LETTERS From CAMP Rehoboth |
CAMP Money |
by Frederick Dean, Jr. |
Alternative Minimum TaxNot Just for High Earners Anymore In 1990, 132,000 individual taxpayers paid alternative minimum tax (AMT), a tax created to ensure that high-income taxpayers paid their fair share of taxes. Because Congress has not indexed the AMT for inflation, increasing numbers of middle-income taxpayers will end up footing the bill in the future. Unless things change, the nonpartisan Congressional Budget Office estimates that by the year 2016, AMT will affect 33 million taxpayers to the tune of $81 billion. Think you're exempt from AMT? Think again. Consider "George Greatheart" whose elderly parents are in declining health and incurring some astronomical medical bills. George's father requires the use of a wheelchair and needed an accommodating home. George, in caring for his parents, took over their support and purchased a small wheelchair-friendly house in which his parents could more comfortably reside. He planned to deduct the real estate taxes paid on his own residence and two years of back taxes on the house purchased for his parents, anticipating a significant refund. Instead, George found out that the over $17,000 in medical expenses and $11,000 in real estate expenses are AMT 'preference items' and they put him over the 7.5 percent adjusted gross income threshold. Instead of a much-needed refund, George got stuck paying the AMT. After the sick feeling he got when he saw his tax return, he enlisted the help of a tax professional so he knows how to better leverage his expenditures and avoid similar situations in the future. "AMT is like a 'stealth tax'," contributes enrolled agent Kevin Huston and NATP member from Arden, North Carolina. "It comes out of nowhere when you least expect it, and catches you by surprise. All the rules for regular tax planning are turned upside down when you are planning to avoid or minimize AMT. It looks very much like a flat tax, where you don't get to use your deductionswith AMT, planning is critical, as tax professionals cannot usually fix it after the end of the year," Huston adds. However, Dawn J. Renner, CPA, MBA of Minnetonka, Minnesota, mentions that that in some cases there is a glimmer of hope, "In years after paying AMT, tax preparers can see if filing Form 8801, Credit for Prior-Year Minimum Tax, will allow you to recoup some of the AMT paid." Renner also reminds that many states also have an AMT and the state AMT may be computed differently than federal taxes. Depending on your circumstances, you may be a target for AMT. Here are the top ten AMT preference items that could potentially hurt you in the future: Personal exemptions. Standard deduction. State and local income, sales, and property taxes. Mortgage interest on refinanced or second mortgages and home equity loans not used to buy, build, or improve a home. Medical expenses. Miscellaneous itemized deductions subject to the two percent floor. Exercise of incentive stock options. Long-term capital gains. Tax-exempt interest from private activity bonds. Business tax deductions. If you are part of the potential group of middle-income taxpayers that may be ensnared in the coming years by AMT, talk with your tax preparer when you have your taxes prepared this year, to avoid being caught in coming years. Small changes can reap big rewards. For local assistance with Alternative Minimum Tax and related issues visit www.restylement.com or contact Frederick Dean, Jr. at dean@restylement.com. |
LETTERS From CAMP Rehoboth, Vol. 17, No. 15 November 21, 2007 |