CA Brandt's Aspirin Chronicles aspirin 
A Monthly E-Newsletter
for Tax and Accounting
Pain Relief


JANUARY 2008 ISSUE 2
 
Dear Friends,

Sometimes, good advice is worth repeating! You may recall that in our last newsletter, we talked about the Alternative Minimum Tax (AMT). Here's what we said:

   Beware of the "stealth tax," so called because it sneaks up on you.....


We think that this issue is so important, we're devoting an entire newsletter to the subject. Be sure to check-out the additional resources we've listed at the end....and as always, please call me with any questions or concerns you may have.

Certified pain relief is always just a phone call away!

Cindy Brandt

 
The Alternative Minimum Tax
What You Should Know

The Alternative Minimum Tax was originally designed to prevent wealthy taxpayers from using tax shelters to avoid paying their fair share of taxes.

However, Congress has changed the tax laws many times since the inception of the AMT and shut down many of the tax-avoidance opportunities that existed in the 1960s and 1970s.  Today, the AMT affects millions of taxpayers with no tax-avoidance motives at all - unless one considers choosing to live in a high-tax state or choosing to have children to be a tax-avoidance motive.   Thus, about 87 percent of the additional income subject to the AMT tax is simply a result of where you live or the size of your family!

Moreover, the AMT is now affecting increasing numbers of middle-income taxpayers, because the amount of income exempt from the AMT  is not indexed for inflation.  When Congress first enacted a minimum tax in 1969, the exemption amount was $30,000 for all taxpayers.  If Congress had indexed that amount, it would be equal to about $165,000 today.  Instead, the exemption amountsare $45,000 for married taxpayers and $33,750 for most other taxpayers.

As a result, it is now projected that in 2007, absent a change in law, 23.4 million individual taxpayers - or about 26 percent of individual filers who pay income tax - will be subject to the AMT. Among the categories of taxpayers hardest hit, 89 percent of married couples with adjusted gross incomes between $75,000 and $100,000 and two or more children will owe AMT.

Could the IRS Make It Any More Difficult?

The burden that the AMT imposes is substantial.  In dollar terms, it is estimated that each AMT taxpayer will owe, on average, an additional $6,782 in tax in 2006. In terms of complexity and time, taxpayers often must complete a 16-line worksheet, read ten pages of instructions, and complete a 55-line form simply to determine whether they are subject to the AMT.  Thus, it is hardly surprising that 77 percent of AMT taxpayers hire practitioners to prepare their returns.

Perhaps most disturbingly, it is often very difficult for taxpayers to determine in advance whether they will be hit by the AMT.  As a result, many taxpayers are unaware that the AMT applies to them until they receive a notice from the IRS, and some discover they have AMT liabilities that they did not anticipate and cannot pay.  To make matters worse, the difficulty of projecting AMT tax liability in advance makes it challenging for taxpayers to compute and make required estimated tax payments, which often results in these taxpayers being subject to penalties.

How Do I Know if the AMT Applies to Me?

Unfortunately, there's no good answer to this often asked question - which is one of the big problems with the AMT. One big item on your tax return can push you into the AMT liability, or you might fall into it because of a combination of many small items. Some things that can contribute to AMT liability are common items that appear on many tax returns, such as a deduction for state income tax, interest on a second mortgage, long term capital gains, incentive stock options, or even your personal and dependency exemptions. See Top 10 Things that Cause AMT Liability for details on how these items can affect your AMT liability.

The Internal Revenue Service also has an online calculator to help you figure out if you are subject to the alternative minimum tax. It's called the AMT Assistant for Individuals.

aspirin

At CA Brandt, we know how difficult financial management for the small business owner can be. After all, you didn't start your business because you loved accounting, right?

Time and time again, we've been able to take the headache out of business and tax planning, as well as a host of other financial challenges that keep you awake at night. That's why we call our services "Certified Financial Pain Management" because at CA Brandt, we take the pain of financial management and planning away, so that you can get back to the real business at hand.

 
Sincerely,
 
Cindy Brandt
CA Brandt LLC

Woburn Office
12 Alfred Street, Suite 330
Woburn, MA 01801
Phone: 781.897.1755
Fax: 781.897.1756

Cambridge Office
777 Concord Avenue
Cambridge, MA 02138
Phone: 617.547.4594
Fax: 781.897.1756


Haverhill Office
50 Main Street
Haverhill, MA 01835

Phone: 978.556.5050
Fax: Fax 978.521.4081
In This Issue
The Stealth Tax
IRS
The Alternative Minimum Tax
We clear-up the confusing and perplexing AMT tax law.......
cindy
ASK CINDY

I am self employed.  I have been told that taking a home office deduction raises red flags.  Is this true?

No, the home office deduction is a perfectly legitimate deduction, as long as the taxpayer meets the requirements for a home office. 

To deduct home office expenses, a self-employed taxpayer must use the home office space exclusively and regularly:

1.  As a principal place of business;

2.  As a place to meet or deal with clients and customers in the normal course of business; or

3.   In connection with the business if the space is a separate structure from the residence (Sec. 280A(c)(1)).

Note: While employees may also claim home office deductions, the home's business use must be for the convenience of the employer and the space must be used exclusively and regularly for job-related activities, conditions which are much more difficult to meet.

What's Your Question? Email me at cbrandt@cabrandt.com!