Archive for the ‘Alternative Minimum Tax’ Tag
Back to Basics Part XXII – Form 6251 – AMT
Filed under: Back to Basics | Tags: 6251, adjustment, Alternative Minimum Tax, Alternative Minimum Taxable Income, AMT, AMT patch, AMTI, depreciation, employee business expenses, ESPP, home equity debt, investment advisory fees, ISO, itemized deductions, minimum tax credit, mortgage interest, parallel, preference, real estate taxes, standard deduction, state taxes, Tentative Minimum Tax
Leave a comment Originally published in the Cedar Street Times
September 4, 2015
AMT, or “Alternative Minimum Tax” was enacted in 1969 in response to a disturbing report by the Secretary of the Treasury that 155 taxpayers with adjusted gross incomes over $200,000 paid zero tax on their 1967 tax returns.
In its simplest form, AMT is a separate taxation system with its own set of rules that runs parallel to the regular tax system. You are supposed to run the calculations under both systems, and if the AMT system says you owe more tax than the regular system, then you pay the incremental difference as “AMT.” That incremental difference shows up as additional tax on Line 45 (2014) of your Form 1040. The calculation of AMT is summarized on Form 6251 and accompanying worksheets, as well as AMT versions of traditional schedules.
The irony of the AMT system is that most of the loopholes it was originally designed to prevent, no longer exist, and it has become a tax that affects the middle and upper-middle class more than the wealthy, yet we still have it and all of its complications. Today, those who are subject to it, despise its existence, and not many people fully understand it, tax practitioners included.
For people still preparing returns by hand, AMT is an absolute nightmare since many of your other schedules have to be calculated a second time using AMT rules. For instance, depreciation rules differ between the AMT system and the regular system, as accelerated depreciation methods are generally not allowed. This means you have to keep an entirely separate set of depreciation schedules just for AMT. And to make matters more complicated, California does not conform to all of the Federal AMT rules either. So now you end up with four sets of depreciation schedules – Federal regular, CA regular, Federal AMT, and CA AMT.
I do not think I have ever seen a hand-prepared return done correctly when AMT is involved. (Actually, in the last ten years, I do not think I have seen any hand-prepared returns done correctly!)
So when do you hit AMT? It depends. AMT is calculated on taxable income under about $185,000 at a flat 26 percent rate, and income over that mark at 28 percent. There is a $53,600-$83,400 AMT exemption amount depending on filing status.
Compared to the regular system, the standard deduction is thrown out (meaning itemizing is your only option), your normal exemptions for yourself, spouse and dependents get the boot, as do many itemized deductions such as state taxes, real estate taxes, mortgage interest on home equity debt (if the funds were not used to improve your home), unreimbursed employee business expenses, tax preparation fees, investment advisory fees and more.
As mentioned before, depreciation methods are not as generous, also ISOs and ESPPs have less tax-friendly rules, investment interest can be hacked, and a whole bunch of other specific differences that apply to certain situations.
Since some people will have more AMT adjustments and preferences than other people, there is no set dollar threshold that will trigger AMT. That said, I feel that I rarely see it for a Married Filing Joint return with under $100,000 of adjusted gross income. It also starts phasing out for people with high incomes. The top AMT rate is 28 percent, but has fewer deductions than the regular system. Besides a handful of lower brackets, the regular system also has 33, 35 and 39.6 percent brackets, but with more deductions. At some point, however, the higher tax rates outweigh the additional deductions and the regular system results in more tax than the AMT system. You may pay no AMT once you get to $600,000 or $700,000 of income, depending on your AMT adjustments.
People in AMT that are employees often feel trapped, especially those in the sales industry that are used to generating a lot of deductions from vehicle mileage and other expenses their employers do not reimburse. It does not matter how many unreimbursed expenses they come up with, they will all get thrown out in the AMT system.
For people that flip back and forth between years of AMT and no AMT, there can be a minimum tax credit generated by the AMT you paid that can be helpful. If you paid AMT in one year, and the next year the regular tax system is higher than the AMT system, you can get a credit against your regular tax to the extent of the difference between the two tax systems limited to the credit amount generated by certain deferral type AMT adjustments/preferences. Got it? Just trust me, sometimes it can help! There are also sometimes when flipping can be a negative…fairness is not always the result of our tax system.
The best news we have had about AMT in recent years was that in 2013 Congress finally legislated an annual inflation adjustment for the AMT exemption. For years Congress was in a habit of passing an AMT patch in late December or January to make up for the fact that the exemption was not inflation adjusted, and would return to 1993 levels if nothing was done.
Tax professionals were biting their nails some years wondering if it would happen. The impacts on middle class Americans would have been tremendous, and many were oblivious. I read estimates in 2011 that 4 million taxpayers were subject to the AMT, but without a patch that number would have swelled to 31 million! I can remember running scenarios for a family making around $100,000 and realizing they would have a surprise tax bill of an additional $2,000 or so without a patch.
The form itself is only two pages. Part I is a summary of all the adjustments and preferences that differ from the regular tax system, to arrive at Alternative Minimum Taxable Income (AMTI). Part II deals with calculating your AMT exemption, your Tentative Minimum Tax (tax calculation under the AMT system), and then the AMT itself (the amount your Tentative Minimum Tax exceeds the regular tax system amount). Part III is a supplemental calculation that feeds into Part II when your return includes capital gains, qualified dividends, or the foreign earned income exclusion.
If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Back to Basics Part I – Overview of 1040
Filed under: Back to Basics | Tags: 1040, above the line, adjusted gross income, adjustments to income, Alternative Minimum Tax, AMT, basics, below the line, charitable contributions, childcare credit, credits, direct deposit, educator expenses, energy efficient upgrades, exemptions, filing status, first-time home buyer credit, health savings account contributions, Household employees, interest, itemized deductions, medical expenses, miscellaneous itemized deductions, moving expenses, other taxes, paid preparer, real estate taxes, retirement plan contributions, self-employment taxes, student loan interest, tax return, taxes, tuition and fees, understanding
Leave a comment Originally published in the Cedar Street Times
October 17, 2014
On Wednesday October 15, the 2013 personal tax filing season came to a close. Or at least it did for most timely filers. People who requested the six-month extension finally had to lay down their cards, or face increased penalties, and being branded delinquent by the taxing authorities. But I am sure you had your returns done long ago!
It is hard to believe that 2014 is rapidly drawing to a close, and soon we will start filing taxes all over again. This coming year, I would like to challenge you to spend some time looking at your tax returns and learning something new. I am a firm believer that everyone should have at least a basic understanding of the flow of a tax return. This document is a linchpin in your financial life. Let’s spend a few minutes talking about the big picture. You may wish to do this with a copy of a 1040 close at hand.
Tax returns can be hundreds of pages long with many supporting forms and schedules, but it all boils down to a two page summary whether you are John Doe or Warren Buffett…this is your Form 1040. Essentially, the first page lists your income, adjusted by a few preferential items leaving you with your all important “adjusted gross income.” “Below the line,” as it is known, is the second page, and lists your deductions and credits, calculates your tax, and determines what you owe or will get refunded.
Looking at page one in more detail, the top section captures your name, mailing address, and Social Security number. There is also a somewhat passe little box to designate three dollars of the tax you are already paying to the Presidential Election Campaign fund. If you want to learn more about this, I wrote an entire article on its history on April 18th. You can find it at www.tlongcpa.com/blog.
The first real section is where you designate your tax return “filing status” – single, married, head of household, etc. This is very important because it determines how much your standard deduction is and how quickly you will climb the tax brackets as your income increases. Your status is determined by rules, not choice. That said, married people do have the choice of the generally unfavorable Married Filing Separate status.
The next section deals with “exemptions.” This is where you list the dependents in your household – generally your children up through college (even if away at college). A parent or someone not even related can qualify, but they have to meet strict limiting rules. You get an exemption from your taxable income of $3,950 (2014 amount) for each of your dependents. Children under 17 may also qualify you for child tax credits which would go on page two.
The income section falls next. Wages from your job, interest, dividends, business income, rental income, sales of stock, money received from retirement accounts or plans, pensions, social security, etc.
After getting your total income figure, you then are allowed certain favorable “above the line” deductions for things like educator expenses, moving expenses, retirement plan contributions, health savings account contributions, student loan interest, tuition and fees, etc. After subtracting these adjustments, you arrive at your AGI (adjusted gross income). AGI is a key figure and is used in a lot of calculations which could affect your taxes in many areas. Above the line deductions are therefore preferable for that reason, but also because they will have a direct impact on taxable income. Below the line deductions such as itemized deductions are less certain and do not impact your AGI.
The taxes and credits section is at the top of the second page. This is where you get to subtract all your itemized deductions listed on Schedule A- things like medical expenses, taxes paid, interest, charitable contributions, and miscellaneous other deductions (like tax preparation fees!). If you don’t have many itemized deductions you get the standard deduction instead (for example – $12,200 for married status) as determined by your filing status from the first page.
Next, the number of exemptions you claimed on the first page is multiplied by $3,950 (2014) and that is subtracted out to leave you with your taxable income. Your tax is then calculated using tax tables and other rules.
With income generally in the $100,000 to $200,000 range ore more, you may also hit alternative minimum tax (AMT). In simple terms, AMT is a parallel tax system that has a different set of rules and allows less deductions. You calculate the AMT system on every return. If the AMT tax calculation yields a larger tax bill than the regular system, you pay the incremental difference as alternative minimum tax. Real estate taxes and miscellaneous itemized deductions subject to two-percent such as unreimbursed employee business expenses are common items that get kicked out in the AMT system.
Next you get to subtract any tax credits you may have. Tax credits are a dollar-for-dollar reduction of tax owed and are therefore more valuable than deductions, which only save you a fraction on the dollar. Depending on your circumstances there are credits for education, childcare, children in general, energy efficient upgrades, etc.
The next section is “Other Taxes.” There are a handful of other taxes people might incur , such as tax on taking money out of retirement plans too early, household employee taxes, repaying a first-time home buyer credit, etc. The most common, however, is self employment taxes. Business owners must pay the employer and employee side of their Social Security and Medicare taxes. After you add these taxes and determine your total tax liability, you then look at the payments section to see was has been paid in or credited to your account, and whether you will end up owing, or getting a refund.
At the bottom of the second page, you can choose things like direct deposit, or applying the payment to the following year. You can also designate a third party such as the tax preparer to be able to discuss the return with the IRS, if the IRS wants to discuss it. At the bottom, a paid preparer also has places to sign and fill out.
In two weeks we will start examining Schedule A – Itemized Deductions.
Prior articles are republished on my website at www.tlongcpa.com/blog.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Tax Changes on the Horizon?
Filed under: Tax Rates, Trusts and Estates | Tags: Alternative Minimum Tax, AMT, Bush Tax Cuts, Capital Gains, Clawback, Estate Tax, expire, Gift Tax, payroll rates, Tax Policy Center, tax rate increase
Leave a comment Originally published in the Cedar Street Times
October 19, 2012
Unless you have been hiding under a rock, you are sure to have heard the hubbub surrounding potential tax increases in 2013. These tax increases do not require Congress to take action, but to gridlock and do nothing, which is why they stand a much better chance of actually occurring than a concerted effort to raise taxes. Most of the increases are the result of the expiration of the temporary tax decreases dubbed “The Bush Tax Cuts,” passed in 2001 and 2003 while George W. Bush was in office. There was also a two percent reduction in payroll taxes a few years ago that was meant to be a temporary stimulus for the economy. The Tax Policy Center estimates that nearly 90% of American households will face an average tax increase of $3,500 if the tax cuts expire.
If current legislation stays in place, ordinary income tax brackets will jump 3-5%, depending on your bracket. Capital gains tax will increase 5-15%, depending on your bracket, and there will be a new Medicare surtax, generally for people making over $200,000, of another 3.8% on net investment income.
Alternative Minimum Tax (AMT) is another big issue that could affect most Americans. AMT is a parallel tax calculation that runs alongside the normal system, cutting out common deductions, and if it results in a higher overall tax liability, you pay the incremental difference as additional tax.
Estate and lifetime gift tax will also get hit hard. Currently, there is a $5,120,000 exemption for the combined estate and gift tax. If you have a taxable estate above that and you pass away by December 31, the excess will be taxed at a top rate of 35%. Next year, this exemption reverts to $1,000,000 with a maximum tax rate of 55% on your taxable estate above that figure.
This certainly presents questions for you, your tax professional, and your estate planner to analyze. If you knew ordinary tax rates, capital gains, and estate tax rates were going to rise next year, you would likely try to push expected income from next year to this year, sell your stocks now that could result in a gain in the future, and gift money from your estate to your heirs. It is not quite this simple, and you should get professional assistance, but it is something to think about now rather than December 31st.
Related to the estate and gift tax issue, on Saturday morning, October 27th, I will be presenting with local attorney, Kyle A. Krasa, and local investment advisor, Henry Nigos, in a free seminar titled “Opportunities and Clawbacks – Taking Advantage of the Once-in-a-Lifetime 2012 Estate/Gift Tax Rules” from 10:00 am to 11:30 am at 700 Jewell Avenue, Pacific Grove. The seminar is sponsored by Krasa Law – please RSVP at 831-920-0205.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 