AMT Items

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 5

Sunday, November 29th, 2009 | Print This Post Print This Post | Email This Post Email This Post

State Income Tax Refunds – AMT Adjustment

The AMT adjustment for State Income Tax Refunds, line 8 on Form 6251, is a reduction to your Alternative Minimum Taxable income. There isn’t much a taxpayer can do about this other than to understand just a little bit of what is going on.

Just for fun, let’s start with the IRS’ explanation for this in the instructions to Form 6251:

“Include any refund from Form 1040 line 10, that is attributable to state or local income taxes.  Also include any refunds received in 2009 and included in income on Form 1040, line 21, that are attributable to state or local personal property taxes or general sales taxes, foreign income taxes, or state, local, or foreign real property taxes. Enter the total as a negative amount.  If you include an amount from Form 1040, line 21, you must enter a description and the amount next to the entry space for line 8.  For example, if you include a refund of real property taxes, enter “real property” and the amount next to the entry space.”

What does this mean in “plain English?”  The answer is best done with an example:

Assume a couple paid $5,000 in state income taxes in 2008 and itemized this deduction (Schedule A), which they were allowed to do.  But the state income tax return filed showed they had overpaid by $500.  This $500 refund was received from the state in April, 2009.

For Regular Tax purposes, the $500 is reported as income in 2009.  This is because of the tax principle that if an allowable deduction for some expense is taken in one year (e.g., 2008), but that expense is refunded in the following year, instead of amending the 2008 return to “correct” the deduction, the proper tax fix is to reverse the deduction in 2009 by reporting it as income.  Note in total it actually was only a $4,500 expense, which is the deduction of $5,000 less the refund of $500.

For AMT purposes, both income (the refund) and deductions need to be shown on an apples-to-apples basis. Because there is no deduction of the $5,000 state taxes for those in the AMT, any related refund amount, Tax Refunds, line 8, does not require a recovery of that item in income like you see in the Regular Tax. The $500 is deducted from Alternative Minimum Tax income in 2009, effectively netting any impact, income or deduction, to zero.

Posted in Calculation of the AMT, State Income & Other Taxes | No Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 4

Sunday, November 22nd, 2009 | Print This Post Print This Post | Email This Post Email This Post

Personal Exemptions

A personal exemption deduction is allowed for a taxpayer, a spouse and any dependents such as children and other relatives. The amount for 2009 is $3,650 for each exemption, but this amount is reduced if the taxpayer’s Adjusted Gross Income (AGI) exceeds a certain amount.

In calculating the Alternative Minimum Tax, however, no deduction is allowed for personal exemptions. Thus, AMT taxable income will be higher than Regular Tax taxable income by the amount of exemptions claimed. For example, a married taxpayer with two children would be entitled to a Regular Tax deduction of $14,600 for these exemptions. If Regular Tax income for this family were $100,000, then AMT income would be $114,600.

There really isn’t anything that can be done to change the AMT effect of personal exemptions for the taxpayer and spouse – the tax law simply takes them away for purposes of the AMT. However, if there are dependents, a few situations exist where there may be planning opportunities to save taxes within the family unit.

One example is if the dependent is a daughter, a son, or other relative with income of her own but yet the taxpayer is still providing substantial support. In figuring out who provides more than half of the dependent’s support – the basic eligibility test for claiming the exemption – one looks to whether income of the dependent is or is not spent on her own support. So, for example, if the daughter is attending college and also at the same time working, any of her earnings that are spent on her support count towards her eligibility to take the personal exemption. Even though the student’s tax bracket most likely would be lower than the parent-taxpayer’s, any tax benefit certainly is better than the zero tax benefit the parent is getting because of the AMT.

Another example is in the case of divorced or separated parents, who may or may not have executed a multiple support agreement. The tax rules essentially allow the parties to agree which of them will take the child’s personal exemption. The planning here is simple, assuming lines of communication between the parties remain open – if one is in the Alternative Minimum Tax but the other is not, why not arrange to give the one not in the AMT the exemption deduction?

Posted in Personal Exemptions | 3 Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 4

Wednesday, November 18th, 2009 | Print This Post Print This Post | Email This Post Email This Post

Standard Deduction

A taxpayer has a choice of itemizing deductions or taking the Standard Deduction in computing his Regular Tax liability. The Standard Deduction is a fixed dollar amount that varies depends on filing status. In tax year 2009 it is $5,700 for Single and $11,400 for Married Filing Jointly – what we’ll call the base Standard Deduction.

State sales taxes paid in 2009 on the purchase of a qualifying new automobile can be added to the base Standard Deduction. Similarly, a limited amount of real estate taxes, and certain casualty losses, also may be added.

For purposes of the Alternative Minimum Tax, however, the base Standard Deduction is not allowed. But if the taxpayer was eligible to take a Regular Tax deduction for a casualty loss or for the new car sales tax in addition to the Standard Deduction, these items also are allowed for the AMT. The Form 6251 shows the AMT payer how to do this. Note also that if the Standard Deduction is chosen for Regular Tax purposes, it must also be used when calculating the AMT – it is a binding tax election.

The choice between itemizing and taking the Standard Deduction seems simple: if the total of a taxpayer’s itemized deductions is less than the Standard Deduction, then the Standard Deduction will result in less being paid. But this is not always the case when the Alternative Minimum Tax is involved. For AMT payers, there are certain situations where itemizing for Regular Tax purposes actually could lower the amount of AMT paid.

To illustrate, assume a taxpayer lives in Florida (no state income tax), rents instead of owns a home (no real estate taxes or mortgage interest), and didn’t make any taxable purchases this year (no sales tax deduction). But suppose this taxpayer also gave $10,000 to charity. The Standard Deduction for 2009 for joint return filers is $11,400, so this would appear to be the better choice. However, if the taxpayer were in the Alternative Minimum Tax there would be no benefit at all from the Standard Deduction, but there would be a benefit of up to $2,800 (the 28% Alternative Minimum Tax bracket times the $10,000 charitable contribution deduction) if itemizing is elected instead. Even the lower 26% tax rate would result in nearly the same benefit. So, somewhat counterintuitively, in this example opting to pay more Regular Tax will result in a lower overall tax liability.

Posted in Standard Deduction | 2 Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 3

Saturday, November 14th, 2009 | Print This Post Print This Post | Email This Post Email This Post

“Miscellaneous” Itemized Deductions

It may seem odd that a category of expenses labeled “job expenses and certain miscellaneous deductions” could affect nearly a third of all taxpayers caught in the AMT, but that just happens to be the case. This category includes, in addition to job-related expenses that are not reimbursed by your employer, such other things as tax return preparation fees, investment-related expenses like fees paid to an investment advisor, trust fees, safe-deposit box fees, and any other expenses that are incurred in connection with earning the income that is shown on the tax return.

When calculating the Regular Tax, these types of expenses are deductible, but only if they exceed a certain percentage limitation. The limitation is 2 percent of the taxpayer’s Adjusted Gross Income, or “AGI.” For example, if AGI is $100,000, the taxpayer is allowed a deduction if the total of job-related and miscellaneous expenses exceeds $2,000 – but then only for the amount in excess of the $2,000.

For taxpayers stuck in the Alternative Minimum Tax, however, no deduction is allowed for miscellaneous itemized deductions. This difference between the Regular Tax and the AMT is reported on IRS Form 6251 as one of the numerous adjustments that must be made in calculating taxable income.

A couple of key planning tips here:

First, as with all itemized deductions, miscellaneous expenses are eligible to be deducted only in the year paid, whether by cash or by writing out and mailing, or actually delivering, a check. If a credit card is used, the date the charge is put on the card is the important date, even though the credit card bill is not paid until later when the bill comes in.

Second, as we’ve been preaching all along with other items such as state and local taxes, the key AMT planning step is determining whether the taxpayer has enough control over paying the expense so that he could choose to make it a deduction either in the current year or in the next year.

For example, if a taxpayer filed his 2008 return on the final extended due date of October 15, 2009, he probably wouldn’t be receiving the bill from his CPA until about now, in November. In this case, if the taxpayer is in the AMT in 2009 but will not be in the AMT in 2010, it makes more sense to pay the bill in January, 2010. So long as the 2 percent threshold is exceeded in 2010, there will be a Federal income tax benefit that otherwise would not be available if the bill were paid in 2009. Depending on the individual’s tax bracket, this savings could be up to 35 percent of the amount of this deductible expense.

There is nothing secret about this tax reduction opportunity – just the same basic and easily executed tax planning strategies as discussed in our earlier articles. Estimating your tax situation this year and next – to see if you are in or out of the AMT – and then just paying the bill in the more advantageous year is all there is to it.

Posted in Misc Deductions 2-percent Floor | 2 Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 3

Wednesday, November 11th, 2009 | Print This Post Print This Post | Email This Post Email This Post

Sales Tax on New Cars – Special Alternative Minimum Tax Benefit Expires December 31

If you still are thinking about buying a new car but haven’t done it yet, you’d better start visiting showrooms soon. The new tax law allowing a one-time deduction for sales tax paid on a new vehicle will expire in just 6 weeks; after December 31st it’s too late. New car models currently are arriving in dealer showrooms, so whether you end up negotiating a good price on a leftover 2009, or are one of the first in your neighborhood to own a 2010, it makes no difference – both of them qualify.

Under the stimulus bill enacted last February, this tax benefit is separate and distinct from the “cash for clunkers” program; in fact, you can take advantage of both so long as you qualify under each program’s requirements.

The extra good news for AMT payers is that, unlike the rule for general sales taxes, and for state income taxes and property taxes that we already have told you about, this new-car sales tax break is available even if you are stuck in the Alternative Minimum Tax!

A quick summary of the rules:
- State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible.
- In a state that does not have a sales tax – such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon – other fees or taxes are deductible so long as they are assessed on the purchase of the vehicle and are based on the vehicle’s sales price or as a per unit fee.
- Qualified motor vehicles include new – not used – cars, light trucks, motor homes and motorcycles.
- Purchases must have occurred after February 16, 2009, and before January 1, 2010.
- The deduction can be taken regardless of whether or not you itemize your deductions on your tax return – i.e., even if you take the standard deduction you are still eligible for this one.
- The deduction is claimed on your 2009 Federal income tax return, not on your 2008 as can be the case with certain casualty losses.
- The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

If you already have bought a car that qualifies, you need to go and figure out how much this new benefit will save you if you haven’t done so already.
If you’re still wavering over whether to do it or not, you need to calculate the tax savings you will get – up to 28% of the sales tax paid even if you are in the AMT, and then figure this in to what you can afford. Maybe this will help you make the decision!

George Bauernfeind is with AMTIndividual.com, providing analysis, customized strategies, and an online dual tax calculator / planner to help you reduce your Alternative Minimum Tax.

Posted in State Income & Other Taxes | No Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 2

Sunday, November 8th, 2009 | Print This Post Print This Post | Email This Post Email This Post

Property Taxes

Real estate taxes

Similar to state income taxes, for Regular Tax purposes you are allowed a deduction for property taxes that you pay.  Under the AMT, however, you are allowed no deduction for property taxes.  This problem affects 94 percent of all folks stuck in the Alternative Minimum Tax, so it is something that you definitely need to look at.  This also represents one of the easiest AMT planning opportunities.

Property tax assessment and billing cycles vary among the states, but the basic concept of your control over paying a tax bill in December or in January – as we previously discussed regarding state income taxes – also applies to property taxes.

As an example, here is a sample of an actual property tax bill you would have on a $500,000 residence in a state that assesses the tax in the fall, and then gives the taxpayer a choice of payment dates in accordance with a set schedule.  With this example we can see how easy it is to have a direct impact on the AMT you pay.

Assessed value

$500,000
Total property tax rate

1.0724%
Property tax due

$5,362
Due date

12/31/09
Payment schedule as shown on the actual bill:
If paid by

10/31/09

the amount due is

$5,255

 (2% discount)
“

12/31/09

“

5,362

 (full amount)
“

1/31/10

“

5,630

 (5% penalty)
“

after 1/31/10

“

6,488

 (21% penalty)

The AMT-saving strategy for property taxes is extremely simple here, since you have a choice of paying your property taxes in 2009 or in January, 2010.  The simple act of when you write out the check will have a direct impact on the AMT you will pay.  As mentioned above, you get no benefit from a property tax deduction in a year you are in the AMT.  By paying your property taxes paid in a year you are not in the AMT, you will achieve real tax savings.

In this example, if you are in the AMT this year but do not expect to be in the AMT in 2010, by waiting until January to pay this bill you will save up to 35% in Federal income taxes.  This obviously is much great than the 2% discount you will forego and the 5% penalty you will incur.

Your particular state’s assessment and billing cycle likely will vary from this example, but the concept is the same – to the extent you can, without incurring penalties with which you would not be comfortable, control even a portion of the timing of payment of your property taxes, you can save on your AMT bill.

Personal property taxes

Many states impose taxes on the value of personal property that you own.  Common examples are automobiles, boats, RVs and the like.  Like real estate taxes, personal property taxes are deductible for the Regular Tax but not for the Alternative Minimum Tax, so here is one more, although smaller, planning opportunity.

Assume your personal property tax rate is 1.5%, for example, and you have a $40,000 car.  Your tax will be $600.  If you have the opportunity to pay this in one year versus another (the December – January example above), this could be an easy way to shave a few hundred dollars off your AMT bill.

George Bauernfeind is with AMTIndividual.com, providing analysis, customized strategies, and an online dual tax calculator / planner to help you reduce your Alternative Minimum Tax.

Posted in State Income & Other Taxes | No Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 2

Monday, November 2nd, 2009 | Print This Post Print This Post | Email This Post Email This Post

State Income Taxes

For Regular Tax purposes – that is, if you are not in the Alternative Minimum Tax – you are allowed a deduction for state income taxes that you pay. Under the AMT, however, you are allowed no deduction for state income taxes. This problem affects 94 percent of all folks stuck in the Alternative Minimum Tax, so it is something that you definitely need to look at. This also represents one of the best AMT planning opportunities.

Every state with an income tax requires that you pay the tax throughout the year. You can do this either through withholding from your paycheck if you are an employee, or through quarterly estimated payments if you are self-employed, retired, or have not adjusted your withholding to cover the taxes you’ll owe on your investment income.

Two key points:

1 – No state requires you to pay in 100% of your state tax liability – the required percentage generally is 80% or 90%. If you don’t pay in this required amount you may be subject to an underpayment penalty, which usually is calculated in a manner similar to interest.

2 – If you make quarterly estimated tax payments, the fourth quarter payment is generally due on January 15 – for example, January 15, 2010 for the fourth quarter installment of your 2009 taxes. This is the way the IRS works, and most states follow this pattern.

How to do this simple tax planning:

The AMT-saving strategy here is to focus on the control you have over the payment of this last amount - the fourth quarter installment, if applicable, and/or the last 10 or 20 percent you will owe. Assuming you have a choice of paying a portion of your state income taxes in December or in January, the simple act of when you write out the check will have a direct impact on the AMT you’ll pay. As mentioned above, you get no benefit from a state income tax deduction in a year you are in the AMT. By getting more of your state income taxes paid in a year you are not in the AMT, you will achieve real tax savings.

Example:

State Income Taxes

Assume that you are in the AMT in 2009, your total 2009 state taxes are $15,000, you will not be in the AMT in 2010, and your Regular Tax bracket is 35%. If you could defer paying $1,500 of your 2009 state income tax until January, this would save you over $500. If you could defer $3,000, your savings would be over $1,000. Note that even if you end in the AMT again next year, continuing to execute this strategy will mean that you will achieve this Regular Tax benefit in the first year that you are not in the AMT.

If you are certain that you will not be in the AMT next year, consideration might be given to delaying payment of more than the allowable percentage, even if it means incurring an underpayment penalty. Many states have underpayment rates around 6%; this small penalty obviously is less than a Federal tax savings of up to 35%.

What you’ll need:

If you do decide to pursue a state income tax strategy, you’ll first need to check the rules for making estimated payments for the state in which you live. All states have the forms you’ll need, available on their web sites. The three key forms are the state equivalent of the following IRS forms:

  • Form W-4, Employee’s Withholding Allowance Certificate – This can be filed at any time with your employer to adjust your withholding up or down.

  • Form 1040-ES, Estimated Tax for Individuals – This is used to make quarterly estimated tax payments if you are self-employed or retired, or if you have not adjusted your withholding for the additional taxes due on your investment income.

  • Form 2210, Underpayment of Estimated Tax by Individuals – This is used to determine whether you have paid in the required percentage. By reading the instructions you will see what your state’s required minimum pay-in percentage is.

Conclusion:

State income taxes affect nearly everyone and are one of the best AMT planning opportunities. Applying what you learned above will provide a cash and tax benefit. You control this one and can do it without the need of a professional adviser.

If you want additional assistance and links to your State’s forms, plus a dual tax calculator to determine the exact benefit, please visit AMTIndividual.com.

Posted in State Income & Other Taxes | No Comments »

It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas…Week 1

Saturday, October 31st, 2009 | Print This Post Print This Post | Email This Post Email This Post

“It’s the time of the season” was a popular song some years ago. The barbecue grills are put away, the kids are back in school, and the foliage is starting to turn. The 2008 tax return season was officially over on October 15; now it’s time to start thinking about 2009.

With only two months to go, do you know yet whether you’ll owe more taxes in April or be getting a refund? Do you know that you have the opportunity – now – to make your refund bigger or the check you write the IRS smaller? All it takes is brief look at your tax situation and consideration of what you can do in the next 60 days. If you wait until January it’s too late to lower your 2009 taxes.

This is especially true for those of you stuck in the Alternative Minimum Tax. For AMT payers, there is quite a list of things you can do to reduce your AMT bill, and all of them are very simple.

Over the next two months we’ll be doing a series of articles on what these things are, but here is just a sample of what we’ll be talking about:

Property taxes – many of you already have received your property tax bill. Assuming you have a choice of paying it in December or in January, the simple act of when you write out the check can have a direct impact on the AMT you’ll pay.

State income taxes – similar to property taxes, your state income taxes have an impact on your AMT. The more state taxes you pay this year the higher your AMT bill will be – another opportunity to have an immediate impact on the tax you’ll pay.

Example – assume you owe $5,000, either in property taxes or in additional state income taxes. If you are in the AMT in 2009 and pay these taxes in 2009, you will get zero tax benefit. If you wait until January to pay the $5,000, and then are not in the AMT in 2010, you will achieve a tax savings from the IRS of up to $1,750.

There are many other ideas – simple ones like this – that we’ll be writing about between now and year-end, and we’ll be explaining each one in plain English so you can understand them and act on them. Don’t wait any longer – “it’s the time of the season.”

George Bauernfeind is with AMTIndividual.com, providing analysis, customized strategies, and an online dual tax calculator / planner to help you reduce your Alternative Minimum Tax.

Posted in AMT Planning in General, State Income & Other Taxes | No Comments »

Special Alternative Minimum Tax Break on New Car Purchases Available in States With No Sales Tax

Sunday, June 21st, 2009 | Print This Post Print This Post | Email This Post Email This Post

Under the American Recovery and Reinvestment Act, enacted February 17, 2009, taxpayers who buy a new vehicle this year can deduct state or local sales taxes paid on the purchase. Unlike any other itemized deduction for taxes, AMT payers also are eligible for this break.

A problem, however, is that individuals in states without a sales tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — get no benefit from this change, simply because they are not paying a deductible tax as defined in the law.

Now, in a major policy change benefiting folks in these states, the IRS has issued a notice allowing this deduction for “other fees or taxes” paid on automobile purchases. Here is the text of the notice:

WASHINGTON —The Internal Revenue Service and Treasury Department today announced that a tax break for the purchase of new motor vehicles is available in states that do not have a state sales tax. Under the American Recovery and Reinvestment Act of 2009, taxpayers who buy a new motor vehicle this year are entitled to deduct state or local sales or excise taxes paid on the purchase.
The IRS and Treasury have determined that purchases made in states without a sales tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon —can also qualify for the deduction.
The IRS said today that taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee. According to the IRS, Congress intended for these fees or taxes to qualify for this special tax deduction.

“This special tax break is available for people purchasing a new car this year, and that can include people in states without a sales tax,” said IRS Commissioner Doug Shulman. “This means that more people can take advantage of this deduction when they file their tax returns next year.”

To qualify for this deduction, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. Taxpayers can claim this special deduction only on their 2009 tax returns to be filed next year.
The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle.
The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
The special deduction is available regardless of whether taxpayers itemize deductions on their returns. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return. The IRS reminded taxpayers the deduction may not be taken on 2008 returns.

Posted in Other issues, State Income & Other Taxes | No Comments »

Obama and Biden release tax returns – Vice President still stuck in the AMT

Friday, April 24th, 2009 | Print This Post Print This Post | Email This Post Email This Post

Last week President Barack Obama and Vice President Joe Biden released their 2008 income tax returns. The President is not paying the AMT, but the Vice President is still stuck in it, as he has been for several years. We had seen this when they made their tax returns public during the presidential campaign.

Biden’s income is in the “wealthy” category, as defined by the President – those making over $250,000. But with total income of $269K, just barely over that threshold, it may seem odd that he would be subject to the AMT. Unfortunately, our VP’s situation once again confirms that the AMT in its current form is not in any way related to the original AMT enacted 40 years ago. It continues to hit “ordinary” Americans working hard for a living who just happen to be caught in its “sweet spot.” And that sweet spot continues to grow – currently over 4 million taxpayers and counting.

Why is Biden in the AMT but Obama is not? As we’ll see in future articles, he is making just enough income, and has just the wrong level of itemized deductions, and it is the interplay of these two that does it. The President, on the other hand, with his substantial book royalties, had nearly $3 million of income, at which level the “regular” tax is higher than the AMT.

Is there anything the VP can do about this? Of course there is – nearly everyone can reduce his/her AMT liability. In Biden’s case, his focus should be timing his deductions better. Especially with higher tax rates on the horizon – remember that rich people like him will soon be paying the promised higher taxes – the VP could save taxes by doing some simple planning. All this would take is a little modeling with a tax software program to see how tweaking his deductions could have a direct impact on his AMT.

The tax returns can be found on the White House web site – www.whitehouse.gov.

Posted in AMT Items, AMT Planning in General, State Income & Other Taxes | No Comments »

Page 5 of 512345