WASHINGTON — For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

• The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
• The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

Credits, deductions, and related phase outs.

• For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
• The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
• The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
• For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased  from the tax year 2011 amounts; please see the table below.

The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Estate and GiftFor an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts remains at $13,000.

Other Items

• The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
• Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

Details on these inflation adjustments can be found in Revenue Procedure 2011-52, which will be published in Internal Revenue Bulletin 2011-45 on November 7, 2011.

Military personnel have some unique duties, expenses and transitions. Some special tax benefits may apply when moving to a new base, traveling to a duty station, returning from active duty and more. These tips may put military members a bit “at ease” when it comes to their taxes.

1. Moving Expenses If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving you and members of your household.

2. Combat Pay If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, all your military pay received for military service that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

3. Extension of Deadlines The time for taking care of certain tax matters can be postponed. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.

4. Uniform Cost and Upkeep If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.

5. Joint Returns Generally, joint returns must be signed by both spouses. However, when one spouse may not be available due to military duty, a power of attorney may be used to file a joint return.

6. Travel to Reserve Duty If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.

7. ROTC Students Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

8. Transitioning Back to Civilian Life You may be able to deduct some costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.

9. Tax Help Most military installations offer free tax filing and preparation assistance during the filing season.

Tax Information IRS Publication 3, Armed Forces’ Tax Guide, summarizes many important military-related tax topics. Publication 3 can be downloaded from www.irs.gov or may be ordered by calling 1-800-TAX-FORM (800-829-3676).

Links:

Tax Information for Members of the U.S. Armed Forces

IRS Publication 3, Armed Forces’ Tax Guide ( PDF)

YouTube Videos:

Military Tax Tips: English | Spanish |  ASL

If you give someone money or property during your life, you may be subject to the federal gift tax. Most gifts are not subject to the gift tax, but the IRS has put together the following eight tips to help you determine if your gift is taxable.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2010, the annual exclusion is $13,000.
2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.
3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.
4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).
5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:

   • Gifts that are not more than the annual exclusion for the calendar year,
   • Tuition or medical expenses you pay directly to a medical or educational institution for someone,
   • Gifts to your spouse,
   • Gifts to a political organization for its use, and
   • Gifts to charities.

6. Gift Splitting – you and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.
7. Gift Tax Returns – you must file a gift tax return on Form 709, if any of the following apply:

   • You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
   • You and your spouse are splitting a gift.
   • You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
   • You gave your spouse an interest in property that will terminate due to a future event.

8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

For more information see Publication 950, Introduction to Estate and Gift Taxes. Both Form 709 and Publication 950 can be downloaded at http://www.irs.gov or ordered by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 950, Introduction to Estate and Gift Taxes 
• Form 709, United States Gift Tax Return 
• Form 709 Instructions  
• Gift Tax 
• Frequently Asked Questions on Gift Taxes 

The Social Security benefits you received in 2010 may be taxable. You should receive a Form SSA1099 which will show the total amount of your benefits. The information provided on this statement along with the following seven facts from the IRS will help you determine whether or not your benefits are taxable.

1. How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.
2. Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.
3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.
4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.
5. You can do the following quick computation to determine whether some of your benefits may be taxable:
   • First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.
   • Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.
6. The 2010 base amounts are:
   • $32,000 for married couples filing jointly.
   • $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
   • $0 for married persons filing separately who lived together during the year.
7. For additional information on the taxability of Social Security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Publication 915 is available on this website or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 915, Social Security and Equivalent Railroad Retirement Benefits 

1. Reimbursed job expenses
2. Diets and health club dues
3. Primary telephone landlines
4. Home improvements
5. Campaign expenses
6. Commuting costs
7. Charitable services
8. Pet Care
9. Attorney’s fees

To read Ms. Erb’s article, please go to http://aol.it/fK67mc.

The first step to filing your federal income tax return is to determine which filing status to use. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child.

Here are eight facts about the five filing status options the IRS wants you to know so that you can choose the best option for your situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during 2010, usually you may still file a joint return with that spouse for the year of death.
6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2008 or 2009, you have a dependent child and you meet certain other conditions.

There’s much more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant on the IRS website to determine your filing status. The ITA tool is a tax law resource on the IRS website that takes you through a series of questions and provides you with responses to tax law questions.
Link:

Publication 501, Exemptions, Standard Deduction, and Filing Information (PDF 196K)

WASHINGTON — Following last week’s tax law changes, the Internal Revenue Service announced today the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

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

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

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

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

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

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

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

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

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

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

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

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

Related Item: Forms Affected By the Extender Provisions

Individual Tax Rate Provisions

      • Income tax rates. The Act extends the 10% individual income tax bracket as well as the 25%, 28%, 33%, and 35% individual income tax brackets for an additional two years, through 2012.

      • Capital gains rates. The Act allows the capital gains rates to remain at 0% for taxpayers below the 25% bracket and 15% for taxpayers in the 25% rate and above, through 2012. Without the legislation, the capital gains rates were scheduled to expire at the end of 2010, and revert to 10% and 20%, respectively.

      • Dividends taxed at capital gains rates. The current dividend rates of 0% for taxpayers below the 25% bracket and 15% for taxpayers in the 25% bracket and above are extended through 2012. Without the legislation, these rates were set to expire at the end of 2010, taxing dividends at the ordinary income rates.

      • Phaseout of marriage penalty in the 15% bracket. The 15% regular income tax bracket for married couples filing joint returns set at twice the corresponding bracket for an unmarried individual filing a single return (marriage penalty relief for the 15% bracket) is extended through 2012.

      • Employee payroll tax cut. For 2011 only, the Act reduces the Social Security (OASDI) tax rate on employees to 4.2% (from 6.2%) and reduces the self-employment tax (SECA) rate to 10.4% (from 12.4%). However, the Act does not reduce the OASDI contribution base, which is $106,800 for 2011. Thus, the maximum OASDI tax in 2011 for employees is $4,485.60. In addition, the rate reduction is not taken into account in determining the SECA tax deduction allowed for determining net earnings from self-employment. As a result, the deduction for 2011 remains 7.65% of self-employment income (determined without regard to the deduction).

Alternative Minimum Tax Relief

      • Alternative minimum tax exemption amount and credit relief. The Act puts in place a 2-year patch for the AMT. The Act increases the AMT exemption amount to $72,450 for tax years beginning in 2010, and $74,450 for tax years beginning in 2011. For an individual who is not married and is not a surviving spouse, the  exemption amount is $47,450 for tax years beginning in 2010, and $48,450 for tax years beginning in 2011. For married taxpayers filing separate returns, the exemption amount is 1/2 of the married filing jointly amount. In addition, both the personal credits and nonrefundable credits can offset AMT through 2011.

Individual Deductions and Credits

      • Elimination of marriage penalty in standard deduction. The Act extends, from 2010, the basic standard deduction for married couples filing joint returns that is twice the basic standard deduction for an unmarried individual filing a single return, through 2012.

      • Repeal of phaseout for personal exemptions. You may recall that the phase out of the personal exemption (referred to as PEP) for higher income individuals had been gradually decreasing, so that by 2010, the phaseout was entirely repealed. The Act extends the repeal of PEP for an additional two years, through  2012. Thus, personal exemption amounts will continue to be allowed regardless of the taxpayer’s income.

      • Phaseout of overall limitation on itemized deductions. Similar to the PEP, the phase-out of the overall limitation on deductions for higher income taxpayers had gradually decreased until its 2010 complete repeal. The Act extends this repeal for an additional two years, through 2012.

      • Modifications to child tax credit. Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal  income tax for each qualifying child under the age of 17. Prior legislation increased the credit from $500 to $1,000 (per child), allowed the credit to offset AMT as well as regular tax, and converted it from nonrefundable to refundable for certain taxpayers. The Act preserves the child tax credit amount at $1,000 per child, extends the allowance against the regular tax as well as AMT, and maintains the refundability provision by allowing earnings above $3,000 to count towards the refundable portion of the credit (subject to the 2009 special rules discussed below) through 2012.

      • Expansion of adoption credit and adoption assistance programs. The Act extends for one additional year, through 2012, the $13,170 adoption credit amount and the income exclusion of the same amount for employer-assistance programs. Note, however, that although the current refundable credit will still exist through 2011, the 2012 credit is presently slated to become nonrefundable and return to the inflation-adjusted lower amount of $12,170. For 2013 and after, barring further legislation, the credit will revert back to its pre-2001 levels and only adoptions for special needs children will qualify for the credit or assistance exclusion

      • Dependent care credit. This is a credit based on an applicable percentage of child and dependent care expenses for children under age 13 and disabled  dependents. Eligible expenses of $3,000 for one eligible child/disabled dependent and $6,000 for two or more eligible children/disabled dependents, along with the increased applicable percentage of 35% are extended for an additional two years, through 2012.

      • Earned income credit. Legislation in 2009 increased the earned income credit to 45% of a working family’s first $12,570 (inflation-adjusted $12,590 for 2010) of earned income for families with three or more children and also increased the beginning point of the phase-out for married couples filing a joint return. The Act extends, through 2012, the increases to the credit percentage and the married filing jointly phase-out threshold.

      • Refunds disregarded in the administration of Federal programs and federally assisted programs. The Act disregards all refundable tax credits, such as the refundable portion of the EITC and the child tax credit, as income for means tested programs. However, this provision does not apply to amounts received after December 31, 2012.

      • Deduction for certain expenses of elementary and secondary school teachers. The Act extends, from 2009, the $250 above-the-line deduction for professional expenses incurred by elementary and secondary schoolteachers through 2011.

      • Deduction of state and local taxes. The Act extends, from 2009, the election available to taxpayers who itemize their deductions to deduct state and local sales taxes in lieu of state and local income taxes.

      • Contributions of capital gain real property made for conservation purposes. The Act extends, from 2009, the increased contribution limitations and carryover period for charitable contributions of certain conservation property for contributions made through December 31, 2011.

      • Tax-free distributions from individual retirement plans for charitable purposes. Through 2011, the Act allows taxpayers age 701/2 or older to make tax-free distributions to charities from their traditional individual retirement accounts (IRAs) and Roth IRAs up to $100,000 per taxpayer, per taxable year. Although this provision expired at the end of 2009, the Act permits individuals to make charitable transfers during January of 2011 as if they were made during 2010.

      • Employer-provided mass transit and parking benefits. The Act extends the increase (set at $230 in 2010) in the combined monthly exclusion for employer-provided transit and vanpool benefits through the end of 2011.

      • Deduction for mortgage insurance premiums. The Act extends for one year, through 2011, the itemized deduction for the cost of mortgage insurance on a qualified personal residence. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer’s adjusted gross income (AGI) exceeds $100,000, so that the deduction is unavailable for a taxpayer with an AGI in excess of $110,000.

Education Benefits

      • Above-the-line deduction for qualified tuition and related expenses. The Act extends, from 2009, the above-the-line deduction for qualified tuition and related expenses through 2011. The maximum deduction is $4,000 for taxpayers with adjusted gross incomes not exceeding $65,000 ($130,000 for joint returns) and $2,000 for taxpayers with adjusted gross incomes not exceeding $80,000 ($160,000 for joint returns).

      • Coverdell education savings accounts. These are tax-exempt savings accounts used to pay the higher education expenses of a designated beneficiary. The $2,000 annual contribution amount and expanded definition of education expenses to include elementary and secondary school expenses are extended by the Act for an additional two years, through 2012.

      • Exclusion for employer-provided educational assistance.  An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance. Earlier legislation expanded this provision to include graduate as well as undergraduate education through the end of 2010. The Act extends this expansion of the exclusion for an additional two years, through 2012.

      • Student loan interest deduction. Individuals who have paid interest on qualified education loans may claim an above-the-line deduction for the interest  expenses up to $2,500. Before 2001, taxpayers were allowed this deduction only for 60 months and it was phased out for taxpayers with incomes between $40,000 and $55,000 ($60,000 and $75,000 for joint filers). Legislation in 2001 eliminated the 60-month rule and increased the income phase-out to $55,000 to $70,000 ($110,000 and $140,000 for joint filers). The Act extends the 2001 changes to this provision for an additional two years, through 2012.

      • Exclusion of certain amounts received under the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program. The National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program provide education awards to participants on the condition that the participants perform certain services. Legislation in 2001 created an exclusion from gross income for scholarships to apply to these programs. The Act extends the income exclusion for these programs for an additional two years, through 2012.

      • American Opportunity Tax Credit. The Act extends this temporary expansion of the Hope Credit through 2012. Generally, the credit is for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. The credit is allowable for the first four year of post-secondary education and 40% of the  credit is refundable. The credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing  jointly).

Energy Incentives

      • Extension of grants for specified energy property in lieu of tax credits. The Act extends through 2011 the 2009 American Recovery and Reinvestment Act provision that allows taxpayers to apply for grants for specified energy property in lieu of tax credits.

      • Credit for non-business energy property. The Act extends, from 2010, the non-business energy property credit to property placed in service on or before  December 31, 2011, but utilizes the credit structure and rates that existed before the 2009 American Recovery and Reinvestment Act. Thus, for property  installed after December 31, 2010, the credit is 10%, with a maximum of $500, with $200 of that for windows. The Act prohibits taxpayers from taking the credit for expenditures for qualified energy efficiency improvements made from subsidized energy financing.

      • Alternative fuel vehicle refueling property. The Act extends, from 2010, the alternative fuel vehicle refueling property credit to any non-hydrogen related property placed in service on or before December 31, 2011.

Stock/Bond Provisions

      • Empowerment Zone tax incentives. Qualified Zone Academy bonds (QZABs) are a form of tax credit bond designed to provide funds for state and local governments in cooperation with businesses to enhance the academic curriculum and increase public school graduation and employment rates within a qualified zone or enterprise community. QZABS offer the holder a federal tax credit instead of interest. The Act extends the QZAB program by providing an additional $400 million for 2011.

      • Exclusion of 100 percent of gain on certain small business stock. The Act extends the 100% exclusion of the gain from the sale of qualifying small business  stock acquired before 2012, and held for more than five years. In addition, the alternative minimum tax preference item attributable for the sale remains eliminated. Qualifying small business stock is stock from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the  issuance of the stock) and that meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of 10 times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation.

Disaster/Economic Development Incentives

      • Empowerment Zone tax incentives. The Act extends for two years (through 2011) the designation of certain economically depressed census tracts as Empowerment Zones, within which individual residents are eligible for special tax incentives.

      • Tax incentives for investment in the District of Columbia. The Act extends for two years (through 2011) the designation of certain economically depressed census tracts within the District of Columbia as the District of Columbia Enterprise Zone, within which individual residents are eligible for special tax incentives. The Act also extends for two years (through 2011) the $5,000 first-time homebuyer credit for the District of Columbia.

      • Increase in rehabilitation credit. The increased rehabilitation credit for qualified rehabilitation buildings and certified historic structures located in the Gulf Opportunity Zone expired after December 31, 2009. The Act extends the increased credit for two years, through December 31, 2011.

      • Low-income housing credit rules for buildings in GO zones. Additional allocations of low-income housing credits made in 2006, 2007, and 2008 for buildings located in the GO Zone, the Rita GO Zone, or the Wilma GO Zone require that the buildings be placed in service before January 1, 2011. The Act extends the placed-in service date for one year, through December 31, 2011.

As you can see, the Act extends many, but not all, of the various provisions proposed and discussed throughout 2010. Please contact our office so that we can review your particular circumstances in order to maximize your tax benefits for 2010, as well as discuss plans for 2011.

(From the Bureau of National Affairs)

From Mint.com, Personal Finance Software via Don’t Mess with Taxes, http://bit.ly/cAc9rQ

WASHINGTON — The Internal Revenue Service issued guidance reflecting statutory changes regarding the use of certain tax-favored arrangements, such as flexible spending arrangements (FSAs), to pay for over-the-counter medicines and drugs.

The Affordable Care Act, enacted in March, established a new uniform standard that, effective Jan. 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs). Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan.

A similar rule goes into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).

Employers and employees should take these changes into account as they make health benefit decisions for 2011.

For details on current rules, see Publication 969 , Health Savings Accounts and Other Tax-Favored Health Plans.

Updates on this and other health care reform provisions can be found on the Affordable Care Act page on IRS.gov. Notice 2010-59 and Revenue Ruling 2010-23, posted today, further explains this change.

Related Item: Questions and Answers on Over-the-Counter Medicines and Drugs 

You might also be interested in watching this YouTube video: Flexible Spending Arrangements, http://bit.ly/aPhEPy.