The traditional year-end tax planning moves of deferring income and accelerating deductions outlined in Part I apply only if you pay the “regular” federal income tax. However, they may backfire if you fall victim to the dreaded Alternative Minimum Tax (AMT).
It is important to, when preparing your preliminary 2007 Form 1040, determine if you will be an AMT victim.
Part I discussed accelerating medical and miscellaneous deductions, and making a 4th Quarter state estimated tax payment in December instead of January. However, when calculating the dreaded AMT medical expenses are only deductible to the extent they exceed 10% (not 7½%) of AGI, and taxes and miscellaneous investment and job-related expenses are not deductible at all.
If you consistently pay AMT year after year it really doesn’t matter when you pay your taxes, investment expenses or job-related expenses. They will never be deductible (as long as the AMT exists in its current form).
However, if you usually pay the “regular” tax and, due to some special circumstances, you discover you will pay AMT for 2007 you should postpone paying additional taxes, investment and job-related miscellaneous expenses, and possibly medical expenses, until 2008 – hopefully a year when you will not be subject to AMT.
The AMT tax rate is a flat 26% or 28%. If under “regular” tax you are in the 28% bracket for 2007, and you also expect to be in this bracket for 2008, and you will be paying AMT for 2007 (but not necessarily for 2008) at the 26% flat rate it may pay to actually accelerate income to be claimed in 2007. The additional income will be taxed at 28% in 2008, but only at 26% in 2007.
Plus, if you will not be paying AMT in 2008, the increased income could affect the “read my lips taxes” (personal exemption and itemized deduction phase-outs) if claimed in 2008. These “taxes” are not a consideration in calculating AMT.
At this point it is a bit difficult to determine if you will be an AMT victim for 2007. As of this writing, Congress has still not enacted an AMT fix to extend the increased exemption amounts. So the 2007 AMT exemptions are currently $33,750 for Single and Head of Household filers, $45,000 for Married Filing Joint and Qualified Widow(er)s, and $22,500 for Married Filing Separate.
It is important to, when preparing your preliminary 2007 Form 1040, determine if you will be an AMT victim.
Part I discussed accelerating medical and miscellaneous deductions, and making a 4th Quarter state estimated tax payment in December instead of January. However, when calculating the dreaded AMT medical expenses are only deductible to the extent they exceed 10% (not 7½%) of AGI, and taxes and miscellaneous investment and job-related expenses are not deductible at all.
If you consistently pay AMT year after year it really doesn’t matter when you pay your taxes, investment expenses or job-related expenses. They will never be deductible (as long as the AMT exists in its current form).
However, if you usually pay the “regular” tax and, due to some special circumstances, you discover you will pay AMT for 2007 you should postpone paying additional taxes, investment and job-related miscellaneous expenses, and possibly medical expenses, until 2008 – hopefully a year when you will not be subject to AMT.
The AMT tax rate is a flat 26% or 28%. If under “regular” tax you are in the 28% bracket for 2007, and you also expect to be in this bracket for 2008, and you will be paying AMT for 2007 (but not necessarily for 2008) at the 26% flat rate it may pay to actually accelerate income to be claimed in 2007. The additional income will be taxed at 28% in 2008, but only at 26% in 2007.
Plus, if you will not be paying AMT in 2008, the increased income could affect the “read my lips taxes” (personal exemption and itemized deduction phase-outs) if claimed in 2008. These “taxes” are not a consideration in calculating AMT.
At this point it is a bit difficult to determine if you will be an AMT victim for 2007. As of this writing, Congress has still not enacted an AMT fix to extend the increased exemption amounts. So the 2007 AMT exemptions are currently $33,750 for Single and Head of Household filers, $45,000 for Married Filing Joint and Qualified Widow(er)s, and $22,500 for Married Filing Separate.
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However, everyone, myself included, expects that Congress will act before year-end (Congressman Rangel of the House Ways and Means Committee has promised to have a bill that includes a 1-year AMT fix on the House floor by next week - see my post on "As The Congress Turns") and make the exemption amounts at least $42,500, $62,550 and $31,275 again for 2007. I will let you know when this happens, and what the exemption amounts will be, here at TWTP.
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There also exists the possibility that the AMT will either be totally eliminated or drastically revised in 2008. House Ways and Means Committee Chairman Charles Rangel has proposed killing the Alternative Minimum Tax. However, to be safe, you should plan your 2007 year-end tax moves with the assumption that the AMT will continue in its current form for at least 2008.
To be continued……………
TTFN
There also exists the possibility that the AMT will either be totally eliminated or drastically revised in 2008. House Ways and Means Committee Chairman Charles Rangel has proposed killing the Alternative Minimum Tax. However, to be safe, you should plan your 2007 year-end tax moves with the assumption that the AMT will continue in its current form for at least 2008.
To be continued……………
TTFN
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