THE ALTERNATIVE MINIMUM TAX (IT ALL STARTED IN THE 60’S)

REMEMBER BACK when you were young and poor and nothing made you madder than tales of rich people who paid nothing in income taxes? Well, you weren't alone, and that anger led to the creation of something called the alternative minimum tax, which was designed to keep the rich from living tax-free.

Fast-forward a few years. You're a bit older, somewhat better off and paying far more in taxes than you ever thought possible. So what's the last thing you expect to see when you fill out your tax return? That you owe the alternative minimum tax. You can take some solace in the fact that thousands of taxpayers just like you have been snagged by this nasty bit of tax law in recent years. While only 19,000 people owed the AMT in 1970, millions are paying it now.

What happened? Inflation, mostly. While the "regular" tax brackets, exemptions and standard deductions are adjusted annually for inflation, the AMT brackets and exemptions are not, so many people whose income has grown with the economy enter the dreaded AMT zone each year. Especially vulnerable are people with income over $75,000 and some large deductions, but not the exotic ones that were originally targeted by the AMT's creators. Most vulnerable are taxpayers with several children, interest deductions from second mortgages, capital gains, high state and local taxes, and incentive stock options.

How the Tax Works
The best way to understand the AMT is to view it as a separate tax system. It has its own set of rates and its own rules for deductions, which usually are less generous than the regular rules. Because of these confusing rules, the only ways you can tell if you owe the tax are by filling out the forms (essentially doing your taxes a second time) or by being audited by the Internal Revenue Service. If it turns out you should have paid the AMT but didn't, you will owe the back taxes plus any interest or penalty that the IRS decides to dole out.

You should definitely run the numbers if your gross income is above $75,000 and you have write-offs for personal exemptions, taxes and home-equity loan interest. Ditto if you exercised incentive stock options during the year

I just got an inheritance from my Grandma what do I do?

This is another of those "most asked questions". In most cases what you are receiving is a gift through inheritance. It is important to remember that in most cases, gifts are not taxable. Sort of look at it this way. If I stop by your home on Christmas and give you a Christmas present do you need to report that gift as a present from good old Dan? The answer is NO. I gave you a gift. If your Aunt Minnie gives you another of those useless ABC gifts again this year to you report that on you tax return? Of course not. You receipt it at a white elephant party gift give away.
So, like I said most gifts through inheritance come to you tax free. But...

Like most things with our good friends at the IRS there are some exceptions. If Uncle Harry passed and you were the beneficiary of his annuity policy there could be some tax due.

Rental Property sale

There is a different set of rules for rental property sales. The exclusion for sale of residence has nothing to do with the sale of a rental property. When a rental property is sold there will be capital gains tax to pay unless there is 1031 exchange done on the property. The exchange is done in escrow and the exchange rules must be followed.

There is also a problem with the outright sale of a rental property in that the depreciation that has been taken over the years that the property was a rental must be recaptured ( Sort of sounds like a criminal activity). This recapture is done at a higher tax rate than long term capital gains rates.

If you have a situation that needs to be discussed email us at dan@traxtax.com or make a comment on this blog.

Sale of Principal Residence

One of the most asked questions in the tax season is about the sale of a personal residence and if there will be any tax when the sale is made. The answer to that question is maybe. In order to determine if your home sale will be taxable you first need to answer the following questions.

1. Have I lived in this home as my principal residence for at least 2 out of the last five years?
2. Am I single or married? (This may be harder for some than others)
3. What did I pay for this residence?
4. What were the value of the improvements I/we made to this residence?
5. What will I sell this home for?
6. What are the closing costs of sale and of my purchase?

With this information you can get a general idea of the tax liability of the sale. Again this is how it works.

Each individual has a $250,000 exclusion for capital gains from the sale of a principal residence if they have lived in it for 2 out of the past 5 years? So if you are single this is the math.

Sales price, minus purchase price minus closing costs minus $250,000. If the result is less than zero you pay no tax. If you are married and or if there are two or more owners of this residence you just substitute the $250,000 for $500,000. That is as long as this is the principal residence of all owners.

There are some problems if you have used your home for a business or you have rented out a room to a tenant. Email us to get more info.

Finally, there are some exceptions to these rules. There are what the IRS calles "Safe Harbor" exceptions. If you have to sell prior to living in the home for the 2 year period. If you have a two bedroom home and you have multiple births. If you have a job change. If your home slides down a hill, for example, or some other disaster. Divorce works well here also. Do not go out and get a divorce just to sell you home sooner.

Remember there are several other exceptions and rules under this IRS code which has a number. Code number 121. The IRS has a code for all stuff.