Moves You Make that can Trigger the AMT
June 14, 2011 | 
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Among the items that can contribute to an alternative minimum tax (AMT) liability are personal and dependency exemptions, state and local tax deductions, interest on second mortgages, tax credits, exercising stock options, long-term capital gains, tax-exempt interest, and tax shelters.
First, a little background. The AMT was set up to keep very wealthy people from using various tax benefits to pay little or no tax. But the AMT doesn’t just affect the wealthy anymore. It’s hitting increasing numbers of moderate income taxpayers. Back in 1987, only 140,000 personal returns were subject to the AMT. It is estimated that 32.4 million taxpayers are liable for 2010.
Here are some basic facts about the AMT and how it could end up costing you:
- The AMT is a separate tax system with a set of rules aimed at determining the minimum amount in taxes you must pay given your income.
- You calculate both your income tax under the regular rules and the AMT rules and pay whichever is higher.
- Under the AMT rules, you add back many items that are deducted or excluded from regular income taxes. This increases the base for the AMT.
- If you are liable for the AMT, you use the alternative AMT tax rates, which run from 26 percent to 28 percent. Regular tax rates go from 10 percent to as much as 35 percent.
There are several financial moves that you might make that affect the AMT. Among them:
- State and local taxes- it’s common to make year-end prepayments of taxes that would be due next year. However, if you wind up paying the AMT, you may derive no benefit from this practice. You need to know where that cross-over point is.
- Incentive stock options- Certain incentive stock options (ISOs) qualify for tax deferral and preferential capital gains treatment, for the regular tax. But the exercise of these options triggers income for the AMT. You might want to stagger the exercise of options over several years to reduce AMT exposure.
- Miscellaneous itemized deductions- The rules are similar to those for state and local taxes. Again, proceed cautiously before making prepayments of expenses like investment, legal and tax preparation fees. If you unavoidably must pay AMT, the rate is 26 percent on the first $175,000 of income and 28 percent for amounts above $175,000.
Questions about the AMT and how it might affect you?
An Extra 2%
May 25, 2011 | Subscribe to our RSS Feed
If you’re an employee, 6.2% of your wages (up to the taxable wage base–$106,800 in 2011) would normally be withheld for your portion of the Social Security retirement component of FICA employment tax. But legislation passed in December 2010 included a temporary one-year 2% reduction in this tax. That means for 2011, you’re paying the tax at a rate of 4.2%. If you’re self-employed, the 12.4% your would normally pay for the Social Security portion of your self-employment tax is reduced to 10.4%.
Have you earmarked the resulting extra dollars in your paycheck efficiently, by, for example, paying down high-interest debt or saving for retirement? If you haven’t, consider making up for it by contributing an extra 4% of your income to your 401(k) or an IRA for the remainder of the year. By applying the extra money toward a long-term goal, the potential benefit of the temporary tax reduction can extend beyond 2011.
Questions on making a plan?
vanessa.duchman@glassjacobsonia.com
8 Facts about IRS Penalties
April 27, 2011 | Subscribe to our RSS Feed
When it comes to filing a tax return – or not filing one – the IRS can assess a penalty if you fail to file, fail to pay or both. Here are eight important points the IRS wants you to know about the two different penalties you may face if you do not file or pay timely.
1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and explore other payment options in the meantime. The IRS will work with you.
3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
6. If you timely filed a request for an extension of time to file and you paid at least 90 percent of your actual tax liability by the original due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.
7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
Questions?
What Records Should I Keep?
April 5, 2011 | Subscribe to our RSS Feed
As you are scrambling to get all your taxes properly filed by April 18th, you may be thinking: “next year, it won’t be like this. Next year, I WILL be more organized.”
Here’s a list of the records you should keep and for how long. Keep these organized and you (and you Advisor) will be glad you did.
- Income Tax Returns and Related Items: Keep all federal and state income tax returns and supporting documents (i.e., those items confirming your income and/or deductions) for a minimum of three years after the return’s filing date. The more prudent route is to keep these returns and documents for six years. Why? The IRS can assess additional taxes within three years of its filing date, but has up to six years in which to make a tax assessment if the IRS determines that a substantial amount of income has been omitted from the return.
- Mailing Receipts: Keep with your file copy of each tax return the U.S. Postal Service receipt — i.e., the registered mail receipt —showing the date the return was mailed. If your return is filed electronically, keep a copy of the electronic filing confirmation with a printed copy of the return. In the event the return is misplaced or lost, this documentation will save you from penalties.
- Residential Property Records: Keep settlement records from all of your home purchases and sales in a safe place. This will help you determine basis for any future sale and gain determination. In addition, keep records of the amounts that you spend for home improvements with this file. These records will provide documentation of your basis in the house if and when it comes time to compute your taxable gain.
- Stock and Bond Records: Keep records of your investment (e.g., stock, mutual funds, and bonds) purchases. Besides providing you with a date for determining the type of gain — long term versus short term — these records establish your basis in the investment and help to compute the gain/loss when you sell. In addition, keep records that show a return of capital on your investments.
- Depreciation Records: For any rental real estate or depreciable business property that you own, keep records of the property’s cost, the purchase date, the method used to calculate depreciation, and a schedule of all depreciation claimed on the property in previous years. Maintain these records until you sell or dispose of the property. Once you sell the property, keep these records with the tax return on which you report the sale.
- Personal Records: Keep a permanent file of personal records — such as divorce agreements, copies of estate and gift tax returns under which you received property, etc. – - since they can provide a basis for determining your tax liability when you dispose of the property.
- Other Records: There are other situations in which you will benefit from keeping records. For example, if you have made nondeductible contributions to an IRA or Roth IRA, maintaining records of these contributions will facilitate proving your tax liability when funds are withdrawn from the IRA.
Taking an Early Distribution from your Retirement Plan? 10 Things to Know.
March 28, 2011 | Subscribe to our RSS Feed
Some taxpayers may have needed to take an early distribution from their retirement plan last year. The IRS wants individuals who took an early distribution to know that there can be a tax impact to tapping your retirement fund. Here are ten facts about early distributions.
- Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
- Early distributions are usually subject to an additional 10 percent tax.
- Early distributions must also be reported to the IRS.
- Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
- The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
- If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
- If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
- If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
- There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.
- For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Questions?