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NOTICE TO RESIDENTS OF MARYLAND

We are NOT affiliated with the State of Maryland. If you are looking for information about Maryland income taxes, please go to www.marylandtaxes.com.


Useful Links:

FindAGoodCPA.com - Not a healthcare professional?  Find a CPA or EA who understands the tax issues specific to you.

IRS Web Site - for tax forms, publications, and general tax information.

Exchange Authority - New England's first authority for IRC 1031 Exchanges

Cost Segregation Studies - Accelerate tax depreciation deductions on new and existing buildings through cost segregation studies

Social Security - find out the latest rules or your projected retirement benefit.

The Company Corporation offers fast, reliable & affordable incorporation and LLC services.

 


MONTHLY TAX NEWSLETTER

October 2007

A.M.T. SPELLS BAD NEWS FOR TAXPAYERS IN 2007

by Andrew D. Schwartz, CPA

On New Year's Day 2007, the Alternative Minimum Tax went from bad to worse.   Due to a stop-gap provision that expired at the end of 2006, many more people could end up paying a lot more AMT this year.  Experts predict that the number of people being hit by the AMT is on track to jump six-fold, from 4 million taxpayers in 2006 to 23 million taxpayers in 2007.

What is the AMT?  When you calculate your taxes, you're supposed to calculate them two ways.  First, you figure your tax liability under the regular tax system.  And then you re-calculate your taxes using the AMT rules.   Whichever tax is higher is the one that you pay.

When calculating the ATM, certain tax breaks aren't allowable, including your personal exemptions and your standard deduction if you don't itemize.  Itemizers are required to back out their state income taxes, real estate taxes, a portion of allowable medical expenses, all miscellaneous itemized deductions, and interest paid on home equity debt not used to purchase or improve a principal residence or second home.  Anyone who realizes significant capital gains or exercises and holds Incentive Stock Options (ISO's) generally ends up paying the AMT as well.

Numbers Don't Lie

Each summer, my CPA firm starts preparing income tax projections for our clients who don't want to be surprised by the outcome of their tax return the following winter.  What we discovered once we started working on our 2007 projections is that taxpayers are going to get clobbered by the AMT this year.

Here is a sample of our clients who are projected to pay significantly more AMT in 2007:

Filing
Status
2006
AGI
(actual)
2007
AGI
(projected)
2006
AMT
(actual)
2007
AMT
(projected)
AMT
Increase
MFJ $74k $77k $-0- $1,242 $1,242
MFJ $94k $91k $-0- $724 $724
MFJ $80k $115k $-0- $6,006 $6,006
MFJ $137k $145k $-0- $2,999 $2,999
MFJ $151k $149k $-0- $1,325 $1,325
MFJ $192k $190k $-0- $4,752 $4,752
MFJ $218k $221k $1,609 $7,023 $5,414
MFJ $264k $264k $3,522 $11,023 $7,501
MFJ $299k $300k $5,125 $10,736 $5,611
MFJ $317k $337k $2,099 $8,661 $6,562

Eroding Exemption

What is causing this AMT catastrophe?  The biggest culprit is the AMT exemption that you're allowed to claim each year.  The purpose of this exemption is to protect middle-income taxpayers from paying the AMT. 

If Congress doesn't do something about the current AMT rules, the allowable AMT exemption for married couples will be cut from $62,550 as allowed in 2006 to just $45,000 in 2007.  That's a reduction of $17,550, or 28%.

For single individuals, the reduction isn't quite as dramatic, with the AMT exemption decreasing to $33,750 in 2007 from $42,500 in 2006.  That's a reduction of $8,750, or 20% of the 2006 amount.

When you factor in that the AMT tax rate is 26% for the first $175k of AMT income (at which point the rate increases to 28%), the decreased exemption costs middle income married couples up to $4,563 in extra taxes.  Single individuals should expect to pay as much as $2,275 in additional AMT due to the decrease in the exemption.

There Is Hope

So the big question is whether Congress will act on the AMT before it's too late.  One positive sign comes directly from the IRS.  A few years back, the IRS developed an on-line AMT Assistant for Individuals.  Go to this application and you'll see that this tool has not yet been updated for the 2007 rules.  Hopefully that means that the IRS doesn't expect the current rules to be around for long.

Need another sign? I recently had the chance to talk with one of my friends from college who is now a Congressman in the US House of Representatives.  He told me that AMT reform is definitely on the mind of his colleagues.  The problem is that they are currently searching for a permanent fix to the AMT, instead of the annual stop-gap measures that had been enacted for each of the prior two years.  To completely eliminate the AMT, however, Congress needs to find a revenue raiser to offset the projected $800 billion of lost tax revenues.

When you factor in that next year is an election year, I am optimistic that Congress will do something about the current AMT crisis.  With taxes due April 15th, and then election day just six and a half months later, there could be a lot of angry people voting with their pocketbooks if taxpayers end up paying the kind of AMT that I've seen in my projections.

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ANDREW D. SCHWARTZ CPA TO HOST WEEKLY RADIO SHOW ON TAXES

Andrew D Schwartz CPA has agreed to host a weekly, one-hour radio show on taxes through WorldTalkRadio.com. The show can be heard live each Wednesday at 7 pm ET (4 pm PT) at www.worldtalkradio.com starting on December 5th. Each week, Andrew will interview various guests who can add information and insight to that week's topics, as well as take questions directly from the listeners.

This year marks Andrew's 20th year in public accounting, primarily as a tax practitioner. Each winter, he prepares individuals and business tax returns for more than 1,000 of his clients. And throughout the year, Andrew helps these clients with tax planning and strategies.

Andrew is also the founder and editor of many nationally recognized websites, including The MDTAXES Network (www.mdtaxes.com), NewlywedFinances (www.newlywedfinances.com) and FindAGoodCPA.com (www.FindAGoodCPA.com).

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TAX CREDIT FOR HONDA HYBRIDS GETTING HIT

by Andrew D. Schwartz, CPA

The numbers are in.  Through June 30, 2007, Honda has sold a total of 58,872 hybrid vehicles since the beginning of 2006.

Why are these sales figures important? Even though the hybrid car tax credit is in place through 2010, the credit begins to phase out for each manufacturer upon selling its 60,000th hybrid as follows:

  • The full credit is allowed through the end of the quarter following the quarter during which the manufacturer sells its 60,000th hybrid vehicle after January 1, 2006.
  • The credit is cut in half for the subsequent two quarters.
  • The credit is then cut to twenty-five percent of the original credit for the subsequent two quarters.
  • No credit is allowed for vehicles purchased from that manufacturer thereafter.
Based on Honda's sales figures for their hybrids, the allowable credit for their hybrids is on track to be cut in half on January 1, 2008, cut in half again on July 1, 2008, and then will be fully phased-out on December 31, 2008.  The one exception is the Honda Civic GX, which will not be subject to any phase-outs through 2010.

To qualify for this tax credit, the hybrid purchased must be a new vehicle. According to the IRS, "the original use of the vehicle must begin with you", so used vehicles don't qualify. Leasing a hybrid doesn't qualify the lessee for the credit. "If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit," explains the IRS. And the final condition to qualify for this tax credit is that you use your hybrid predominantly within the United States.

Current Credit

Toyota and Lexus hit the 60,000 threshold during the second quarter of 2006, so the credit for their hybrids is fully phased-out as of September 30, 2007, as we warned you in our August 2007 newsletter.  According to the IRS, here are the hybrid vehicles eligible for this tax credit as of October 1, 2007:

Model Year 2008

  • Chevrolet Malibu hybrid — $1,300
  • Ford Escape 2WD Hybrid — $3,000
  • Ford Escape 4WD Hybrid  — $2,200
  • Mazda Tribute 2WD Hybrid — $3,000
  • Mazda Tribute 4WD Hybrid — $2,200
  • Mercury Mariner 2WD Hybrid — $3,000
  • Mercury Mariner 4WD Hybrid — $2,200
  • Saturn Aura hybrid — $1,300

Model Year 2007

  • Chevrolet Silverado 2WD Hybrid Pickup Truck — $250
  • Chevrolet Silverado 4WD Hybrid Pickup Truck — $650
  • Ford Escape Hybrid 2WD — $2,600
  • Ford Escape Hybrid 4WD — $1,950
  • GMC Sierra 2WD Hybrid Pickup Truck — $250
  • GMC Sierra 4WD Hybrid Pickup Truck — $650
  • Honda Accord Hybrid AT —  $1,300
  • Honda Accord Hybrid Navi AT — $1,300
  • Honda Civic GX — $4,000
  • Honda Civic Hybrid CVT — $2,100
  • Mercury Mariner 4WD Hybrid — $1,950
  • Nissan Altima Hybrid — $2,350
  • Saturn Aura Hybrid — $1,300
  • Saturn Vue Green Line — $650

Even Energy Efficient Alternatives Lose to the AMT

While the amount of this tax credit can be substantial, the "Alternative Motor Vehicle Credit" won't benefit you once the Alternative Minimum Tax (AMT) kicks in.  And unless something's done to alleviate the current AMT crisis, there's a very good chance you'll get hit by the AMT this year.  Experts predict that the number of taxpayers subject to the AMT will jump six-fold, from 4 million taxpayers in 2006 to 23 million taxpayers in 2007.

To make matters worse, unlike many other tax breaks, you're generally not allowed to carry forward the unused portion of this tax credit to a subsequent year.  So if you're hit by the AMT and can't use the credit the year you purchase the vehicle, you lose it.

Is there any way around the AMT?  Yes, if you purchase the hybrid through your business, you get to carry back the unused "general business credit" to the prior year, and then carry it forward for twenty years.  There's a pretty good chance that one year during this twenty-two year window you'll avoid the AMT and be eligible to claim this tax credit.

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TAX AND FINANCIAL PLANNING CALENDAR FOR OCTOBER, 2007

Month

Income Taxes

Saving and Investing

 

October

  • Update your net worth statement using 9/30 information
  • Taxpayers on extension must fund retirement accounts by October 15th

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2006 & 2007 TAX FACTS

  • For 2007, the standard deduction for a single individual is $5,350 and for a married couple is $10,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2007, the personal exemption is $3,400. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $97,500 for 2007, up from  $94,200 in 2006.
  • The standard mileage rate is $.485 per business mile for 2007, up from $.445 per mile in 2006.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2007.  And if you'll be 50 or older by December 31, 2007, you can contribute an extra $5,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $4,000 for 2007.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2008 to make your 2007 IRA contributions. 

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copyright - 2007 - CPANiche, LLC

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WHAT'S NEW WITH THE FICA REFUND?

Most recent information issued by the IRS

Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

For more information, go to our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Copyright 2007 The MDTAXES Network by CPANiche, LLC    Email us at  info@cpaniche.com