Sunday, March 17, 2013
ON THE MONEY: Becoming tax savvy
Greg Roberts for the Aiken Standard writes: The latest estimate that I saw stated that 75 percent of
Americans get a tax refund each year, and, translated, that means that
too many of us are giving the federal government a tax-free loan out of
our money. The average federal tax refund is in the neighborhood of
$3,000, which means that most of us are having too much withheld from
our paychecks. There is a very good withholding calculator at www.kiplinger.com/tools. You can use this online tool to adjust your
exemptions so that you can take home more of your own money each
paycheck.
One very good reason to adjust your withholding is that
far too many of us spend our tax refunds on non-essential items and wind
up frittering the money away. If instead, we had more take home pay,
that additional income could be spent on “regular” expenses, or better
still, used to pay down debt.
If you work out of your home, don’t think that claiming
the cost of an office in your home will necessarily trigger IRS
scrutiny. So long as your home office expenses are legitimate, you
should include every possible expense to reduce your taxable income.
That includes depreciation of your home, including as an expense a
prorata share of the cost of your utilities, including Internet access
fees. And don’t forget the business portion of your cell phone charges.
The amount of your deductions for the business use of
your vehicle depends on the manner in which you receive your income. If
you receive a W-2, you may deduct the unreimbursed portion of your
mileage expenses at the rate of 55.5 cents per mile (for 2012) offset by
the amount of any employer reimbursement. Remember that the total
dollar amount of the expense must exceed 2 percent of your adjusted
gross income to be included as an itemized expense. Yes, you could use
your actual vehicle expenses, including depreciation, but keeping
accurate records can be a hassle, so most persons take the mileage
route.
If you are self-employed, your business mileage expense
(or the actual expenses of operating your vehicle for business) is
deductible without the 2 percent of AGI threshold. The self-employed can
also deduct 100 percent of any long-term care insurance premiums,
regardless of age. Then, too, if you have substantial income and are
self-employed or are the sole owner of a pass through entity, consider
installing a defined benefit pension plan, particularly if you are over
50. The deductible cost of a defined benefit plan can far exceed the
amount that you can contribute to a profit sharing plan or other defined
contribution plan. If you have no employees, the entire contribution
would benefit you.
Be wary of using your home equity credit line if your
income will catapult you into paying Alternative Minimum Tax. Generally,
interest on up to $100,000 of debt secured by your home can be
deducted, however you choose to use the money. But if you pay AMT, you
must use the Home Equity loan proceeds to improve your home to quality
for a tax deduction.
Remember to get receipts for all of your non-cash
charitable contributions, and keep track of all your philanthropic
expenditures, including mileage, which is deductible at the rate of 14
cents per mile. If you believe that your non-cash charitable
contribution is worth more than $500, you will need to document the
method you used to value your contribution, so it will pay you to be
accurate.
If you are going to make a cash contribution to a
charity, take a look at giving away shares of appreciated stock rather
than cash. If you have owned the stock for at least one year, you get to
deduct the market value of the stock (which would equate to cash) plus
you never have to pay any tax on the profit.
If you have a traditional IRA, be sure that your
beneficiary designations are current. If you are leaving your IRA to
your children or grandchildren, check to ensure that you have named each
beneficiary by name and not by class, such as “all my living children,
equally.” The reason for this precision is that by being specific, your
named beneficiaries will be able to withdraw their monies each year over
their life expectancies, which is a huge benefit. In the absence of a
specific beneficiary designation, their only option will be to withdraw
the monies over the five years after your death.
If you are going to buy shares in a mutual fund this
year, be sure to find out when the fund distributes dividends. On that
date, the value of the shares will drop by the amount of the dividend.
But if you buy just before the payout date, the dividend will
effectively rebate part of your purchase price, but you’ll owe tax on
the amount. Buy after the payout, and you’ll get a lower price and no
tax bill.
Three buckets (taxable, tax-deferred and tax-free) many methods to reduce tax / Deferral among tools to trim liability over earning years
Joel Steele for the Courier-Post writes: How do you want to pay tax on your investments?
It is nice to have a choice. However, many don’t realize it is up to you in part how you pay tax on this money. In general, there are three tax buckets you can have your money in. They are taxable, tax-deferred and tax-free. Inside of these three buckets can be many types of investment products. An account in a taxable bucket is one you pay tax on whether or not you take the interest. This is non-IRA money and can apply to interest earned on CDs, mutual funds, etc.
If interest for the year is $10 or more, you get a 1099 tax document on all interest and dividends. The good and bad news on these accounts is that the interest rates are so low on CDs that you’re probably not having much taxable income to report. If you depend on the interest from these accounts for income, then that is a bigger issue you may need to address.
The tax-deferred bucket includes traditional IRAs, deferred annuities, 401(k)s, etc. Tax deferred simply means you defer paying tax on it now, but you or your heirs will pay tax on the money later. You can move taxable money into a tax-deferred account if that makes sense for you.
If you are paying more tax than you prefer now, you can defer taxes until a time when you feel you will be in a lower tax bracket. A common use of a tax deferred strategy is using a deferred annuity, either fixed or variable, to postpone the taxable event until later. If your goal is to have more money go to your heirs, you should keep in mind the taxes they may pay on your money. Here is an example. You have a $100,000 deferred, nonqualified account and $50,000 of it is accumulated interest. When you take withdrawals you’ll pay tax on the built up interest first. If you pass away and your beneficiaries cash it in, they’ll pay tax on the whole $50,000 of interest all at once. This would likely result in a chunk of your hard-earned money going out the window in taxes.
However, you may have the ability to strategically reduce the tax liability over time. If you have tax-deferred accounts, I highly suggest you see what you can do to possibly reduce your tax liability so the tax bubble doesn’t burst one day. Additionally, there are a couple account types that are tax-deferred to you and tax-free to your heirs. They are Roth IRAs and single premium life insurance policies.
The tax-free bucket can be a good place for some of your taxable money. When you take money out of a tax deferred account like an IRA, you have to pay tax on it now. Once you start taking a required minimum distribution at 70½, you now have more taxable income than you may need or want. If you have some of your other taxable money move into a tax-free account, that may help to keep your tax bite down. There are a few good strategies to use when it comes to tax-free investments. Each strategy is best left to each individual’s situation.
I do recommend that you meet with your financial services professional to see if and how using the tax-free bucket can help you retain more of your money in your lifetime and after.
Regardless of which of the three tax buckets you are using, it doesn’t hurt to see if you have too much in one bucket or not enough in another.
Your accountant may be able to shed some light on this. He or she can tell you if you have a big tax bite, but your financial services professional can help you design a strategy to possibly reduce it.
It is nice to have a choice. However, many don’t realize it is up to you in part how you pay tax on this money. In general, there are three tax buckets you can have your money in. They are taxable, tax-deferred and tax-free. Inside of these three buckets can be many types of investment products. An account in a taxable bucket is one you pay tax on whether or not you take the interest. This is non-IRA money and can apply to interest earned on CDs, mutual funds, etc.
If interest for the year is $10 or more, you get a 1099 tax document on all interest and dividends. The good and bad news on these accounts is that the interest rates are so low on CDs that you’re probably not having much taxable income to report. If you depend on the interest from these accounts for income, then that is a bigger issue you may need to address.
The tax-deferred bucket includes traditional IRAs, deferred annuities, 401(k)s, etc. Tax deferred simply means you defer paying tax on it now, but you or your heirs will pay tax on the money later. You can move taxable money into a tax-deferred account if that makes sense for you.
If you are paying more tax than you prefer now, you can defer taxes until a time when you feel you will be in a lower tax bracket. A common use of a tax deferred strategy is using a deferred annuity, either fixed or variable, to postpone the taxable event until later. If your goal is to have more money go to your heirs, you should keep in mind the taxes they may pay on your money. Here is an example. You have a $100,000 deferred, nonqualified account and $50,000 of it is accumulated interest. When you take withdrawals you’ll pay tax on the built up interest first. If you pass away and your beneficiaries cash it in, they’ll pay tax on the whole $50,000 of interest all at once. This would likely result in a chunk of your hard-earned money going out the window in taxes.
However, you may have the ability to strategically reduce the tax liability over time. If you have tax-deferred accounts, I highly suggest you see what you can do to possibly reduce your tax liability so the tax bubble doesn’t burst one day. Additionally, there are a couple account types that are tax-deferred to you and tax-free to your heirs. They are Roth IRAs and single premium life insurance policies.
The tax-free bucket can be a good place for some of your taxable money. When you take money out of a tax deferred account like an IRA, you have to pay tax on it now. Once you start taking a required minimum distribution at 70½, you now have more taxable income than you may need or want. If you have some of your other taxable money move into a tax-free account, that may help to keep your tax bite down. There are a few good strategies to use when it comes to tax-free investments. Each strategy is best left to each individual’s situation.
I do recommend that you meet with your financial services professional to see if and how using the tax-free bucket can help you retain more of your money in your lifetime and after.
Regardless of which of the three tax buckets you are using, it doesn’t hurt to see if you have too much in one bucket or not enough in another.
Your accountant may be able to shed some light on this. He or she can tell you if you have a big tax bite, but your financial services professional can help you design a strategy to possibly reduce it.
Who Will Get Hit With New Tax? Q: How high does your income have to be to get hit by the new investment-income tax?
Tom Herman for the Wall St. Journal writes: Question: How high does your income have to be to get hit by the new investment-income tax? —
C.F., Rancho Santa Fe, Calif.
Answer: Our reader is asking about a surtax of 3.8 percentage points on net investment income. This new tax, enacted in 2010 to help pay for sweeping health-care changes, became effective this year. (It doesn't affect tax returns for the 2012 tax year.)
According to the Internal Revenue Service, individuals will owe the tax if they have net investment income and also have "modified adjusted gross income" above a certain threshold. The threshold is $250,000 for married couples filing jointly, $200,000 for most singles and $125,000 for married individuals filing separately.
Net investment income includes items such as interest, dividends, capital gains, and rental and royalty income. Tax-exempt interest income isn't considered part of net investment income. Here are two IRS examples of how to calculate it:
• A single taxpayer has wages in 2013 of $180,000 and $15,000 of dividends and capital gains. Total modified adjusted gross income: $195,000. Since that's less than the $200,000 threshold, the surtax won't apply.
• A single filer has $180,000 of wages and $90,000 from a passive partnership interest. Total modified adjusted gross income: $270,000. That exceeds the threshold for single taxpayers by $70,000. The taxpayer's net investment income is $90,000. The IRS says the tax is "based on the lesser of $70,000 (the amount that taxpayer's modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (the taxpayer's net investment income)." So the taxpayer owes a net investment tax of $2,660—3.8% of $70,000.
For more details, go to the IRS website and search for "Net Investment Income Tax FAQs."
Answer: Our reader is asking about a surtax of 3.8 percentage points on net investment income. This new tax, enacted in 2010 to help pay for sweeping health-care changes, became effective this year. (It doesn't affect tax returns for the 2012 tax year.)
According to the Internal Revenue Service, individuals will owe the tax if they have net investment income and also have "modified adjusted gross income" above a certain threshold. The threshold is $250,000 for married couples filing jointly, $200,000 for most singles and $125,000 for married individuals filing separately.
Net investment income includes items such as interest, dividends, capital gains, and rental and royalty income. Tax-exempt interest income isn't considered part of net investment income. Here are two IRS examples of how to calculate it:
• A single taxpayer has wages in 2013 of $180,000 and $15,000 of dividends and capital gains. Total modified adjusted gross income: $195,000. Since that's less than the $200,000 threshold, the surtax won't apply.
• A single filer has $180,000 of wages and $90,000 from a passive partnership interest. Total modified adjusted gross income: $270,000. That exceeds the threshold for single taxpayers by $70,000. The taxpayer's net investment income is $90,000. The IRS says the tax is "based on the lesser of $70,000 (the amount that taxpayer's modified adjusted gross income exceeds the $200,000 threshold) or $90,000 (the taxpayer's net investment income)." So the taxpayer owes a net investment tax of $2,660—3.8% of $70,000.
For more details, go to the IRS website and search for "Net Investment Income Tax FAQs."
Tax questions? Ask our experts (Cliff Note version update of 2012 income tax regulations)
Mary Carr Mayle for the Savannah Morning News writes: When Congress and the president waited until New
Year’s Day to cobble together a “fiscal cliff” deal, it put taxpayers,
tax preparers and even the Internal Revenue Service behind the curve. With
some tax regulations changing — but not necessarily the way they were
expected to — and others that were expected to change actually staying
the same, the IRS had to delay all tax filings until Feb. 1 while it
played catch-up, printing new forms and instructions.
To help our
readers sort through this latest maze of IRS rates and regulations, the
Savannah Morning News and Savannahnow have teamed up with the tax
experts at longtime local accounting firm Hancock Askew & Co. this
week to take your questions regarding individual or small business
returns.
Four of the firm’s tax accountants will help you
understand changes in the tax laws and how they might pertain to you,
whether you are an individual taxpayer or a business person.
What they can’t do, of course, is offer legally binding answers to questions specific to your circumstances.
“Because
we can’t possibly understand anyone’s complete tax situation in one
phone call, we’ll give you our best advice based on what we know about
your circumstances and suggestions for seeking additional help if you
need it,” said Ann Carroll, director of business development and
marketing for Hancock Askew.
To get you started, here is an update of 2012 income tax regulations:
Rates
• The Bush era income tax rates of 10, 15, 25, 28, 33 and 35 percent remain the same, although the thresholds were expanded.
• A new rate of 39.6 percent applies to taxpayers with taxable income over $400,000 ($450,000 for married taxpayers and $425,000 for heads of households).
Capital gains and dividend rates
• The top rate for capital gains and dividends was raised to 20 percent (up from 15 percent) and applies to taxpayers whose income falls in the thresholds set for the 39.6 percent rate (taxable income over $400,000 single, $450,000 married filing joint and $425,000 heads of households).
• The capital gains and dividend rate of 15 percent applies to taxpayers whose income falls between the 25 and 35 percent rate thresholds.
• A zero percent capital gains and dividend rate applies to taxpayers whose income falls below the top of the 15 percent income tax bracket.
Child, dependent care credit
• The 35 percent credit rate has been permanently extended.
• The $3,000 cap on expenses for one qualified individual and $6,000 cap on expenses for two or more qualifying individuals have also been extended.
Education incentives
• The American Opportunity Tax Credit (AOTC) has been extended through 2017.
The AOTC provides 100 percent for the first $2,000 of qualified tuition and related expenses and 25 percent of the next $2,000 for a total of $2,500 per student.
• The AOTC applies to the first four years of a student’s post-secondary education.
• The above-the-line deduction for qualified tuition and related expenses has been extended
• The exclusion from income and employment taxes of deduction assistance up to $5,250 has been permanently extended.
• In addition to the income exclusion, an employer can also deduct up to $5,250 annually for qualified education expenses paid on behalf of the employee.
• The teacher’s classroom expense deduction allowing a deduction for qualified expenses up to $250 paid out-of-pocket during the year has been extended through 2013.
Mortgage issues
• The provision that excludes cancellation of mortgage debt on a principal residence of up to $2 million from income has been extended through 2013.
• The provision that treats mortgage insurance premiums as deductible qualified residence interest has been extended through 2013.
Alternative Minimum Tax
• The AMT rates remain at 26 and 28 percent.
• A “permanent AMT patch” has been implemented.
• The AMT exemption was retroactively increased for 2012 ($50,600 for single filers; $78,750 for married individuals filing jointly and surviving spouse filers; $39,375 for married individuals filing separately).
• The exemption amounts are slightly higher than 2011.
• Individuals can offset the entire regular tax and AMT liability by nonrefundable personal exemptions retroactive to Jan. 1, 2012.
Retirement Accounts
• Workers may contribute $17,000 for 2012 ($17,500 for 2013) with an additional $5,500 for individuals over age 50.
• IRA and Roth IRA limits remained at $5,000 for 2012 ($5,500 for 2013) with an additional $1,000 for individuals over age 50.
• Most restrictions have been removed allowing participants in 401(k) plans within-plan Roth conversion features to transfer those funds into a Roth account any time.
• These conversions are taxable events.
Other changes
• The marriage penalty relief has been extended.
• The personal exemption phase out rules have been brought back, however with slightly higher income thresholds than in the past.
• The Pease limitation on itemized deductions is back, however with significantly higher applicable thresholds.
• The threshold for deducting medical expenses increased from 7.5 percent to 10 percent of AGI.
• The $1,000 child tax credit has been permanently extended.
Changes for small businesses
• Code Section 179 small business expensing was extended through 2013 and is retroactive for 2012.
• Businesses may expense up to $500,000 of qualified property with a $2 million investment limit.
• The 50-percent bonus depreciation was extended through 2013.
• The 15-year recovery period for qualified leasehold improvements, qualified retail
improvements and qualified restaurant property has been extended through 2013.
• Code Section 41 research tax credit has been extended through 2013.
• The Work Opportunity Tax Credit (WOTC) was extended through 2013. WOTC employers who hire “difficult-to-employ” workers are eligible for a credit up to $6,000.
• Many other business tax extenders that expired after 2011 have been extended through 2013 including 10 renewable resource and other energy tax incentives.
What’s new for 2013?
• According to the Patient Protection and Affordable Care Act, effective Jan. 1, there is a new 3.8 percent Medicare surtax on net investment income, which applies to the extent modified adjusted gross income exceeds $200,000 for single filers ($250,000 for married joint filers).
The effective top rate for net capital gains for many “higher income” taxpayers thus becomes 23.8 percent for long term gains and 43.4 percent for short-term capital gains.
• There is an additional 0.9 percent surtax on any wages and self-employment income earned in excess of $200,000 ($250,000 for married filers) with required withholding.
• Beginning in 2013, the thresholds for the phase out of the Alternative Minimum Tax exemption amount are indexed for inflation ($115,400 for single filers; $153,900 for married individuals filing jointly and surviving spouse filers; $76,850 for married individuals filing separately).
The Collector's Handbook: Tax Planning, Strategy, and Estate Advice for Collectors and their Heirs [Kindle Edition]
Something different, an "e book" [Kindle Edition] on Tax Planning, Strategy, and Estate Advice for Collectors and their Heirs over on Amazon.com. It was published last week and at $0.99 - if you know a collector of anything - how can you go wrong? They say: "When it comes to collectibles, no one knows more than the folks at Heritage.” – Andrew Tobias, New York Times Bestselling Author of The Only Investment Guide You'll Ever Need
On February 3rd 2008, famed art collector Charles Martignette died suddenly at the age of fifty-seven, leaving behind the greatest collection of American illustration art in the history of the world: 4,300 pieces with a total value of more than $20 million, including important works by Norman Rockwell, Alberto Vargas, and Gil Elvgren. Heritage Auctions, the third largest auction house in the world, used a fleet of three fifty-three foot long trucks to haul the collection to its offices in Dallas.
Unfortunately, Mr. Martignette's visionary collecting habits were not accompanied by astute estate planning. It took weeks to locate his will and when it was finally found, it had not been properly executed (only one witness rather than the two witnesses Florida law requires); it was declared invalid and, after thousands in legal fees that could have been avoided, his estate went to his estranged family rather than the man (his lifelong friend and mentor) whom he had had designated as his beneficiary.
Stories of poor estate planning leading to disaster are common—but in the world of art, antiques and collectibles, collectors and their heirs face a unique set of challenges, such as authenticity and provenance, identifying which pieces are of great value and how they should be sold or otherwise transferred, storage and maintenance, and more. Now more than ever, collectors and their families need objective and authoritative guidance. A 2012 Barclays Wealth and Investment Management study found that, on average, high-net worth individuals have 9.6% of their net worth invested in art, antiques, and collectibles. Yet unlike their real estate holdings and securities investments, the estate planning for these assets is often overlooked.
Enter 'The Collector's Handbook: Tax Planning, Strategy, and Estate Advice from Collectibles Experts for Collectors and their Heirs.' “We wrote this book because we’re tired of seeing families plunged into chaos when a devoted collector neglects the administrative elements of his collection,” says co-author James Halperin, co-founder and Chairman of Heritage Auctions. “The collectors we work with derive great pleasure and a sense of purpose from their passion for beauty and scarcity. With just a little more attention to detail, they can ensure that their heirs and charities of choice derive the maximum value from their efforts. This book provides a step-by-step guide on how to do that.”
The Collector’s Handbook, written by the Heritage Auctions experts who presided over more than $860 million in sales in 2012, helps collectors create a plan for heirs, ensure that charitable donations provide maximum tax benefits, and choose the best method for storing, preserving, and liquidating a collection. It’s also filled with stories from the trenches of the auction business: from the abstract art collector who left his heirs puzzled when they couldn’t figure out which of the paintings in his collection was the “banana” painting he was referring to to the New Jersey politician who made a small fortune when a live auction-misunderstanding drove the coin he’d consigned to sell for more than five times its pre-sale estimate. 100% of proceeds from eBook sales will be donated to Reading Is Fundamental (http://www.rif.org/).
More Praise: “…helpful summaries about care of collections, security, and tax pitfalls.” – The Philadelphia Inquirer
“In summary, this small paperback book contains a wealth of information for collectors at all levels of the hobby. You can read it over a weekend, and I would urge you to share it with your potential heirs. If nothing else, place a copy on top of your collection, with important (to you) sections highlighted. Your heirs will be glad you did.” – Mike Thorne, Writer. Coins Magazine
Stories of poor estate planning leading to disaster are common—but in the world of art, antiques and collectibles, collectors and their heirs face a unique set of challenges, such as authenticity and provenance, identifying which pieces are of great value and how they should be sold or otherwise transferred, storage and maintenance, and more. Now more than ever, collectors and their families need objective and authoritative guidance. A 2012 Barclays Wealth and Investment Management study found that, on average, high-net worth individuals have 9.6% of their net worth invested in art, antiques, and collectibles. Yet unlike their real estate holdings and securities investments, the estate planning for these assets is often overlooked.
Enter 'The Collector's Handbook: Tax Planning, Strategy, and Estate Advice from Collectibles Experts for Collectors and their Heirs.' “We wrote this book because we’re tired of seeing families plunged into chaos when a devoted collector neglects the administrative elements of his collection,” says co-author James Halperin, co-founder and Chairman of Heritage Auctions. “The collectors we work with derive great pleasure and a sense of purpose from their passion for beauty and scarcity. With just a little more attention to detail, they can ensure that their heirs and charities of choice derive the maximum value from their efforts. This book provides a step-by-step guide on how to do that.”
The Collector’s Handbook, written by the Heritage Auctions experts who presided over more than $860 million in sales in 2012, helps collectors create a plan for heirs, ensure that charitable donations provide maximum tax benefits, and choose the best method for storing, preserving, and liquidating a collection. It’s also filled with stories from the trenches of the auction business: from the abstract art collector who left his heirs puzzled when they couldn’t figure out which of the paintings in his collection was the “banana” painting he was referring to to the New Jersey politician who made a small fortune when a live auction-misunderstanding drove the coin he’d consigned to sell for more than five times its pre-sale estimate. 100% of proceeds from eBook sales will be donated to Reading Is Fundamental (http://www.rif.org/).
More Praise: “…helpful summaries about care of collections, security, and tax pitfalls.” – The Philadelphia Inquirer
“In summary, this small paperback book contains a wealth of information for collectors at all levels of the hobby. You can read it over a weekend, and I would urge you to share it with your potential heirs. If nothing else, place a copy on top of your collection, with important (to you) sections highlighted. Your heirs will be glad you did.” – Mike Thorne, Writer. Coins Magazine
NJ Tax return can expedite health coverage for kids
Mary Coogan, Advocates for Children in NJ writes: As parents complete their 2012 tax returns, they should look for the
box on the state tax form that asks whether their child has health
insurance. Parents of uninsured children can check this box and receive a
one-page, easy-to-complete “express application” to get health coverage
for their children. Through NJ
FamilyCare, New Jersey offers health coverage to children in families
with income up to 350 percent of the federal poverty level. Children
who have health insurance are more likely to get the preventative care
they need to stay healthy. That’s good for children and for our state’s
economy, as fewer children miss school and fewer parents miss work to
stay home to care for a sick child. NJ
FamilyCare offers great coverage for medical and dental care. It is
offered free to the lowest-income families and on a sliding scale to
others. So,
parents, if your children do not have health insurance, including
private insurance, NJ FamilyCare or Medicaid, check box 13 on your tax
return and watch for the envelope from the state that will come in the
mail with your express application.
AMT complicates tax journey (A CFP's summation)
Neil Brown, a CFP has his take on the AMT, for The State he writes: The Alternative Minimum Tax was permanently extended this
year by the American Taxpayer Relief Act of 2012 after a decade of
legislative patches. Passed in the first days of 2013, it retroactively
applies to the 2012 tax year. Here’s a quick guide to understanding the current rules. The AMT is essentially a separate federal income tax system with its
own tax rates, and its own set of rules governing the recognition and
timing of income and expenses. If you’re subject to it, you have
to calculate your taxes twice – once under the regular tax system and
again under the AMT system. If your income tax liability under the
alternative is greater than your liability under the regular tax system,
the difference is reported as an additional tax on your federal income
tax return. If you’re subject to the AMT in one year, you may be
entitled to a credit that can be applied against regular tax liability
in future years.
Part of the problem with the AMT is that, without doing some calculations, there’s no easy way to determine whether or not you’re subject to the tax. Key “triggers” include the number of personal exemptions you claim, your miscellaneous itemized deductions, and your state and local tax deductions. So, for example, if you have a large family and live in a high-tax state, there’s a good possibility you might have to contend with the tax. IRS Form 1040 instructions include a worksheet that may help you determine whether you’re subject to the it (an electronic version of this worksheet is also available on the IRS website), but you might need to complete IRS Form 6251 to know completely.
It’s no easy task to calculate the AMT, in part because of the number and seemingly disparate nature of the adjustments that need to be made. Some of the more common adjustments are as follows:
• The federal standard deduction, generally available under the regular tax system if you don’t itemize deductions, is not allowed for purposes of calculating the AMT. Nor can you take a deduction for personal exemptions.
• Under the AMT calculation, no deduction is allowed for state and local taxes paid, or for certain miscellaneous itemized deductions. Your deduction for medical expenses may also be reduced and you can only deduct qualifying residence interest to the extent the loan proceeds are used to purchase, construct or improve a principal residence.
• Under the regular tax system, tax is generally deferred until you sell the acquired stock. However, for AMT purposes, when you exercise an incentive stock option, this does cause a change in your AMT calculations and possibly your tax.
While the AMT takes away personal exemptions and a number of deductions, it provides other specific exemptions. The amount of AMT exemption that you’re entitled to depends on your filing status and your exemption amount and begins to phase out once your taxable income exceeds a certain threshold.
Under the AMT, the first $175,000 for 2012 of your taxable income is taxed at a rate of 26 percent. If your filing status is married filing separately, the 26 percent rate applies to your first $87,500 in taxable income. Taxable income above this amount is taxed at a flat rate of 28 percent.
Owing the alternative minimum tax isn’t the end of the world, but it can be a very unpleasant surprise. It also turns a number of traditional tax planning strategies – such as accelerating deductions – on their heads, so it’s a good idea to factor in the AMT before the end of the year, while there’s still time to plan.
If you think you might be subject to the AMT, it may be worth sitting down to discuss your situation with a tax professional.
Life is a journey, plan for it.
Read more here: http://www.thestate.com/2013/03/16/2679315/amt-complicates-tax-journey.html#storylink=cpy
Read more here: http://www.thestate.com/2013/03/16/2679315/amt-complicates-tax-journey.html#storylink=cpy
Part of the problem with the AMT is that, without doing some calculations, there’s no easy way to determine whether or not you’re subject to the tax. Key “triggers” include the number of personal exemptions you claim, your miscellaneous itemized deductions, and your state and local tax deductions. So, for example, if you have a large family and live in a high-tax state, there’s a good possibility you might have to contend with the tax. IRS Form 1040 instructions include a worksheet that may help you determine whether you’re subject to the it (an electronic version of this worksheet is also available on the IRS website), but you might need to complete IRS Form 6251 to know completely.
It’s no easy task to calculate the AMT, in part because of the number and seemingly disparate nature of the adjustments that need to be made. Some of the more common adjustments are as follows:
• The federal standard deduction, generally available under the regular tax system if you don’t itemize deductions, is not allowed for purposes of calculating the AMT. Nor can you take a deduction for personal exemptions.
• Under the AMT calculation, no deduction is allowed for state and local taxes paid, or for certain miscellaneous itemized deductions. Your deduction for medical expenses may also be reduced and you can only deduct qualifying residence interest to the extent the loan proceeds are used to purchase, construct or improve a principal residence.
• Under the regular tax system, tax is generally deferred until you sell the acquired stock. However, for AMT purposes, when you exercise an incentive stock option, this does cause a change in your AMT calculations and possibly your tax.
While the AMT takes away personal exemptions and a number of deductions, it provides other specific exemptions. The amount of AMT exemption that you’re entitled to depends on your filing status and your exemption amount and begins to phase out once your taxable income exceeds a certain threshold.
Under the AMT, the first $175,000 for 2012 of your taxable income is taxed at a rate of 26 percent. If your filing status is married filing separately, the 26 percent rate applies to your first $87,500 in taxable income. Taxable income above this amount is taxed at a flat rate of 28 percent.
Owing the alternative minimum tax isn’t the end of the world, but it can be a very unpleasant surprise. It also turns a number of traditional tax planning strategies – such as accelerating deductions – on their heads, so it’s a good idea to factor in the AMT before the end of the year, while there’s still time to plan.
If you think you might be subject to the AMT, it may be worth sitting down to discuss your situation with a tax professional.
Life is a journey, plan for it.
Read more here: http://www.thestate.com/2013/03/16/2679315/amt-complicates-tax-journey.html#storylink=cpy
Read more here: http://www.thestate.com/2013/03/16/2679315/amt-complicates-tax-journey.html#storylink=cpy
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