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Everyone wants to lower their tax burden as much as possible, well, the tax law does provides ways to help, here is some useful information.

 

 

Be careful with this one, it's new and most people dont qualify for it. As a matter of fact the IRS has issued an announcement dated 1/30/09 regarding this credit because of all the early tax returns that have been filed, 15% of them contain errors with regards to this credit. So, here's the deal. You can only take this credit if you did not get an economic stimulus payment last year OR your economic stimulus payment was less than $600.00 ($1200.00 if filing jointly) plus $300.00 for each qualifying child. And if ALL of the following apply you do NOT qualify for this credit.

 

1) You received an economic stimulus payment of $300.00 ($600.00 if filing jointly) before any offset.

 

2) Your 2008 tax liability is $300.00 or less ($600.00 if filing jointly)

 

3) Your 2008 filing status is the same as your 2007 filing status

 

4) You do not have any qualifying children

 

 

 

 

 

 

 

So far we have discussed some basic yet common tax topics. Now lets go to the other end of the spectrum and try and figure out what in the world is a minimum tax.

 

It is indeed a very complex calculation and difficult to determine quickly if a taxpayer is subject to it. But, where did it come from? Well, not too long ago an income exceeding $200,000 would label a taxpayer as being wealthy. Really wealthy according to the IRS and not deserving of "tax preferences" which reduce taxable income. So, the AMT was enacted to ensure that these wealthy taxpayers paid a tax that would be on par with their earnings. 

 

What has happened in recent years is many more taxpayers are earning the type of income that would trigger the AMT. Well, if incomes have gone up so dramatically shouldn't the threshold for the AMT go up in response?

That is a good question and it has but not as much as people would like. Regardless, let's take a look.

 

Lets take a married couple, both holding full time jobs, and raising 2 small children. They own their own home and pay a mortgage and real estate taxes. So they itemize their deductions. For simplicity lets say their jobs provide their only income and their home the only deductions. First, lets examine form 1040.

 

 

Ok, line 7 is their wages, line 40 is the total of their itemized deductions, 10,000 for real estate taxes and 8,500 for mortgage interest. This total has been reduced by 250 because their income exceeded 159,950, so they lost a bit piece of their deductions. They would have a tax liability of 31,514 and that liability corresponds to a flat tax rate of 21%

 

 Now lets see what the AMT calculation does.

 

 

6251
Line
1	166,751	Income before exemptions
3	10,000	Real estate taxes
6	(251)	Amount by which itemized deductions were reduced
29	176,500	AMT Income
30	63,200	AMT exemption
31	113,300	AMT taxable income
	29,458	AMT tax
	26%	AMT tax rate

 

 Ok, so what does this mean? We start with the taxable income before personal and dependent exemptions. So you lost your exemptions for the AMT calc. That is pretty big, if we could include them then we would be starting with a number that would be 14,000 less. As it stands now we must calculate AMT on a higher starting number than your normal taxable income.

Next step is to add back the deduction for real estate taxes. 10,000 gets added to an already inflated amount. If you notice next we subtract 251. This was the amount by which we had to reduce normal itemized deductions because this couple's income exceed the allowable amounts.

 

Now we arrive at an AMT income of 176,500. Quite a bit more than our regular taxable income of  152,751 right?

 

But, alas, we get a break. The tax law allows us an exemption, an AMT exemption and it's significant. Now for a couple filing jointly we have a pre-adjusted exemption of 69,950 but again because of the high starting income we had to reduce that to 63,200. But it leaves us with 113,300 subject to AMT as opposed to a regular taxable income of 152,751. Slam dunk, right? If our taxable income is greater than our AMT then we are not subject to AMT, right? Not so fast, while it is true that in this example we would not be subject to AMT, it's awfully close. Look at our tax liability on our 1040, 31,514, and now look at our AMT tax, 29,458. Much closer than the taxable income spread. And why? Take a look at the last line in each grid. Our tax rate for regular tax is 21% while our AMT rate is 26%. It makes a difference.

 

I hope this example and explanation at least gives you a little knowledge on why you are getting hit with this tax. As I mentioned earlier it is really difficult to pinpoint one thing that would trigger an additional tax. You know your in the ballpark if you have a high income and you itemize. As a matter of fact, the more tax preferences you have the more likely you are to be hit with this. 

 

 

 

 

Exemptions, what are these? I am sometimes asked the question "Can I claim the money I lent my brother this year?" Well, for the most part I have found that taxpayers do not fully explore the amounts that are available in exemptions that could possibly reduce their tax burden. But let's start with an explanation.

 

In addition to the standard deduction that we previously discussed, the IRS also gives each taxpayer something called a personal exemption. Not a dependent exemption (we'll get to that later). This amount in 2008 is equal to $3,500.00. So, if you are a single taxpayer you have a standard deduction of $5,450.00 plus the personal exemption of $3,500.00 and you have a grand total of $8,950.00 in deductions from your taxable income. Now, think about it, if you can deduct $8,950.00 of your taxable income just for filing a return, how much do you need to earn in order to incur a tax liability? Right, anything over $8,950.00. So, if you didnt earn that much then guess what? You dont even need to file a return. But you probably should. Can anyone guess why? We'll get to that later. Back to exemptions.

 

We have explained that each individual taxpayer receives an exemption. Wonderful, can we get any more? Yes, the tax law provides an exemption for your spouse (if you are married, and file a joint return) and for your dependents. Oh, dependents, that just means children, right? Well, yes and no. You may claim an exemption for each of your qualified children provided they meet certain criteria the most prominent being between the ages of 1-18, 24 if a full time college student, and you providing over half of their support, (and no one else is eligible to claim them).

 

But what about other relatives? Can I claim them? If they are direct relatives, such as a parent, grandparent, brothers or sisters and aunts or uncles (if blood related) then yes, if you provide over half their support then go ahead and claim them.

 

Ok, what about my friend who is down on his luck and moved into my house? Yes, you may claim an exemption for your friend but only if he or she lived in your household and you provided over half their support. And make sure that no one else can claim them (even themselves) Which leads to one last point, if you claim anyone as a dependent, then they will lose their personal exemption.

 

Oh, and by the way, did you figure out why the person who has less income than deductions should file a return? If you said to collect a refund for amounts withheld from their paycheck, you would be correct.

 

So, there it is, simplistcally offered, but hopefully it helped.

 

 

 

 

 

Each year in preparing an individual taxpayers 1040 there are clients who announce "I should be getting a larger refund this year because I have an additional expense" Well, sometimes this legitimate, deductable expense does not result in a larger refund and here's why.

 

The IRS gives each and every tax payer something called a Standard Deduction. This is given regardless of any specified deduction. For the fiscal year 2008 for a single taxpayer the deduction equals $5,450.00.

This means that after calculating all your possible taxable income, the above amount will be deducted from it to arrive at a number we call Taxable Income. This is the number that your tax will be figured on.

 

So if your friend or co-worker advises you that the books you bought for advancement at work, or your medical prescriptions or your charitable gifts to save a rainforest are definately deductable and if your accountant doesnt reduce your tax liabilty because of it then he's a moron please read on.

 

Most of the time your additional expense will be considered part of that standard deduction. In other words, it's already been deducted from your income. In order for it to reduce your taxable income even more will require the taxpayer to Itemize their deductions. Now, what is that?

 

The IRS allows each taxpayer to calculate their own deductions. If these deductions are greater than the standard deduction then they will replace the standard deduction in calculating taxable income. Wow, thats great, ok, lets do that then.

 

Oh, but we need to exceed the $5,450.00 to do that. And if you are married and filing jointly that number is $10,900.00. So we need a significant amount of deductions to itemize. Now, getting back to your friend who gave you the advice. They probably own a home and carry a mortgage. You see that is the biggest itemized deduction available to most people, mortgage interest and real estate taxes. So if you spent an additional $1000.00 on truly deductable expenses and you dont have any others, you will not receive a greater tax benefit.