Social Security benefits are subject to two levels of taxation.  For some taxppayers from 0% to  50% of their Social Security benefits are subject to tax.  For taxpayers with income in excess of a certain level, up to 85% of Social Security income may be subject to tax.

Withdrawing an amount from an IRA will potentially cause the recipient’s income to increase from the 50% taxable bracket to the 85% Social Security taxable bracket.  Even though the withdrawn amount is given to charity and deducted, there might be additional taxation with the added 35% of social security benefits.  Making the transfer directly to charity from the IRA account, many Social Security recipients will save substantial taxes.

Also…
Many seniors do not have a mortgage and their medical deductions are less than 7.5% of adjusted gross income.  Thus, they may not have a sufficient level of deductions to benefit from  itemized deductions and choose instead to use the standard deduction.

If this donor withdraws $500 from his or her IRA and then gives it to charity, there is $500 of increased income with no offsetting charitable deduction, since the standard deduction is taken.  Therefore, it will be preferable for such donors taking a standard deduction to make IRA gifts directly to charity.

There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.

Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

The behavioral control factors fall into the categories of:
Type of instructions given
Degree of instruction
Evaluation systems
Training

Types of Instructions Given
An employee is generally subject to the business’s instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
When and where to do the work.
What tools or equipment to use.
What workers to hire or to assist with the work.
Where to purchase supplies and services.
What work must be performed by a specified individual.
What order or sequence to follow when performing the work.

Degree of Instruction
Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
Note: The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.

Evaluation System
If an evaluation system measures the details of how the work is performed, then these factors would point to an employee.
If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

Training
If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.

Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
The financial control factors fall into the categories of:
Significant investment
Unreimbursed expenses
Opportunity for profit or loss
Services available to the market
Method of payment

Significant investment
An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

Unreimbursed expenses
Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

Opportunity for profit or loss
The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work). Having the possibility of incurring a loss indicates that the worker is an independent contractor.

Services available to the market
An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

Method of payment
An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.

The factors, for the type of relationship between two parties, generally fall into the categories of:
Written contracts
Employee benefits
Permanency of the relationship
Services provided as key activity of the business

Written Contracts
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.

Employee Benefits
Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.

Permanency of the Relationship
When a worker is hired with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

Services Provided as Key Activity of the Business
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

When someone is unsure of the status they can file form SS-8 with the IRS and they will make the determination. This can take up to 6 months but if you anyone in a business that continually hires the same types of workers to perform particular services may want to consider this option.

Article – content from Accountants World 5/27/11

Calculation of the possible credit requires detailed research as well as information relating to total hours paid employees and the percentage of premiums paid. 

Which employers are eligible for the small business health care tax credit?

 Small employers that provide health care coverage to their employees and that meet certain requirements (“qualified employers”) generally are eligible for a federal income tax credit for health insurance premiums they pay for certain employees. In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees (“FTEs”) for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a “qualifying arrangement” .  Can a tax-exempt organization be a qualified employer? Yes. The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a).

What expenses are counted in calculating the credit?

Only premiums paid by the employer under an arrangement meeting certain requirements (a “qualifying arrangement”) are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.  There are transitional rules applicable to non uniform percentages.

However, if an employer offers more than one type of coverage, such as a major medical plan and a separate limited scope dental or vision plan, the employer must separately satisfy the requirements for a qualifying arrangement with respect to each type of coverage the employer offers (meaning the employer cannot aggregate these different plans for purposes of meeting the qualifying arrangement requirement). In addition, employer contributions to health reimbursement arrangements (HRAs), health flexible spending arrangements (FSAs), and health savings accounts (HSAs) are not taken into account for purposes of the small business health care tax credit.

In addition, the amount of an employer’s premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the state in which the employer offers coverage were substituted for the actual premium.  This one is not easy to figure !

Here is the scoop…

One of the primary benefits of selling your home is that a significant portion of any profit–$250,000 for a single taxpayer and $500,000 for a married (filing joint) taxpayer–is completely tax free if you’ve lived in the home two out of the last five years.  And that part  is STILL true.

The part that’s new is a tax on the profit above that exemption amount for taxpayers in certain brackets. If a single taxpayer makes more than $200,000, or for marrieds above $250,000, they are subject to a new 3.8% tax on the profit above that exempted amount starting in 2013. It will actually be collected as a Medicare tax – so this was a funding for the health care bill.

For example, let’s say a single homeowner purchased in 2001 for $300,000.  That taxpayer’s home might  now be worth $600,000.  If that taxpayer makes more than $200,000 in AGI, she will be subject to tax of 3.8% * (300,000 profit – 250,000 exemption) = $50,000 taxable profit = additional $1900 tax on the sale of her home (in addition to capital gains taxes on the $50,000 above the exemption) . A couple filing jointly would pay neither the 3.8% tax or capital gains tax on this home example.

 Taxpayers who will have to wait until mid- to late February to file include:

 • Taxpayers who claim itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, state and local taxes.

 • Taxpayers who claim a deduction for tuition and fees. This is a so-called “above-the-line” deduction, which means taxpayers don’t have to itemize to claim it.

 Parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit, will not have to wait to file, the IRS said, assuming they don’t itemize.

 • Taxpayers who claim the educator expense deduction. This deduction, which is also an above-the-line deduction, allows teachers to deduct up to $250 in out-of-pocket costs for classroom materials.

The biggest winners, at least in dollar terms, are individual taxpayers, whose tax benefits account for roughly $700 billion of the bill’s total $858 billion 10-year price tag.

The measure includes retention of the Bush-era tax rates and breaks for all earners for two years, as well as protection through 2011 from the Alternative Minimum Tax for more than 20 million mostly middle-class households. It includes a new payroll-tax credit for virtually all workers, as well as a 13-month extension of benefits for the long-term unemployed. The wealthy won a lowered estate tax rate for the next two years of 35% on estates of more than $5 million.

Middle-income Americans fared best from the deal, due in large part to the new payroll-tax holiday, according to the nonpartisan Tax Policy Center. Those with the largest average gain in after-tax income, compared with current tax policies, earn between $35,000 and $64,000. They gain about $613, or 0.9% of their income. Lower-income earners will benefit from continued expanded availability of the child credit and other breaks. Higher-income people took the most cash from the deal. The average gain for households with $500,000 to $1 million in income was $3,859 compared to current tax levels. Democrats had wanted tax rates for this group to rise.

A number of short expiration dates now litter the U.S. tax code, affording a lack of predictability and continued political noise. In 2010 there were 141 tax provisions that were either expiring or just expired, including all the Bush-era individual rates. With this week’s votes to extend most of those provisions for just a year or two, many of the predictability problems could continue beyond the 2012 presidential election.

paraphrased from the WSJ

Is it deductible – Schedule A – misc deductions:   MAINTENANCE OR IMPROVEMENT OF SKILLS vs. NEW TRADE OR BUSINESS OR MINIMUM EDUCATIONAL REQUIREMENTS

To be deductible, expenses must be for education that maintains or improves the taxpayer’s skills or that meets legal or employer requirements for the taxpayer to maintain his or her employment, status or pay level. Nondeductible expenses include those for education to meet an employer’s minimum requirements for a position or those that qualify the taxpayer for a new trade or business. Taxpayers must be prepared to substantiate in detail a direct relationship between the expense and the taxpayer’s business or employment. This determination will depend on the specific facts of each case, and the taxpayer will bear the burden of proof. 

 If the education qualifies the taxpayer for a new trade or business or if it meets the minimum entry-level educational requirements for the taxpayer’s job, then the travel expenses are not deductible.   In the field of education certain job transitions, including classroom teacher to principal, are not to a new trade or business. Although , a teaching assistant working under the supervision of a licensed teacher while taking college courses cannot deduct transportation expenses. 

Education expenses in preparation for entering a new business prior to the “functioning” of or active engagement in the business are not deductible.

TRAVEL AWAY FROM HOME: If the travel away from home is lengthy enough to require sleep or rest, then transportation, meals (subject to limits) and lodging may be deductible. If the travel does not require a stay for sleep or rest away from the taxpayer’s tax home, the taxpayer cannot deduct expenses such as meals and lodging

TRAVEL AND PERSONAL EXPENSES: Expenses for travel as a form of education are not deductible. Taxpayers may not deduct the cost of a vacation with educational aspects.  Although a taxpayer may “gain insights” that help the taxpayer in a job, the taxpayer must establish “a direct relationship between her travels and the specific skills required” in her job, or that the employer required the travel. However, travel for the purpose of taking courses for college credit, involving syllabuses and reading, rather than being mere tours, may be deductible in some circumstances. 

FOREIGN TRAVEL AND CRUISES: If the travel is outside the United States or by cruise ship, limitations on the amount of the deduction for certain foreign travel expenses may apply. In addition, if the travel is to a convention or seminar outside the North American area, the travel is scrutinized more carefully.

SUBSTANTIATION

Educational expense deduction cases are often won or lost based upon substantiation of the deductible expenses. As well as losing the benefit of the expense deductions, some taxpayers may also incur accuracy-related penalties under section 6662 relating to the disallowed deductions. The taxpayer bears the burden of properly substantiating the amount, time, place and business purpose of any travel.

Taxpayers should keep a diary or log of expenses, together with supporting documentary evidence, such as receipts, canceled checks, statements and similar records. The diary should indicate the dates the taxpayer left and returned on each trip for further education, the number of days or amount of time spent on education during each trip, the destination of the trip and the business purpose. Generally, the IRS looks more favorably upon records created and obtained at or near the time of the travel, instead of self-serving records or those created in hindsight many months or years after the travel occurred. Taxpayers should keep records of the cost of each separate expense for travel, lodging, transportation and meals. In addition, for automobile expenses, the taxpayer should keep a record of the cost of the car and improvements, the date the taxpayer started using it for business, a mileage log, the mileage for each business use, total miles for the year, the date of the expense and the date of the use of the car. 

If a taxpayer is entitled to reimbursement from his or her employer for educational expenses and does not claim reimbursement, the taxpayer cannot deduct the expenses. Therefore, if a taxpayer is currently employed and the employer maintains a reimbursement plan, the taxpayer should request reimbursement of the travel expenses in writing even if the taxpayer is certain that the employer will not pay these expenses. The taxpayer should obtain any denial of reimbursement in writing from the employer.

from  Journal of Accountancy

• 51 cents per mile for business miles driven (2010 = 50 cents)
• 19 cents per mile driven for medical or moving purposes  (2010 16.5 cents)
• 14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. A taxpayer may not use the business standard mileage rate for a vehicle after using any non straight line depreciation. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.