Tag Archives: Alternative Minimum Tax

Tax Reform is Confusing Part 2

Do you struggle feeling Tax Reform is confusing?

Yes, tax reform is confusing. In part 2 we hope to shed light on other areas of tax reform changes. As mentioned last week, we decided to put together a side-by side comparison of the old and new law. At the end of Part 1’s blog post, is an infographic to help you maneuver all the details behind Tax Reform. Below we will break down Part 2 of this very long infographic for an easier understanding. Let’s go! Continue reading

FacebooktwitterlinkedinFacebooktwitterlinkedin

Itemized Deductions, Should I Itemize My Tax Deductions?

2015_11_25 Itemized Deduction graphicItemized deductions, what are the income limitations? Who qualifies for the standard deduction? Who is not allowed to use the standard deduction? How do I phase-out itemized deductions? All these questions may be running through your head. Don’t worry, we will walk you through this maze of itemized deductions.

Are you looking ahead to the filing season for this year’s tax returns? A frequent question is whether you should keep track of tax-deductible expenditures? Or should you simply settle for the standard deduction amount.

Itemized Deductions versus Standard Deductions

Whether you can itemize deductions on your tax return depends on how much you spent on certain expenses during the year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions. Miscellaneous deductions are usually job or investment related and can reduce your taxes. If the total amount spent on those categories is more than the standard deduction, you can usually benefit by itemizing.

The standard deduction amounts are based on your filing status, your age and whether or not you or your spouse is blind. The standard amounts are adjusted for inflation annually and for 2015 are:stamdard deductions, itemized deductions, tax deductions,

Single $ 6,300
Married filing jointly(1) $12,600
Head of household $ 9,250
Married filing separately $ 6,300

Additional amounts if age 65 or older and for those who are blind (2) (each taxpayer):

Married taxpayers filing jointly $ 1,250
Others $ 1,550

(1) Also applies to qualifying widows and widowers, may have had a dependent child and spouse die in 2013 or 2014.

(2) If a taxpayer or spouse of the taxpayer is both age 65 or over and blind the taxpayer or spouse gets two extra amounts. The extra allowance is not available for dependents. But, as with most taxes situations, it is not that simple. There are certain taxpayers who are precluded from taking the standard amount because of special circumstances, and they include:

Taxpayers Subject to the Alternative Minimum Tax (AMT)

The standard deduction is only used when computing your tax in the normal manner. You receive no benefit from the standard deduction to the extent you are taxed by the AMT.

Married Taxpayers Filing Separately

There is a rule that prevents one spouse from filing separately and claiming all of the couple’s deductions while the other takes the standard deduction. Simply stated, if one spouse itemizes deductions, the other spouse must also itemize and cannot claim the standard deduction.

Taxpayers Ineligible for the Standard Deduction

Certain taxpayers, by law, are not eligible for the standard deduction. They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months.When it comes to itemizing your deductions there are still more complications. First of all, not all of your deductions will be included in the final total that you compare against the standard deduction to decide whether you itemize or not. Certain ones are adjusted as follows:

Medical Deductions

They are only included to the extent that they exceed 10% (7.5% for taxpayers age 65 and over) of your adjusted gross income (AGI).

Taxes

Deductions for state income or sales taxes and real property tax are not limited by income, but they are not deductible at all for AMT purposes. Thus large tax deductions can result in the addition of an alternative minimum tax.

Interest

Deductible interest includes home mortgage interest and investment interest. However, home mortgage interest is limited just to the interest on up to $1 million of acquisition debt and $100,000 of equity debt. For AMT purposes, only acquisition debt interest is deductible, so the interest paid on equity debt to buy a motor home, boat, car, etc., is not deductible for the AMT.

Charitable Contribution Deductions

They are the same for both regular tax and AMT, and the total in any year is generally limited to 50% of your income (AGI). There are lower income limits for certain non-cash contributions.

Miscellaneous Deductions

They are where most employee business and investment expenses are deducted. Generally these deductions are only deductible to the extent that they exceed 2% your income (AGI).As if those complications were not enough, some of the itemized deductions for higher-income taxpayers are further limited by a formula. This limit applies to all itemized deductions except medical and dental expenses, casualty and theft losses, gambling losses, and investment interest if the adjusted gross income is more than the following:

  • $309,900 for a married couple filing jointly or qualifying widow or widower
  • $258,250 for single taxpayers
  • $284,050 for taxpayers filing as head of household, and
  • $154,950 for married-filing-separate taxpayers.

As you can see, the choice of whether to itemize or claim the standard deduction is not always clear. That is why it is necessary to save the documentation for itemized deductions throughout the year. This is so the two options can be compared and the best one selected. If you took the standard deduction last year and think you might have been able to itemize your deductions, an amended tax return can be prepared for a refund.

Click here if you would like to read more about Itemized Deductions versus Standard Deductions. Please give Alex Franch, BS EA  a call at 781-849-7200, and he will have the information you may need.

FacebooktwitterlinkedinFacebooktwitterlinkedin

What Do Barack Obama and Ronald Reagan Have in Common?

By: Alex Franch, BS EA

On paper, presidents Barack Obama and Ronald Reagan could not be more different. But despite their political differences, they do have something in common regarding their approach to taxes.

The History of Federal Income Tax

medium_536344029In the olde tyme days before Ronald Reagan, Federal tax brackets remained static from year to year. Therefore, if your pay merely kept up with inflation, you would find more and more of your income subject to higher and higher tax brackets. This reduced your purchasing power because the real value of your income had remained unchanged. This was a big problem in the 1970s when inflation was quite high. What was the solution? Congress would step in every few years and would raise the tax brackets. This allowed everyone in Congress to pat themselves on the back for across the board tax cuts every few years, even though all they were really doing was keeping taxes the same.

President Reagan

In 1981, President Reagan signed into law (as part of a broad tax overhaul) the indexing of the Federal tax brackets, the standard deductions, and the personal exemptions, to take effect in 1984. Every year after that, taxpayers would see a small tax cut before adjusting for inflation. Most of the tax changes under the early Reagan years settled into their current structure by 1986.

History of the Alternative Minimum Tax

In 1982, President Reagan enacted the present day Alternative Minimum Tax or AMT. The AMT is a separate tax rate that is parallel to the Federal Income Tax. Long story short, you get to pay whichever is higher. President Reagan must have forgotten about 1981, because AMT was not indexed to inflation. This lapse trapped more and more people every year. AMT was ‘patched’ eleven times from 1986 to 2012 under presidents Bush 41, Clinton, George W, and Barack Obama. For the record, the predecessor to AMT goes back to the prehistoric days of 1969.

What Similarities are there between Barack Obama and Ronald Reagan?

medium_15364657104In 2013, President Obama signed the American Taxpayer Relief Act of 2012. This bill, in spite of putting in place the “fiscal cliff,” delaying everyone’s tax returns, and being a symbol of dysfunction in DC, took a page out of President Reagan’s book and indexed AMT to inflation.

The Short Answer?

Barack Obama and Ronald Reagan both indexed tax brackets to inflation.

What about your thoughts?

Do you have any thoughts on this subject matter? Maybe you know of a few other similarities you want to talk about, please feel free to leave your comments below or post to our Facebook or Google+ page. Perhaps you want to know how this indexing affects your income tax bracket?

Tax Season is Here!

Time flies and before it slips away, call Alex at 781-849-7200 for your appointment.

Other Notes:

Read about the Permanent AMT Patch of 2012 here.

– – – – –
photo credit: nordique via photopin cc
photo credit: myglesias via photopin cc

FacebooktwitterlinkedinFacebooktwitterlinkedin

Permanent AMT Patch

The American Taxpayer Relief Act of 2012, signed by President Obama on January 2nd, included a permanent AMT (Alternative Minimum Tax) Patch.

The AMT was first enacted in 1969 to make sure the ultra-rich paid their share of taxes. The problem was that it was never indicated for inflation. And as a result, Congress has had to act on a patch each year to adjust for it.

The signing of the permanent patch is helping millions of people avert the AMT by raising the exemption amounts to $50,600 for individuals and $78,750 for couples filing jointly. It also now allows nonrefundable personal credits.

More good news is that the exemption rate will rise as inflation does, it’s one less thing for Congress to deal with each year, and e-filing won’t be delayed because of it.

FacebooktwitterlinkedinFacebooktwitterlinkedin