Simply Junior

A last-ditch effort on the part of liberal Democrats in the House to send the big tax cut extension bill back to the Senate has failed. With last night’s favorable vote, an AMT Patch for 2010 and 2011 has now been passed by Congress, included as a part of “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” The bill now goes to President Obama, who is expected to sign it into law as soon as he receives it.

What the Patch actually does

As has been mentioned in previous articles, “the Patch” simply is an adjustment to the AMT exemption amount that individuals are allowed as a deduction in computing their Alternative Minimum Taxable Income. The new law sets the 2010 exemption levels at $72,450 for married couples filing jointly and $47,450 for single individuals. Without this adjustment, the exemption amounts would have reverted to their much smaller equivalents from ten years ago, with the unfortunate result that 28 million new taxpayers would have been pulled into the AMT for the first time.

Effect on those already in the AMT

While the Patch primarily is designed to keep the 28 million new taxpayers from getting caught in the amt, there also is a significant benefit to the four million individuals already there. This benefit is the avoidance of as much as additional AMT of nearly $8,000 for married folks and nearly $4,000 for singles, had the exemption levels fallen back to their levels a decade ago.

Taxpayers by level of income who benefit from the Patch

The IRS Statistics of Income report for 2008, just recently released, shows that the majority of AMT payers – 62% – fall within the $200-500,000 income range. Taxpayers making between $100-200,000 comprise 22% of AMT payers while those in the $50-100,000 range make up another 5%. Without the Patch, the number of folks at these levels and below filing the Form 6251, Alternative Minimum Tax – Individuals, would have grown dramatically.

Different types of taxpayers who benefit from the Patch

With respect to what types of taxpayers are affected by the Patch, the entire spectrum is included. This includes employees receiving regular paychecks, self-employed individuals running their own businesses, and investors as well as retirees. There are so many different ways of becoming ensnared in the AMT that its tentacles reach out and pull in every single category of individual taxpayer.

AMT planning between now and year-end

With only two weeks left in the year, much still can be done to lower an individual’s 2010 Alternative Minimum Tax liability. The key to doing this is the fact that individuals are cash method taxpayers, and, therefore, income that can be pushed to 2011 will not be taxed this year (and vice-versa), and checks that can be written by December 31 become eligible deductions in 2010 (and, again, vice versa). These types of changes will directly affect the calculation of an individual’s AMT liability.

As an example, the biggest single item pushing people into the AMT is the itemized deduction for state and local taxes. This includes income taxes as well as real estate taxes, and it represents an AMT item that affects nearly 95 percent of all individuals who are stuck in the AMT. The simple act of whether and to what extent an individual pays these state and local taxes by December 31, or waits until January 1, can represent a significant savings opportunity.

Don’t wait any longer – with the Patch now enacted, there’s no excuse for anyone not to be doing year-end AMT planning right now!

So what is in store for us with the IRS tax return in 2011? Why is it a concern, the tax cuts that were made in 2009 are coming to an end. If nothing is done a lot of taxes could go right back up including estate taxes. So there is a lot of worry if Congress will renew the tax cut laws?

Changes for the Tax Preparer

Also another thing that is going to be changing in the IRS tax return this year is for the tax preparer. There are going to be some requirements if you are going to be a return preparer, and apply for compensation for it. The new requirements require all be screened to be a tax return preparer. In screening they must do they following:
- Be registered
- Be tested
- Have follow up with continuing education

This is helping protect the people from fraudulent tax preparers that are out there online since so many are filing online these days. There really is no license needed to be a tax preparer, which is kind of scary considering our finances, are in these people’s hands.

Also starting in January of 2011 it is going to be required by some IRS tax preparers to file electronically only and the paper mail in format will no longer be used.

Debt Indicator Removed

Starting in 2011 the IRS has stated that this year’s IRS tax return the Debt indicator will be no longer used. The Debit Indicator was used in finding out your refund. Now with e -filing for your tax return and the turnaround being so quick there really is no need for the service any more thanks to electronic filing. You can file your IRS tax return online and get your refund within ten days. So there really is no use for the Debt Indicator any more.

Fist Time Home Buyer Credit Sill Available

The first time homebuyer credit is still going to be available this tax return season. The deadline has been extended till September 30 2010 so you if you are in a binding contract it has to be finalized by September 20 of 2010 for you to be able to apply it on your 2011 IRS tax return.

New Tax Forms

New tax forms are going to be rolling out this IRS tax return season as well. This coming IRS tax season businesses will have to fill out a 1099 if they have payment purchases of at least $600. It is also going to be required that firms that deal with credit or debit card payments will have to send their client and the IRS a form every year that states the transactions of the year. This is all to crack down on businesses that possibly do not pay what they owe by not reporting all income.

President Obama is currently pitching a tax cut program that includes substantial changes to existing federal estate tax laws, including: exempting estates valued at under $5.0 million from federal estate taxes and setting the maximum rate at 35 percent. Under this plan, couples could potentially pass up to $10.0 million to their children and other heirs without paying federal estate taxes.

The reason that president Obama is trying to push this legislation through now is because the President Bush tax cuts enacted in 2001 are set to expire at the end of this year. Similar to the Bush tax cuts, if the Obama tax cuts expire in 2012 then pre 2001 tax laws apply.

The proposed changes are significant since under current law the 2011 exemption level is $1.0 million per individual. The maximum tax rate will be 55 percent in 2011 if the House and Senate fail to approve President Obama’s tax cut program. Many house democrats are upset over the agreement reached between President Obama and House Republicans since these changes are perceived to benefit only the wealthy and strip the government of a substantial revenue source. In response to President Obama’s tax cut program, Democrats have proposed changes to the federal estate tax landscape that would increase the federal exemption level to $3.5 million per individual and the maximum tax rate to 45 percent. Essentially, the Democrats’ proposed change is equivalent to the 2009 federal estate tax laws.

No matter what changes, if any, are approved, the proposed changes will not be retroactive. This means the estates of individuals that died in 2010 will not owe any federal estate taxes, such as George Steinbrenner’s estate.

Unfortunately, Obama’s tax cuts are only temporary; expiring in two years.

Note that the federal changes do not affect state estate/inheritance tax laws unless you reside or have property in a state with estate tax laws tied to the federal laws. In Oregon, a taxable estate continues to be an estate worth over $1.0 million. If you have property in Oregon and your gross estate (not just the property located in Oregon) is over $1.0 million then your estate may owe Oregon inheritance taxes and not owe federal estate taxes under the proposed legislation. Washington’s exemption level is currently $2.0 million. Neither state is likely to increase its exemption levels in the future since both states are hurting financially.

President Obama’s proposed estate tax cuts won’t affect most people and are a small band aid covering a large wound. If approved, the legislation continues the unpredictability of estate planning since we, as planners, do not know what the legislature will do in 2 years.

©12/08/2010 by Kevin J. Tillson. All rights reserved.