State Income & Other Taxes

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

Sunday, December 27th, 2009 | Print This Post | Email This Post

Year-End AMT Planning Wrap-Up – Part 1

In our 10-week series of articles on tax planning for the Alternative Minimum Tax, we have looked at many things a taxpayer can do to reduce his AMT liability. With only four days left in which to act in order to reduce 2009’s taxes, here is a summary of these items, with reference to the date each article appeared on amtblog.com. Please refer back to the article for the specific tax-saving steps that still may be taken before year end.

State and local taxes

This item affects 94% of all AMT payers, yet it is one of the easiest to plan for and it can have the most direct impact on a taxpayer’s Alternative Minimum Tax. There are three types of taxes here:

1. Property taxes – by weighing the relative factors of property tax burden, percentage of AMT payers, and size of population, here is a ranking of the top 10 states that are hit the hardest by this item. Residents of these states really do need to focus on this one in particular. See the November 8th article posted on amtblog.com, “Property Taxes.”

#1 – New York
#2 – New Jersey
#3 – California
#4 – Illinois
#5 – Massachusetts
#6 – Connecticut
#7 – Maryland
#8 – Pennsylvania
#9 – Virginia
#10 – Ohio

2. Income taxes – the tax dollars here are larger, on a per-taxpayer basis, than property taxes. While the AMT planning takes a little more work than property taxes, the potential savings still are there. See the amtblog.com article posted on November 2nd, “State Income Taxes.”

3. Sales tax on new cars – this is easy money for those who bought a new car this year, or still are contemplating buying one. See the amtblog.com article posted on November 11th, “Sales Tax on New Cars.”

Stock options, in particular Incentive Stock Options (ISOs)

A large number of corporate employees, generally ranging from the mid-management level up to the “C Suite” folks, have stock options granted to them by their employers. If these options are ISOs, AMT planning is critical because of the major impact the exercise of these options can have on an individual’s Alternative Minimum Tax. Our two-part series of articles appearing on amtblog.com on December 3rd and December 6th, “Incentive Stock Options – Parts 1 and 2,” go through the basic steps in determining whether a taxpayer does in fact have an ISO – often confused with the other types of stock options and equity grants an employer may offer – and then explains how these ISO exercises trigger the AMT. This is a very important read for all those who either have exercised stock options or are contemplating exercising stock options.

Capital gains

The impact of capital gains on a taxpayer’s Alternative Minimum Tax can be a real surprise – and, unfortunately, not a pleasant surprise At first blush capital gains appear to be AMT-neutral, but this is far from the case. The December 13th article on amtblog.com, “Investments – Capital Gains,” explains this issue. To the extent a taxpayer has recognized capital gains in 2009, and/or “harvested” capital losses to offset capital gains, there can be a direct AMT impact. Any capital gain or loss activity between now and December 31 also will have this impact.

Summary

It is not too late to take action on any of the above items for 2009, but time is short. Once the ball drops in Times Square, you’ll be planning for 2010!

Posted in AMT Planning in General, Capital gains & Dividends, Incentive Stock Options Exercised, State Income & Other Taxes | No Comments »

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

Sunday, November 29th, 2009 | Print 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 3

Wednesday, November 11th, 2009 | Print 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 | 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 | 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 | 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 | 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 | 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 »