Without a Fix, the AMT will Snare Millions of Taxpayers -Are You in the Crosshairs?

A recently released Congressional Research Service (CRS) Report entitled “The Alternative Minimum Tax for Individuals” examines the effects of the Alternative Minimum Tax (AMT) without yet another Congressional fix.

The AMT is another way of computing an individual’s income tax with limited deductions and the elimination of certain tax preferences. Taxpayers pay the higher of the regular computed tax and the AMT.

When calculating the AMT, taxpayers are allowed to deduct a specified amount that is not taxable; this is called the AMT exemption. This exemption is not automatically inflation-adjusted, like most other tax deductions, but Congress has been adjusting it annually. For example, the permanent exemption amounts are $33,750 for unmarried taxpayers and $45,000 for joint filers. Congress has temporarily increased these amounts over the years, and for 2011, the exemption amounts were $48,450 for unmarried taxpayers and $74,450 for joint filers. Without Congressional action, these AMT exemption amounts will revert to the permanent amounts in 2012.

Another temporary adjustment to the AMT allows a number of personal credits to be deducted from the AMT. The credits affected include child and dependent care credit, elderly and disabled credit, mortgage credit, and the Hope and Lifetime education credits. These will no longer offset the AMT after 2011 unless Congress acts.

The CRS Report notes that without Congressional action, an estimated 30 million taxpayers (approximately 20% of all taxpayers) will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers (approximately 1% of all 1997 taxpayers) who were subject to the AMT in 1997.

A permanent fix to the AMT without adjustments to the regular tax could be expensive. For example, the CRS Report notes that if the AMT is repealed, the lost revenue would be over $1.3 trillion between 2011 and 2022 if the Bush era tax cuts are not extended and over $2.7 trillion if they are extended.

It is difficult to say what the Congressional Tax Reform committee (also referred to as the “super committee”) will come up with in November. But one thing is for sure: some taxpayers will have to pay more to fix the deficit problem.

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Last-Chance Opportunity to Deduct General Sales and Use Taxes?

For 2011, taxpayers have the option of deducting the amount of state and local income tax that they paid during the year or, if they so elect, of deducting their state and local general sales and use taxes as an itemized deduction on their federal income tax return. This choice is currently scheduled to expire at the end of 2011.

If a taxpayer elects to deduct the sales and use tax, then the taxpayer may opt to deduct the actual sales and use taxes paid or use the amount indicated in the tables published by the IRS, alongside certain big ticket items, such as vehicles, motor homes, boats, aircraft, and mobile and prefabricated homes. The IRS tables take the state of residence, taxpayer’s income, sales and use tax rates, and family size into account.

Although the sales tax option primarily benefits taxpayers in states with no state income tax, it can also benefit taxpayers who make big-ticket purchases. Their sales tax deduction may exceed their state income tax deduction when they itemize their deductions.

Thus, if you are considering a big-ticket purchase, making the purchase prior to the end of the year may enable you to benefit from a potentially increased tax deduction. If you do plan on deducting sales tax in 2011 and you are paying state income tax estimates, you should avoid paying the fourth-quarter estimate installment until after the first of the year. Paying it in 2011 provides no additional benefit for 2011 on your federal return when electing to deduct sales and use tax.

Congress has extended this tax provision before, but at this time, there is no way of telling if it will do so again. Please give our office a call if you have concerns about how the sales tax election and purchasing big-ticket items before the end of the year might benefit you.

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Don't Miss Out on the Domestic Production Deduction

Originally enacted to help offset the repeal of a tax break for U.S. exporters, this provision of the tax code provides a deduction for many U.S. businesses that’s allowed for both regular tax and alternative minimum tax (AMT) purposes. And, despite the deduction’s history, it’s fully available to taxpayers who don’t export.

For 2010 and later years, the deduction equals 9% of the net income from eligible activities but cannot exceed 50% of the wages paid to employees whose work relates to the production of the income eligible for the deduction. This means that businesses operated as sole proprietorships or partnerships with no employees aren’t eligible for the deduction. To take advantage of the deduction, such businesses can incorporate and pay W-2 wages to their principals. (However, the decision to incorporate should not be based solely on claiming this credit - many other factors need to be considered.)

The following is an example of how this deduction works. Suppose your business manufactures a product which you wholesale to retailers. Your net income from sales of that product for the year is $550,000, and the wages you paid to your employees to manufacture that product totaled $100,000. Your deduction would be the lesser of 9% of the $550,000 in revenue or 50% of the $100,000 wages. Thus, your business’ domestic production activities deduction would be $49,500 (.09 x $550,000).  

The domestic production activities deduction is allowed with respect to the following activities:

1.  The manufacture, production, growth, or extraction of qualifying production property (tangible personal property, computer software, and certain sound recordings) by the taxpayer in whole or in significant part within the United States;
2. The production of any qualified film by the taxpayer if at least 50% of the total compensation relating to its production is compensation for services performed in the United States by actors, production personnel, directors, and producers;
3. The production of electricity, natural gas, or potable water by the taxpayer in the United States;
4. Real property construction in the United States; and
5. The performance of engineering or architectural services in connection with U.S. real property construction projects.

The deduction is allowed to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is allowed to partners and the owners of S corporations and may be passed through by farming cooperatives to their patrons.

 

A broad range of activities qualify as eligible manufacturing or production activities. The taxpayer's raw materials and finished products may be brand new, or they may be made out of scrap, salvage, or junk material. Manufacturing or producing components used by another party in later manufacturing or production activities is an eligible activity, as is manufacturing or producing finished items from components manufactured or produced by others.

 

The processing and preparation of food products for sale at wholesale are eligible “production” activities, but the preparation of food and beverages for sale at retail is not.

 

Construction activities are eligible for the deduction, but only if the construction is of real property and it is performed in the United States. The real property may consist of residential or commercial buildings and permanent structures. Eligible construction activities don’t include tangential services such as hauling trash and debris or delivering materials, even if the tangential services are essential for construction. 

 

Engineering and architectural services are eligible for the deduction, but only if they’re performed in the United States for real property construction projects in the United States.

 

The foregoing is only an overview of this deduction; careful analysis of its application to each type of manufacturing activity must be done. The deduction applies to both large and small businesses, so don’t assume that just because your business is small, you won’t benefit from the deduction. If you have questions related to how the domestic production deduction might apply to your specific circumstances, please give our office a call.

 

 

 

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Save for Retirement Week Promotes Lifelong Security

When it comes to saving for retirement, there is never a better time than today to assess your prospects toward meeting your goals. And with our nation's leaders declaring Oct. 16 through Oct. 22 as National Save for Retirement Week, you have a great opportunity.

National Save for Retirement Week is the first congressionally endorsed, national event formally calling on all employees to take full advantage of employer-sponsored retirement plans.

Experts predict that retirees will need from 80 percent to 100 percent of their pre-retirement income to maintain their lifestyle after retirement. Yet, surveys show that most Americans remain unprepared for retirement.

Many workers already participate in company sponsored retirement plans, which provide a foundation for retirement saving. And many workers will also be eligible for Social Security benefits at retirement age.

But, for many, that won't be enough. They will need to add additional retirement savings in order to live comfortably and securely during their retirement years – to fulfill their dreams.

For many Americans today it is important to begin saving for retirement – or increasing contributions to meet their goals. National Save for Retirement Week is dedicated to showing how important it is meet retirement objectives by contributing regularly and investing wisely for the long term.

Here are a few simple examples of what it takes to prepare for when it's time to retire:

• Save just $10 per week in a deferred compensation plan for 40 years and earn an average rate of return of 7 percent, and you will have an account with over $100,000. That just shows the power of tax-deferred savings.
• If you start a little later, don't be discouraged. You can still save more than $73,000, by setting aside $60 a month in a tax-deferred savings account for 30 years and at a 7 percent return.
• If you are saving now, and you increase your contributions, you can really make a difference in your final total. Over 30 years, adding $25 to your $100 biweekly contribution can increase your account from $264,327 to more than $330,409, assuming you earn 7 percent.
• Saver's Credit. Sometimes saving seems really hard, especially if your income is limited. The government has a special Saver's Credit just for you. If you are eligible, you can actually receive money back when you file your tax return.

There are many resources available on the Internet to provide you with the information you need to plan for retirement. Here are a few sites that will help you get started:

• http://www.ssa.gov/ – Social Security Administration – You will find calculators to determine what your benefit will be, information on how to apply for benefits and other information about the government retirement system.
• http://www.asec.org/ –American Savings Education Council – A useful calculator helps you estimate how much you need to save to meet your retirement goals as well as a number of savings tips and useful brochures.

If you need assistance planning for your retirement, please give our office a call. We will be happy to help you as you plan for your future.

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Tax Tips for Job Seekers

If you are unfortunate enough to be out work, you may be spending time attending career fairs and traveling around looking and interviewing for employment. Some of the expenses you incur attempting to secure employment may be deductible on your tax return.

Here are several things you should know about deducting costs related to your job search:

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income, up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. Use of your automobile in 2011 for the travel is deductible at 51 cents per job search mile during the first six months of the year and 55.5 cents per mile for the last six months of the year. The fares for other forms of transportation are also deductible. Lodging and 50% of your meal costs also count when traveling away from home overnight. 
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job-search expenses if you are looking for a job for the first time.
7. The job search expenses are included with other miscellaneous itemized deductions that are reduced by 2% of your adjusted gross income, and therefore may be limited. If you use the standard deduction instead of itemizing deductions, you cannot deduct any of your job-search expenses.

If you have additional questions related to job-search expenses, please give our office a call.

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