Other Notable Tax Changes
- Coverdell ESA and 529 Plan Alterations. Previously, under a 529 Plan, taxpayers with children were encouraged to invest after-tax money into an account that increased with tax free withdrawals assuming the money was being used to contribute towards educational plans. However, in 2011, 529 Plan withdrawals will not be tax free when paying for the cost of computers or internet access. Coverdell ESA Plan will see changes as well. This plan is similar to the 529 Plan but is directed towards elementary and secondary educational costs. In 2011, the maximum contribution limit per year on this plan will drop dramatically from $2,000 to $500 unless Congress moves quickly.
- HSAs, HRAs, and FSAs Cannot Be Used for Over The Counter Medicine. Americans will not longer be able to use Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) to purchase over the counter medicine if it is not insulin.
- Economic Substance Doctrine. This sounds confusing but basically is a new IRS provision that gives the IRS more power. If the Internal Revenue Service deems perfectly legal tax deductions as not having “economic substance” because the underlying transactions were enacted to avoid taxes, your business could face penalties. (Weakonomist note: this is very interesting.)