Legislation/tax law changes

Who Has to File the Form 6251?

Sunday, March 21st, 2010 | Print This Post | Email This Post

A common question that is asked is who has to file the IRS Form 6251, “Alternative Minimum Tax – Individuals.” The answer seemingly is simple – those who have to file the Form 6251 are those who owe the Alternative Minimum Tax. If a taxpayer does not owe the AMT, the 6251 does not need to be attached to the Form 1040. But how does a taxpayer know if he owes the AMT? There are several different ways to approach this; these are discussed below.

1. Fill out the Form 6251

Each and every taxpayer is responsible to determine the taxes he owes, so he alone is responsible to test for the AMT. Filling out the form is one sure way to do this; if the AMT is not owed, the form simply can be discarded. But with the IRS estimating that it takes 21.4 hours on average to complete the Form 1040, including recordkeeping and other requirements, why add to this burden if there is any way around it?

2. Fill out the worksheet located in the Form 1040 instructions

The IRS has plenty of instructions. The 2009 version of the basic Form 1040 instructions is 175 pages long, and buried in among all that good knowledge is a worksheet to help taxpayers determine of they owe the AMT (for 2009 it is located on p. 41). But this worksheet is of limited assistance because it focuses only on the basic computation, and whether a taxpayer’s itemized deductions or the phaseout of the AMT exemption is what is triggering the AMT.

What the worksheet does not do is help a taxpayer who has any of the 17 AMT items and credits that are listed there. If a taxpayer has any one of these, he is told to “fill in Form 6251 instead of the worksheet.”

3. Go to the IRS web site and check out its “AMT Assistant.”

This is a handy little tool, but again is of limited utility because it simply is an electronic version of the worksheet found in the Form 1040 instructions. If a taxpayer has none of the 17 items, this can save him from having to do the actual calculations himself. But if the taxpayer has any one of the items, it’s back to the Form 6251.

4. If I didn’t pay it last year then I don’t owe it this year (also known as the “head in the sand” approach)

It’s probably fair to say that it is not anyone’s idea of fun to fill out IRS forms, especially if it is not necessary to do so. So one approach is that, if the taxpayer did not owe the AMT last year, and assuming no big changes in income or deductions this year, the odds are that the AMT won’t be due again this year. But for some taxpayers it doesn’t take much of a fluctuation in income or deductions to get caught in the AMT. Another problem is that this approach fails miserably if Congress does not once again extend the “patch,” the annual indexing of the AMT exemption amount for inflation. If the patch is not acted on again this year, the number of individuals owing the AMT will increase from the current 4.4 million to a projected 26.7 million. As of today’s date, the patch has not been enacted for 2010, which means that 22.3 million taxpayers cannot rely on the test of not having paid the tax in the prior year.

5. Use the AMT Planning Model / Dual-tax Calculator at AMTIndividual.com

Fast and easy way to help you determine if you are in the AMT and how much AMT you will owe. It will also show you why you are in the AMT, what items are trapping you, and how to reduce or possibly eliminate the AMT in future years. The Free edition helps individuals better understand the AMT and what items are trapping them for the most recent tax return. The Deluxe edition is a comprehensive version that adds customized, written strategies and the AMT Planner to plan for this current year. Go to www.amtindividual.com to learn more.

Posted in AMT Planning in General, Calculation of the AMT, The "patch" | 1 Comment »

The Estate Tax and the AMT – An Urgent Concern for Taxpayers

Wednesday, March 3rd, 2010 | Print This Post | Email This Post

As we sit today, we do not have an estate tax in 2010. The problem this presents is that, through an interplay of the estate tax rules and the Alternative Minimum Tax rules, if Congress does not act to reinstate the estate tax for 2010 there will be a significant increase in the number of individuals paying the AMT, not only in 2010 but in all future years as well.

The AMT issue

The AMT side of this issue stems from the impact that capital gains have on an individual taxpayer’s AMT. While long-term capital gains are taxed at the same tax rates for both the Regular Tax as well as the AMT, an increase in an individual’s taxable income, whether from ordinary income or from capital gains, in many cases means a decrease in the individual’s AMT exemption amount.

Here is how this works: once a certain level of Alternative Minimum Taxable Income (AMTI) is reached, every dollar of additional income will reduce the taxpayer’s exemption by 25 cents. The threshold level for a married couple filing jointly is $150,000; it is lower for singles and marrieds filing separately. These thresholds, as well as the mechanics of the AMT exemption phaseout, are explained in the lower part of the IRS Form 6251.

The estate tax issue

Here is the estate tax issue: capital gains are the excess of the selling price of a capital asset, such as a security, over the taxpayer’s basis in that security. The most common concept of basis is what the taxpayer paid for the security when he bought it. For example, a share of stock purchased for $100 will have a tax basis of $100; if it is later sold for $120, the taxpayer has a capital gain of $20 on which he will pay tax. But in the case of inherited securities the determination of basis is very different.

So long as the estate tax is in effect, a beneficiary receives a tax basis in any inherited property equal to its fair market value on the date of death. In the vast majority of cases, this is a “stepped-up” basis because, over time, stocks generally appreciate. This is especially the case for senior citizens because they generally have a long-term hold strategy. All of this means that a decedent’s tax basis typically is well below a stock’s current price. In the above example, that share of stock worth $120 may have been acquired by the decedent for $50, or even less.

The two rules together

With the estate tax in place, if the decedent passes away when that stock is worth $120, that amount is now the tax basis for the heir when the shares are distributed to him. Thus, if the heir sells it for $120, he has zero gain to pay tax on, and this has zero effect on his AMT exemption amount.

Suppose, however, the estate tax is not put back in place. In this case the heir’s tax basis in the above example is $50 because he receives a “carryover” basis instead of a stepped-up basis, and a sale at $120 would result in a $70 capital gain. If the individual has AMTI over the specified threshold, this $70 gain on each share of stock sold would decrease his AMT exemption by $17.50 (25% of the gain). If enough shares are sold, this could have a significant and direct impact on the individual’s Alternative Minimum Tax liability.

Summary

Warren Buffet and Bill Gates are long-standing advocates for the estate tax. While these two probably are not AMT payers, every one of the 4.3 million individuals currently subject to the Alternative Minimum Tax, as well as all other taxpayers who are at risk of being drawn into the AMT, should be right there joining these two in advocating reinstatement of the estate tax!

Posted in AMT Exemption, AMT Planning in General, Legislation/tax law changes, Other issues | 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 »

PAYGO and the Alternative Minimum Tax – Here We Go Again

Sunday, June 14th, 2009 | Print This Post | Email This Post

Yesterday President Obama issued a call for returning to a statutory pay-as-you-go (“PAYGO”) requirement. This issue has a direct and very significant inpact on the Alternative Minimum Tax you pay, yet it is understood by very few AMT payers.

By way of background, PAYGO refers to a method of financing changes to the law that result in Federal monies being spent, by demanding that offsetting funds also are made available at the same time. In other words, to spend a dollar Congress must find a way either to increase revenues by a dollar, or to make a dollar of spending cuts somewhere else. The obvious goal of this is to put a brake on deficit spending.

PAYGO was first enacted into law in 1990, and it remained in effect until 2001 when it was allowed to lapse. At that point the discipline of fiscal restraint was gone, and the annual budget deficits began to grow again.

In 2007 the PAYGO system was reestablished as a rule of the House of Representatives, although the Senate did nothing. Less than one year later, however, due to taxpayer outcries to do something about the ever-growing Alternative Minimum Tax burden, Congress completely abandoned its PAYGO pledge, allowing it to pass the series of “patches” we have seen in recent years.

Yesterday’s White House press release read as follows:

“The President will discuss his plan to ensure that the federal government lives within its means and will lay out his commitment to:
• Return to an era of responsible government spending, the President is asking Congress to approve legislation requiring that any new tax cut or entitlement program be paid for.
• Put PAYGO back into law, with automatic cuts in mandatory programs as penalties for violations.
• Return to the rules of the 1990s when statutory PAYGO enforced the tough choices that moved the budget from large deficits to surpluses.”

With all that great-sounding language, however, the President admitted that he did have to make a few exceptions, including dealing with our favorite little monster – the Alternative Minimum Tax:

“There would be exceptions in four areas where current policy differs substantially from current law: (1) Medicare payments to physicians; (2) the estate and gift tax; (3) the AMT; and (4) tax cuts enacted in 2001 and 2003.”

So while the President acknowledges that he must continue with the annual fixing of the AMT problem, he’s also recognizing that the cost is so great that there simply is no way to pay for it. The old adage repeats itself again – you just can’t have your cake and eat it too!

Posted in AMT Exemption, Legislation/tax law changes | No Comments »

IRS summarizes AMT changes for 2009

Wednesday, May 6th, 2009 | Print This Post | Email This Post

The IRS has put on its web site a summary of changes made to the Alternative Minimum Tax for 2008 and for 2009. While the 2008 information isn’t of much interest to those who already have filed their 2008 tax returns, it is worth noting the changes taking effect in the current year.

The 2009 changes are:

AMT exemption amount increased. The AMT exemption amount has increased to $46,700 (single); $70,950 (married filing jointly); $35,475 (married filing separately). In 2008 these amounts were $46,200, $69,950, and $34,975, respectively.

Qualified motor vehicle tax allowed against AMT. If you claim the standard deduction for the regular tax and it includes any state or local sales or excise tax on the purchase of a qualified motor vehicle, that tax is also allowed as a deduction for the AMT.

Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 exempt from AMT. Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 is not an item of tax preference and therefore is not subject to the AMT. A refunding bond is treated as issued on the date of the issuance of the refunded bond (or, in the case of a series of refundings, the original bond). However, tax-exempt interest on a specified private activity bond issued in 2009 or 2010 to currently refund a private activity bond issued after 2003 and before 2009 is not an item of tax preference.

Certain credits still allowed against AMT. The special rule that allows the credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, mortgage interest credit, and the District of Columbia first-time homebuyer credit to be applied against the AMT was scheduled to expire at the end of 2008. However, Congress has extended the special rule through 2009, so those credits can be applied against the AMT for 2009. This special rule is also expanded to include the personal use part of the alternative motor vehicle credit. It also applies to the nonbusiness energy property credit.

AMT exemption amount for a child increased. The AMT exemption amount for a child whose unearned income is taxed at the parent’s tax rate has increased to $6,700.

As we closer to the end of the year, we will begin watching for changes effective for 2010.

Posted in Legislation/tax law changes | No Comments »

Indexing

Monday, April 6th, 2009 | Print This Post | Email This Post

The AMT “patch” that Congress passed in the recent stimulus bill saved 24 million taxpayers from falling into the AMT in 2009. As we mentioned in the last article, this temporarily fixed the problem caused by Congress’ original failure to index the AMT for inflation.

What is indexing? Under our system, tax brackets are progressive – i.e., the more you make, the higher your tax bracket. Some time ago Congress decided it wasn’t fair to have you fall into a higher tax bracket if your only increase in income simply reflected inflation. For example, in 2008 a single taxpayer hit the 33% bracket when taxable income reached $164,550. In 2009, that same taxpayer will be able to earn $171,550 before hitting 33% – a 4.3% increase. Presumably the CPI increased by 4.3% during this period. (Economists reading this are welcome to write in and explain how all this actually works).

For the AMT, the level at which an AMT payer goes from the 26% bracket to 28% ($175,000) has not changed. Instead, the Congressional fix is to index the AMT “exemption amount.” For a single taxpayer, in 2008 the exemption amount was $46,200. This is an increase of 4.2% over what it was the previous year, because of Congress’ 2008 patch. If the patch is not enacted, however, the exemption amount reverts all the way back to what it was in 1993 – $33,750 for singles. This is the reason such a large number of you – 24 million – are left hanging out there every year.

Posted in AMT Exemption, Calculation of the AMT, Legislation/tax law changes | 2 Comments »

AMT Exemption Calculation of the AMT Legislation/tax law changes

Tuesday, March 31st, 2009 | Print This Post | Email This Post

Once again we read that Congress has fixed the AMT problem by enacting a temporary “patch” in the recent stimulus bill. With this, 24 million taxpayers who otherwise would be in the AMT in 2009 are spared – but only for one year. Come January 1 these 24 million people again risk falling into the AMT.

What is this all about? It’s simply another example of the law of unintended consequences. When the first minimum tax was enacted back in 1969, it seemed like a good idea – 155 taxpayers making over $200,000 were paying no taxes at all under the regular income tax, so a “minimum” tax would make sure that they did. But today that 155 has exploded to over 4 million who are paying the AMT. Unfortunately, this patch does nothing for you 4 million – it just keeps the other 24 million from joining your exclusive club.

Why is this happening? The principal reason for this kudzu vine-like growth in the number of AMT victims is the failure to index the AMT for inflation, while the Regular Tax is so indexed. The annual patch fixes this with a catch-up AMT indexing adjustment. In our next article we will explain indexing and this annual adjustment.

Why just a one-year patch and not a permanent fix? The answer is simple economics – the revenue loss for the 2009 fix alone is 70 billion dollars. A permanent fix, using Congress’ 10-year forecasting model, could approach a cost of nearly 1 trillion dollars. Now you’re starting to talk about real dollars.

Posted in AMT Exemption, Calculation of the AMT, Legislation/tax law changes | 1 Comment »