AMT And How to Avoid It

According to Forbes/Investopedia, your chances of paying AMT tax increases, if you:

--Have a large family;

--Live in an area with high real estate taxes and/or high state and local income taxes;

--Claim significant miscellaneous itemized deductions, including investment expenses or un-reimbursed employee business expenses;

--Exercise and hold incentive stock options; and

--Realize significant long-term capital gains


For 2007, the exemption amounts increased to the following:

--Single: $44,350

-- Married filing jointly or qualifying widow: $66,250

-- Head of household: $44,350

-- Married filing separately: $33,125


For 2008, the exemption amounts are:

--Single: $33,750

--Married filing jointly or qualifying widow: $45,000

--Head of household: $33,750

--Married filing separately: $22,500

As a result, you may have to pay the AMT if your regular taxes, combined with certain adjustments and tax preference items, are more than these amounts.

One way to minimize the AMT is to reduce your adjusted gross income (AGI). If you participate in a 401(k), 403(b), SARSEP, 457(b) plan or SIMPLE IRA, consider making the maximum allowable salary deferral contributions to your account to reduce your taxable income for both taxes.

If your employer offers a cafeteria plan, look into whether you could reduce your taxable income even further by paying for medical insurance, dental insurance, life and disability insurance, and even dependent care expenses through the plan.

If you are self-employed, claiming your business expenses directly against your self-employment income on the Schedule C instead of as a miscellaneous itemized deduction on the Schedule A reduces your AGI and also ensures that you won't lose any of these deductions to the AMT. Plus, contributing to a SEP IRA, SIMPLE IRA, Solo 401(k) or other qualified plan also helps minimize the impact of this tax.

Self-employed individuals who claim a home office deduction can also reduce the AMT they end up paying. The home office deduction offsets your net self-employment earnings, which reduces your AGI. And while real estate taxes reported as an itemized deduction aren't allowable when calculating the AMT, claiming the home office deduction moves a portion of those taxes against your self-employment income to where they are unaffected by the AMT.

Do you have a sizable investment portfolio outside of your tax-deferred accounts? If so, consider switching to tax-efficient mutual funds and tax-exempt bonds or bond funds as a way to decrease your AGI.

Don't forget that with the AMT, timing is everything. Try to pay your real estate taxes and your state and local income taxes in years that your income might fall outside the AMT range.

To determine whether you are subject to the AMT, you will need to complete Form 6251. Before working through the numbers, visit the IRS's Web site, where you can download the current year's Form 6251 along with instructions. While you're there, test drive the IRS' new AMT Assistant tool, which will help you determine whether you need to file Form 6251 in the first place.

Calculating your AMT, or even determining whether you are in fact subject to it, is a complicated process so it may be in your best interest to have your tax return prepared, or at least reviewed, by an expert tax professional, who will be able to determine whether you owe the AMT, are eligible for exemptions and are eligible to claim AMT credits for any year--including previous years.

Upcoming Tax Changes

According to Forbes, here's what to expect through 2011:

.	2007	2008	2009	2010	2011
Capital Gains Rate
Tax Bracket Above 15%	15%	15%	15%	15%	20%
Tax Bracket 15% or Below	5%	0%	0%	0%	10%
Qualified Dividends Rate
Tax Bracket Above 15%	15%	15%	15%	15%	N/A*
Tax Bracket 15% or Below	5%	0%	0%	0%	N/A*
Marginal Income Tax Rates
Top Bracket	35%	35%	35%	35%	39.60%
Fifth Bracket	33%	33%	33%	33%	36%
Fourth Bracket	28%	28%	28%	28%	31%
Third Bracket	25%	25%	25%	25%	28%
Second Bracket	15%	15%	15%	15%	15%
First Bracket	10%	10%	10%	10%	N/A
Child Tax Credit	$1,000	$1,000	$1,000	$1,000	$500
Marriage Penalty Relief
Standard Deduction (% of S.D. for singles)	200%	200%	200%	200%	N/A
15% Tax Bracket (% of bracket for singles)	200%	200%	200%	200%	N/A
Repeal (%) of Personal Exemptions Phase-outs	33.30%	66.60%	66.60%	100%	N/A
Repeal (%) of Limitation on Itemized Deductions	33.30%	66.60%	66.60%	100%	N/A
AMT Exemption
Single	$33,750*	$33,750	$33,750	$33,750	$33,750
Married Filing Joint	$45,000*	$45,000	$45,000	$45,000	$45,000
Head of Household	$33,750*	$33,750	$33,750	$33,750	$33,750
Estate Tax
Exclusion	$2 million	$2 million	$3.5 million	Tax repealed	$1 million
Maximum Rate	45%	45%	45%	0%	55%

Tax Software Does Not Calculate Tax Liability Correctly For 409A/Code Z Income

It appears that H&R Block TaxCut 2006 does not take into account the 20% additional tax liability as required by federal and state for 409A deferred compensation reported as code z in box 12 of the W-2 (even though there is a code z listed for box 12 in the software): the final tax liability calculated is the same whether you have code z income or not. I called H&R Block and they confirmed this is not updated in the software yet.
Therefore it seems like we have to manually override the program ourselves and enter the additional tax liabilities into the worksheets (which can be accessed directly or interactively through the "other taxes" questionaire) for both federal and state (I heard for the federal part TaxCut actually flags an error for code z during the final check and it will take you to the corresponding worksheet, but you still have to enter the extra tax penalty amount manually. For the state part there is no final check however--since the tax laws governing the tax laws are different for each state). I am not a tax accountant, but it appears that we have to manually add the extra taxes as follows:

• 20% of the reported as code z in box 12 of the W-2 (plus interest penalties if any) for federal tax. Enter this amount interactively or manually as "NQDC" on the dotted line left of line 63 on 1040.
• 20% of the reported as code z in box 12 of the W-2 (plus interest penalties if any) for state tax. Enter this amount interactively or manually as "NQDC" on the dotted line left of the corresponding line on the state tax form (for CA 540 it is line 33).

I am not sure whether the same problem exist for Intuit's TurboTax, but according to one of my colleagues it appears to have the same problem.