs Act eliminates the alternative minimum tax (AMT) preference item attributable to such sales.

General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.

Deductibility of health insurance for the purpose of calculating self-employment tax. The Small Business Jobs Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

New tax break for long-term contract accounting. The Small Business Jobs Act provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Limitation on penalty for failure to disclose certain reportable transactions. The Small Business Jobs Act generally limits the penalty to 75% of the decrease in tax resulting from the transaction, retroactively to penalties assessed after Dec. 31, 2006. Minimum and maximum penalties apply.

Revenue raisers. These tax breaks come at a cost. To mention a few of these unfavorable provisions, information reporting will generally be required for rental property expense payments made after Dec. 31, 2010, and increased information return penalties will be imposed.

Please keep in mind that I’ve described only the highlights of the most important changes in the Small Business Jobs Act. If you would like more details about any aspect of the new legislation, please do not hesitate to call.

Revenue Procedure 2010-36 enables affected taxpayers to treat damages from corrosive drywall as a casualty loss and provides a ”safe harbor” formula for determining the amount of the loss.

In numerous instances, homeowners with certain imported drywall have reported blackening or corrosion of copper electrical wiring and copper components of household appliances, as well as the presence of sulfur gas odors. In November 2009, the Consumer Product Safety Commission (CPSC) reported that an indoor air study of a sample of 51 homes found a strong association between the problem drywall, levels of hydrogen sulfide in those homes and corrosion of metals in those homes.

Revenue Procedure 2010-36 provides the following relief:

• Individuals who pay to repair damage to their personal residences or household appliances resulting from corrosive drywall may treat the amount paid as a casualty loss in the year of payment. 
• Taxpayers who have already filed their income tax return for the year of payment generally have three years to file an amended return and claim the deduction.The amount of a loss that may be claimed depends on whether the taxpayer has a pending claim for reimbursement (or intends to pursue reimbursement) of the loss through property insurance, litigation or otherwise.
• In cases where a taxpayer does not have a pending claim for reimbursement, the taxpayer may claim as a loss all unreimbursed amounts paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances resulting from corrosive drywall. 
• If a taxpayer does have a pending claim (or intends to pursue reimbursement), a taxpayer may claim a loss for 75 percent of the unreimbursed amount paid during the taxable year to repair damage to the taxpayer’s personal residence and household appliances that resulted from corrosive drywall. 

A taxpayer who has been fully reimbursed before filing a return for the year the loss was sustained may not claim a loss. A taxpayer who has a pending claim for reimbursement (or intends to pursue reimbursement) may have income or an additional deduction in subsequent taxable years depending on the actual amount of reimbursement received.

For purposes of this revenue procedure, the term “corrosive drywall” means drywall that is identified as problem drywall under the two step identification method published by the CPSC and the Department of Housing and Urban Development in their interim guidance dated January 28, 2010.

Further details and limitations can be found in Revenue Procedure 2010-36 on IRS.gov.