Saturday, September
4 2010
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Saturday, September
4 2010
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Announcing a new acquisition!!
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What's New at Forte for the year 2007 November 2007B - Afraid of the AMT? Now’s the Time to Get Some Help By Forte News Department Unless
Congress acts, the number of taxpayers hit by the Alternative Minimum Tax (AMT)
in 2007 will jump to about 23 million from about 4 million in 2006. The AMT is
an alternative, separate tax calculation created in 1969 to make sure the
wealthiest Americans paid a fair amount of taxes. The AMT is applied to
particular taxpayers’ regular taxable income when particular activities and
deductions add up. Basically,
Uncle Sam wanted to keep taxpayers from writing off their tax responsibilities
forever. But
why is the AMT spreading lower and lower on the tax rolls to the middle class?
There are two reasons. First, since its introduction in 1969, elements of the
AMT have not been adjusted for inflation while the regular income tax has.
According to the Tax Policy Center of the Urban Institute, this means that if
an individual’s income tax just keeps up with the annual rate of inflation, his
or her income tax would remain constant in real terms while the potential AMT
liability would continue to increase. Second, it’s also important to note that
since its inception, the government has dropped the top tax rate from 70
percent at the start to 35 percent in this decade while the AMT rate has risen
by several percentage points. The intersection of AMT and regular tax over the
past 40 years is as much as story of changing tax brackets as it is the
adjustment of the exemption amount. The
approaching election year might finally force some permanent change on the AMT
situation, but until then, it makes sense to consult a qualified tax advisor or
a Certified Financial Planner™ professional on your risk factors for the
AMT. It’s too complicated to fully
explain here, so advice is essential.
There are many reasons people get pushed into the AMT zone. Here are
some key facts and situations related to the AMT: Who should check for the AMT? If your income is above $75,000 and
you write off personal exemptions, state income taxes, property taxes and home
equity loan interest, it’s best to see if you’re at risk. And if you’re simply
earning over $100,000, you definitely should check for AMT eligibility no
matter what your deduction status. Form 6251 requires you to add back some
deductions and income exclusions to your regular taxable income in the process
of computing AMT. Among them: Your personal- and dependent exemptions, or your
standard deduction if you don’t itemize. You will also lose your state local
and foreign income and property tax write-offs and potentially your home equity
loan interest if you don’t use your home equity line for home improvements.
Once computed, if the AMT is higher than your regular tax liability you pay the
additional amount (in addition to regular taxes). The hit could be surprising. Watch those stock options: If you’re thinking of exercising
incentive stock options, keep an eye on the spread between the market value at
the time of exercise and the exercise price. Although not immediately subject
to regular tax, the spread is subject to AMT. Based on advice particular to
your situation, you might want to keep those options still and not exercise
them until early 2008 to gain some tax flexibility. If you own a business, get advice: If you own a business, rental
properties or hold an interest in a partnership or an S corporation, certain
business depreciation deductions might be a critical trigger for the AMT lens. Tax-free bonds can be a trigger: The AMT counts as income interest
earned from municipal bonds designated as private activity bonds, so there goes
that tax edge. Many tax-exempt money market funds and high-yield tax-exempt
municipal bond funds may hold relatively large percentages of these bonds. Know your AMT exemptions: For 2007, if Congress does not
extend the act increasing the exemption (the so-called AMT “patch”
legislation), the AMT exemption will be decreased to $33,750 for an individual,
$45,000 if married filing jointly or if that person is a qualifying widow or
widower and $22,500 if married filing separately. These exemptions were higher
in 2006 after Congress came to the rescue. As of this year, the exemption for
Hurricane Katrina victims is scheduled to expire as well as the additional
exemption for taxpayers who provide housing for a person displaced by Hurricane
Katrina. More bad news: The following credits won’t be
allowed against the AMT unless Congress rides to the rescue: Child and
dependent care expenses, credit for the elderly or the disabled, education
credits, residential energy credits and the mortgage interest credit. Also, if
you live in the District of Columbia, its first-time homebuyer credit will no
longer be allowed against the AMT. The
key is to work with your advisors to determine if you are a likely target and
include the AMT as part of the planning process. Often, it is more something to be aware of than to be
avoided. Because the AMT is so
complicated (and may complicate financial decisions), the IRS provides an AMT Assistant for Individuals—an
electronic version of the AMT worksheet in the 1040 instructions—go to: http://www.irs.gov/businesses/small/article/0,,id=150703,00.html November 2007 — This column is
produced by the Financial Planning Association, the membership organization for
the financial planning community, and is provided by David W. Henion, a local
member of FPA. | ||||||||||||||
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