Friday, 24 May 2024

Taxes and money: More on the Alternative Minimum Tax


Before I return to my discussion of the Alternative Minimum Tax, a couple of important notes.

There is a scam email being sent to individuals targeting those who either did not receive a stimulus payment or felt they deserved a larger payment. This email, which looks official, urges taxpayers to respond by downloading information that will allow them to receive additional money. The IRS simply does not send out emails. So if you receive such an email, it is bogus.

The stimulus rebate received last year, which were based on 2007 income was actually advance refunds of amounts from one's 2008 return. If you didn’t get the full rebate of $600 or $300 for those with lower income or dependents, the IRS will calculate the rebate again based on 2008 data. If the recalculated rebate is larger than what was received last year, you will receive the difference. If the recalculated rebate is the same as last year's, or less, you do not have to pay it back. On most tax software there is a place to report what you actually received as a stimulus rebate.

In addition, while many people were getting ready for the holidays last December, there was a bill passed that effects the tax return preparation for the 2009 tax year.

The Worker, Retiree and Employer Recovery Act of 2008 was approved on Dec. 11, 2008. This act deals primarily with pensions, however under this act there is an important section that deals with retired individuals receiving Required Minimum Distributions (RMD). These are amounts which, in general, must be withdrawn from certain qualified pension plans once a taxpayer reaches the age of 70 ½ years of age.

In general, the penalty or excise tax applied when the RMD has not been taken has been eliminated for the tax year 2009, thus the RMD need not be withdrawn in 2009. This may benefit those who are taking withdrawals from their retirement account by not forcing withdrawals of retirement accounts that are dropping in value. By allowing the principal to remain in the account longer, it is hoped that a recovery will increase the value to the account.

In the last article I mentioned how new legislation could make one's 2009 tax return potentially painful; well I was speaking of what was happening at the time. Both the House Ways and Means and Senate Finance committees have since announced that they are working on new tax legislation. These new potential laws will most likely add a layer of complexity to the existing law. The Senate promises $275 billion and the house promises $30 billion worth of change. These implied promises sound very good, but what will the reality bring?

When judging tax legislation, one must remember that there will be a heck of a lot of speeches and posturing until we really see the reality. So far, none of the analysis of the proposals seems exciting or likely to bring large tax refunds. There will most likely be a continuation of promises and a lot of politics before we actually see workable proposals.

Many of the proposals made will never see the light of day; one such proposal is the “Rangel Rule,” named after the chair of the House Ways and Means Committee. This powerful congressional committee is where all income tax bills get their start, as well as most governmental spending begins. Other committees may propose changes, but all the changes come from this committee. Lake County should be proud that our congressional representative Mike Thompson is a member of this committee.

This rule states that the IRS cannot charge interest or penalties on the collection of past income tax owed. It turns out that the honorable Mr. Rangel paid $5,000 in past taxes he owed but refused to pay any interest or penalties on those taxes. While this is one of my favorite proposals, I seriously doubt that it will see the light of day.

This process makes it crucial that we all be aware of the upcoming changes and determine what, if any, these changes will have on our tax or financial position. This does not mean shifting through all the politics and reports, just that when the final bill is signed that you know the important elements and that you decide if you need to adjust your strategy.

It appears that the Alternative Minimum Tax will not be ignored and will be patched as usual instead of being permanently corrected. The patch, in this case, is a temporarily increase in the exemption level. This tact was probably taken because had it not been proposed, then 20-30 million taxpayers hit with an increase in their tax bill would create a protest too big to ignore.

This of course means that one should have a strategy. As I mentioned in my last article, the days when one could just ignore their tax and financial position has ended. We must be aware how changes in law and finances affect our position.

Of course, a detailed strategy in regard to the AMT must be individualized, but in general, it means, to review your tax return after it has been filed and projecting or estimating what will happen this year and over the next few years.

If you are expecting major changes such as retirement or having children or if there is a potential for higher taxes due to the AMT or less deductions or just more income, then measures should be taken to reverse these effects. This can mean a variety of strategies that in general involve the timing of receiving or paying income and expenses. There may be other tactics that can be taken. The time to act is now, while there is time to plan.

Of course, it’s hard to know what’s going to happen in the future and at this time, it may not be possible. However, once we get into the habit of planning and doing periodic reviews, then when you spot a change, action can be taken before a huge tax bill comes your way.

Jon Meyer is a local tax accountant and enrolled agent with more than 25 years experience in tax preparation. The office of Jon the “Tax Man Meyer “also offers retirement planning and insurance options. Questions regarding this article can be made by calling 928-5200.


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