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Health Insurance Deduction Reduces Self Employment Tax In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their social security self-employment tax liability in addition to their income tax liability. As in the past, eligible taxpayers claim this deduction on Form 1040 Line 29. But in 2010, eligible taxpayers can also enter this amount on Schedule SE Line 3, thus reducing net earnings from self-employment subject to the 15.3 percent social security self-employment tax.

Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer’s dependent.

As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

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• Business travel rate for owned or leased autos (including vans, pickups or panel trucks): 51 cents/mile
• Medical care or in connection with a move that qualifies for the moving expense deduction: 19 cents/mile
• Charitable mileage: 14 cents/mile

Simplified deduction method. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving.

The standard mileage rate may not be used for a purchased auto if:

• it was previously depreciated using a method other than straight-line for its estimated useful life;
• a IRC § 179 expensing deduction was claimed for the auto;
• the taxpayer has claimed the additional first-year depreciation allowance; or
• the taxpayer depreciated it using MACRS under IRC § 168.

Also, under current rules, the standard mileage rate can’t be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously (such as in fleet operations).

Rural mail carriers who receive qualified reimbursements also can’t use the standard mileage rate.

A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business connected portion of actual expenses, so long as he depreciates it from that point on using straight line depreciation over the auto’s remaining life. The depreciation deductions would still be subject to the dollar caps.

A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period.

Other business mileage rate rules. For 2011, the depreciation component of the mileage rate is 22¢ per mile (was 23¢ per mile for 2010, 21¢ for 2009 and 2008, and 19¢ per mile for 2007). The depreciation component reduces the basis of the auto for gain or loss purposes.

Advantages of using standard mileage rate. For those taxpayers eligible to use it, the standard mileage rate offers the following advantages:

• Mileage rate users need not keep a record of actual expenses, or retain receipts where required. A record of the time, place, business purpose and number of miles traveled suffices.
• If an auto’s business expenses are deducted via the mileage rate, it is not subject to the IRC § 280F dollar caps or the special rules that apply if qualified business use does not exceed 50% of total use.
• The mileage rate method may yield bigger deductions than the actual expense method for a thrifty, high-mileage model.

Disadvantages of mileage rate method. The mileage rate method may produce a smaller deduction than would be obtained by claiming actual business-connected operating expenses plus depreciation (or lease payments). Also, use of the mileage rate method prevents the taxpayer from claiming regular MACRS deductions (subject to the luxury auto dollar caps) for the auto in later years.

Other applications of mileage allowance method. Employers that require employees to supply their own autos may reimburse them at a rate that doesn’t exceed 51¢ per mile for employment-connected business mileage during 2011 (50¢ per mile for 2010), whether the autos are owned or leased. The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip.

FAVR allowance method. Employers may use a FAVR allowance method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2011, the standard auto cost used to compute the FAVR allowance cannot exceed $26,900 (down from $27,300 for 2010). For trucks or vans, the 2011 standard auto cost used to compute the FAVR allowance cannot exceed $28,200.

When a corporation distributes its earnings to its shareholders, the distribution is usually a dividend. If the dividend is “qualified” it is taxable at rates that apply to net capital gain; otherwise it is taxable as ordinary income. But not all corporate distributions are dividends. And some transactions that don’t appear to be dividends may be taxed as constructive dividends.

Dividends received before 2011 are taxed to shareholders at the rates that apply to net capital gain (i.e., 15% or 0%) if they constitute “qualified dividend income.” Otherwise they are taxed as ordinary income (at your tax bracket rate). Different rules apply if the shareholder is a corporation.

The net capital gain rate is determined by your tax bracket; you are taxed at the rate below your tax bracket. So if you are in the 15% tax bracket, your net capital gain rate will be 0%. And if you are in the 25% or higher tax bracket, your net capital gains will be taxed at 15%.

Qualified dividend income defined

For dividends received before 2011, qualified dividend income is dividend income received from domestic corporations and qualified foreign corporations. Dividends paid by other foreign corporations also are qualified if paid on stock or ADRs readily tradable on an established U.S. securities market.

Qualified dividend income does not include: (1) dividends paid on stock unless the stock has been held for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date (more than 90 days during the 181 day period beginning 90 days before the ex-dividend date for preferred stock dividends attributable to a period of more than 366 days); (2) dividends on stock to the extent that the taxpayer is under an obligation to make related payments with respect to positions in substantially similar or related property; (3) any amount that the taxpayer elects to treat as investment income to support an investment interest deduction; (4) dividends from corporations that for the distribution year or the preceding year are exempt from tax under Code Sec. 501 (tax exempt organization) or Code Sec. 521 (exempt farmers’ cooperatives); (5) dividends deductible under Code Sec. 591 by mutual savings banks; and (6) dividends paid on employer securities owned by an employee stock ownership plan (ESOP), which are deductible under Code Sec. 404(k).

Qualified dividend income does not include payments in lieu of dividends (typically made to owners of stock that has been lent in connection with a short sale). However, if a payment in lieu of dividends is reported as dividend income on a Form 1099-DIV , the recipient may treat the payment for tax purposes as a dividend, and not as a payment in lieu of dividends, unless he knows, or has reason to know, of the actual character of the payment.

• the research credit
• Indian employment credit
• the new markets tax credit
• employer wage credit for activated reservists
• 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements
• enhanced charitable deductions for contributions of food inventory and book inventories and computer equipment
• enhanced charitable deductions for corporate contributions of computer equipment
• the work opportunity tax credit
• and empowerment zone tax incentives

Contact us or call us at 404-944-3172 to learn how these and others can benefit you.

Get Credit for Your Retirement Savings Contributions

You may be eligible for a tax credit if you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement. Here are six things the IRS wants you to know about the Savers Credit:

1. Income Limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:
   • Single, married filing separately, or qualifying widow(er), with income up to $27,750
   • Head of Household with income up to $41,625
   • Married Filing Jointly, with incomes up to $55,500
2. Eligibility requirements To be eligible for the credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.
3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date – including extensions – for filing the return for the credit year.
5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.