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MONTHLY TAX NEWSLETTEROctober 2007
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:
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.
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
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.
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:
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.
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
Model Year 2007
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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