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It’s the time of year to start talking about taxes. I used to do my own taxes, but it was always a frustrating experience. Eventually I learned that by paying somebody else to do them, I was actually saving money. Because my accountant actually knows what he’s doing, he gets all the deductions I’m entitled to.
This year, I’ve heard a lot of talk about the Alternative Minimum Tax (or AMT). Every time I begin reading about the AMT, my head swims. Fortunately, a couple of other people do understand the AMT and have written about it lately. First, Nickel sat down and answered the basic question: What is the Alternative Minimum Tax? He writes:
The AMT is a parallel tax system with rates ranging from 26%-28%. If your liability is higher under the AMT than under “standard” income taxes, then you have to pay the AMT. Given that standard tax rates top out at 35%, this doesn’t sound too bad. Unfortunately, the AMT also disallows many routine deductions, resulting in a potentially large tax liability.
Basically, if you have too many of certain deductions or exemptions, you may be subject to the AMT. The details are arcane, however. According to Fairmark’s list of the top ten things that cause AMT liability, even routine deductions can trigger the Alternative Minimum Tax. Yahoo! Finance has a guide to understanding the Alternative Minimum Tax, which explains you’re more likely to be subject to the AMT if any of the following are true:
- Your gross income is greater than $100,000.
- You have many personal exemptions.
- You have “significant” itemized deductions, such as state taxes, and (sometimes) home-equity loan interest.
- You had a large capital gain.
- You own a business.
If you’d like more information about this topic — which I admit is dry, but could be very important to some people — BxCapricorn at The Fine Art of Money has an excellent detailed article called Alternative Minimum Tax — Why Care?. You can also read more about the AMT here:
- Wikipedia: Alternative Minimum Tax
- Internal Revenue Service: Alternative Minimum Tax assistant for individuals
- Internal Revenue Service: Alternative Minimum Tax — How it affects filing season 2008
To be honest, after reading all this information, I still have no idea whether I’m subject to the AMT. What are “significant” itemized deductions? How does owning a business trigger the AMT? I’ve decided not to worry about it. This is yet another reason I’m happy to pay an accountant to sort out my taxes.
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January 2nd, 2008 at 1:16 pm
I’ve never really looked into it — what’s reasonable to pay someone to do your taxes? Is it best/easiest to go with the Big Guys like H&R Block, or find your own independent person?
January 2nd, 2008 at 1:18 pm
Unfortunately, Congress screwed around again (I know, it’s a shocker) and didn’t approve 2007 AMT rules until mid-December.
This means that for all of us who might possibly be subject to AMT (I definitely am, in increasing amounts every year), we can’t even use the tax software out there until late February (in the best case scenario), as they have to re-program these parts.
Frustrating!
January 2nd, 2008 at 1:22 pm
I’ll echo Heather’s questions. I wonder what a reasonable rate is for rather “run-of-the-mill” tax preparation.
Also, does anyone know if the tax software out there is any good?
January 2nd, 2008 at 1:27 pm
We use a private firm local to us to do our taxes..
Our typical stacks of paper we get at the beginning of the year:
W2’s
Home Interest Statements
School Loan tax statements
(Wife owns a business) the ludicrous amount of paper required for that..
Many other paper forms..
We pay close to $500 for personal/business tax prep for the April income tax.
My wife’s business pays around $5K/yr for constant accounting services, which includes tax prep consulting.
One day a stinkin’ politician will grow a pair and simplify the G.D. tax code in the US.. But I won’t hold my breath. It’s their money after all, right?
Cheers!
January 2nd, 2008 at 1:49 pm
They omitted the most common reason, lots of children.
January 2nd, 2008 at 1:54 pm
Yet another reason to give serious consideration to a national consumption tax which would replace all of this confusion, replace payroll deductions, put more of your paycheck in your pocket for YOU to decide where the money is spent, and make April 15th just another spring day!
This merits real consideration. This is not some wacko idea, but a real potential alternative to our current system.
Check it out!
January 2nd, 2008 at 1:56 pm
It’s easy to do your own taxes, even without software. I’ve always done ours. Just read the instructions as you fill out the forms.
One year I thought we might come out better if we used a professional. After all, he’d know all the loopholes, right? Wrong. We were going to owe money! With three children and one income! I went back to doing it myself, and I’ve never regretted it.
January 2nd, 2008 at 2:35 pm
One advantage to tax software is that it will calculate your taxes multiple ways and tell you if you owe more under AMT or via normal 1040. Also if you are married, whether you should file jointly or separately.
That said, I have also many times used the pencil-and-paper “check if you owe AMT” checklist in the 1040 booklet.
I consulted TurboTax online last year, and while it did help, it also seemed unable to handle some mutual fund transactions. (I blogged about the details at http://jenk.livejournal.com/tag/taxes - we ended up owing $1.)
I will probably do the manual-with-online help method again next year.
January 2nd, 2008 at 3:08 pm
I have a tax guy that helps me out with federal and state tax. Still, I calculate my taxes in a software application myself as well. If there are differences between his and my taxes, my tax guy and I will discuss.
I learned a lot from him through the years and caught little mistakes.
January 2nd, 2008 at 3:12 pm
I think the only way to figure out if you are subject to the AMT is to run the numbers each year (at least that is my understanding).
We pay a CPA about $400 a year to do our taxes which includes fancy stuff due to our rental income, rental expenses and depreciation, etc. We have been using the same CPA for about 7 years and we are very happy with the service. His price depends on the number of forms/schedules.
January 2nd, 2008 at 3:12 pm
January 2nd, 2008 at 3:27 pm
January 2nd, 2008 at 3:52 pm
It’s nice to know that I won’t be eligible for it. I’m wondering how to handle all my different incomes in different states this year. Maybe next year will be better.
January 2nd, 2008 at 4:07 pm
I ran Turbotax and state taxes with rough numbers last week, just to see whether we should do some last minute tap-dancing to reduce our taxes (shelter some money in 529s and pay property taxes in 2007 — we decided to do neither).
Turbotax is partially fixed for the last-minute AMT changes, so it looked like we would have paid over $1k before the changes, and we get over $2k back now. We got hit with AMT several years ago when we exercised some (startup dot-com) stock options, but we got AMT credits in subsequent years (done this year), which reduced our federal taxes for those years.
January 2nd, 2008 at 4:39 pm
AMT reeks. It has hit me the last 3 years. I remember how furious I was the first time that form rolled out of Turbo Tax. Of course, I had not planned on it happening…
Best Wishes,
D4L
January 2nd, 2008 at 4:50 pm
I go to H&R Block. Last year I paid them $162 total for both State & Federal tax preparation — they charge a certain amount for each form that they prepare for you. That amount can be deducted the following year. When there’s a refund, they can have the IRS electronically deposit that into your checking account.
January 2nd, 2008 at 4:51 pm
Thanks for the answers so far, and I’ll look forward to your post on Friday, J.D.
If it’s possible (or if anyone else wants to chime in)…maybe you could include some tips about which people should really consider getting a tax guy and which of us should just suck it up and do it ourselves.
For example, I’m single with no dependents, just one income, with student loans and a mortgage, and no other investments….so I’ve always figured my taxes were simple enough to do myself, but who knows, maybe I’m missing some big deductions?
How complicated do your finances have to be before you should get outside help to make sure you’re getting all the rewards?
January 2nd, 2008 at 5:54 pm
We were subject to the AMT last year and probably will be this year ago. Under the tax code, state or local income taxes can be included in itemized deductions. However, in our experience, “significant itemized deductions” includes high state or local income taxes. So, if you live in a high tax state like New York or Maryland (vs. Florida, which has no state income tax), it is more likely that you would be subject to the AMT if you itemize and try to take those tax deductions.
January 2nd, 2008 at 6:12 pm
Ms. Micah,
I had that problem before and had to get forms from each state. When I did it, there were special forms for people who had lived in more than one state within the year.
January 2nd, 2008 at 6:31 pm
Great image: exactly expresses my sentiments on this topic!
Because i are a english major, i are not a accountant, the whole subject leaves me with my head spinning. I have my returns prepared by a tax lawyer, who charges significantly less than the CPA I hired when I ran an incorporated business and who saves me significantly more. She (lawyer) normally charges about $400, but that includes the dribs & drabs of legal advice she also has provided over the year. She sends one statement in April that covers the entire year’s worth of legal advice, tax advice, and tax preparation. So far, I’ve had no problem paying her out of the refunds she’s obtained from the state and the feds, which cover her fees and give me an excellent running head start on funding the Roth IRA.
January 2nd, 2008 at 6:34 pm
I did my 2007 estimated taxes and we were going to be hit with it. (I believe with Congress’s repeal this will no longer affect us.) This is laughable because in real income my husband and I make less than $70k per year. What triggered it is the taxable tuition benefits that I receive + taking a deduction for education. It’s just ridiculous. Being penalized for education? Something designed for millionaires triggering at $70k?
January 2nd, 2008 at 7:18 pm
Being really cheap, I’m always on the look out for less expensive ways to get things done. The last two years I’ve used free online software through Tax Act. For basic service, you pay nothing but the $16 to file electronically.
My husband and I have many deductions and Tax Act’s free service has handled them all. (The first year I did my taxes on paper too, just to verify Tax Act was accurate.)
January 2nd, 2008 at 7:50 pm
The last two years I’ve had to do that paperwork “test” in the 1040 to see if I had to pay the AMT, and fortunately, I didn’t. I believe my increasing income that’s due to dividends is the reason why, although I have not seen many people say that dividend income is a reason for AMT. I have no kids, unmarried, no house (wishing I had at least two of those though :).
-
Ryan
http://uncommon-cents.net/
January 2nd, 2008 at 8:22 pm
Heather,
Your situation sounds pretty simple to do. Give Tax Cut a try ($20.00 on the web). It is produced by HR Block, very simple to use and is much cheaper than Turbo Tax. When finished, print your return(do not file electronically, more $$), mail it in and your all set. I bet it will take you about 3-4 hours. I used to do my own paper returns but it took over 20 hours. I started using this software and cut that time in half. Also there are no math errors. I would never use an accountant. We all have to pay taxes and should not have to hire a 3rd party ($400) to do this for us. my 2cents.
January 2nd, 2008 at 9:55 pm
Great post, very informative. Thanks!
January 3rd, 2008 at 11:24 am
I did my own taxes for many, many years. I’m a smart, math-oriented person and took pride in being able to figure out all the tax forms.
Then I bought a business and came face to face with depreciation and amortization. AMT. Loss carry-over. I read the codes and the forms and the instructions. I researched it on-line. I spent hours trying to learn this stuff, and my brain just hurt.
This engineer met her match at the complicated end of the income tax code and handed it all over to an excellent CPA. Just as I had spent my career getting really good at what I do, she had spent hers learning the arcanity (arcaness?) of taxes. She rocks, rolls AND saves me money.
Sometimes it is totally worth it to pay an expert to do the work that isn’t your specialty. This is one of those times for me.
January 3rd, 2008 at 12:57 pm
All I will say is FairTax.org…check it out!
January 3rd, 2008 at 8:19 pm
Thanks to all of those that visited my site, and as TosaJen said, their taxes saw a $3K swing after the patch. I hope that this helped raise awareness for those who may find themselves overwhelmed by this parallel tax in the next few years. The tax planning you do this year is now more important than ever.
January 4th, 2008 at 5:54 am
[...] Get Rich Slowly - A Brief Overview of the Alternative Minimum Tax [...]
January 6th, 2008 at 1:51 pm
[...] JD gives a brief overview of the Alternative Minimum Tax. [...]
January 18th, 2008 at 5:00 am
[...] encourage you to subscribe to my RSS feed. Thanks for visiting!Earlier this month, I mentioned that I haven’t prepared my own taxes since 2001. I pay somebody else to do them. I did them on my own for fourteen years before they became too [...]
February 23rd, 2008 at 12:32 am
I am from Oman.I do not like america for what it stands for. a ripoff of tax professionals and trhe americans trhey do not revolt like the americans did during the Boston tea party. maybe H&R block rules in america but in my country there isno income tax.I know in america you have to have an income tax, but if you had any brain you would start a fair tax party. many of you will be stressed out by the tax season maybe get stroke or cardiovascular disears or suffer emotional problems. you almost are at the mercy of rippppoff accountenants. what amazes me is hoiw a country if so many bright people could tolerate this amt. I think for all your education, you are a country of mutes who do not know hiow to demonstrate like they do in serbia. you know how to celebrate a football champion. many in the arab world are praying that your tax system will slopwly destory your pewrsonal lives shalom alechhem. do not be surprised if dubai winds up owning many of your financial institutions after all many of the arab countries have no income taxes. you hadno income tax once but it is tolate you should have a fair tax but you ptroblaybly need an internet webmaster to start a movie. both the democrats and republicans are part of the problem- i think i dislke americans because they are suckers they enjoy being ripped off by their politicians and cpa’s/ everyone can email me as it is fun tobe in america since I never have to worry about paying taxes. maybe you r should learn how to fight back but you must have a leader