What's New in Taxes – November 2010

New restrictions on health accounts

This year a tax advantaged health account (such as a flexible spending account, health reimbursement account, health savings account, or medical savings account) can be used to purchase aspirin, flu medications, allergy pills, cold medicines, and other over-the-counter medications.

Effective January 1, 2011, funds from these accounts can no longer be used to purchase over-the-counter drugs unless the taxpayer has a prescription for them. Insulin is an exception and will still be eligible for tax-free reimbursement without a doctor's prescription.

Adopting a child provides tax benefits

Are you giving some thought to adopting a child? Since the adoption process can be a costly one, the federal government provides some significant financial assistance with the adoption tax credit.

Here are some of the basic rules.

* It's important to remember that we are talking about a tax credit and not a tax deduction. The adoption tax credit is even more valuable since it can reduce your actual tax liability by up to $13,170 for 2010. Any unused credit can be carried forward five years. The adoption credit can also offset the alternative minimum tax.

* Qualifying expenses include agency adoption fees, attorney fees, court costs, and adoption-related travel expenses.

* Nonqualifying expenses include fees to a surrogate mother.

* The adoption credit is subject to phase-out provisions. For 2010, the credit begins to phase out once modified adjusted gross income reaches $182,520, and the credit is completely eliminated at modified adjusted gross income of $222,520.

* The timing of the credit depends on the nature and the progress of the adoption. For domestic adoptions, if the adoption is not finalized by the end of the year, the credit is computed in the second year. For foreign adoptions, the credit is not computed until the year the adoption is finalized.

* Special needs adoptions can be eligible for the maximum credit even if actual expenses are less.

* Some employers provide adoption financial assistance. These proceeds can generally be excluded from taxable income, but the reimbursed expenses can't also be used to figure the adoption tax credit.

Please call us if you are considering adoption. We can help assess your eligibility for the tax credit, help estimate the available tax assistance for your adoption, and develop a procedure for documenting your expenses.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.