Tax Tips Blog

Jay writes:
Hello Gina! I’m married and I file jointly with my wife. Our taxable income is about $45,000. I believe this means I can have capital gains of about $20K without paying taxes on these gains this year or next (assuming my income stays the same for 2009, which I believe it will).

Is there any reason I can’t sell stock my stock that has a gain and then turn around and buy the same stock at the same time and still not pay any capital gains tax and have an increase in the basis with the new stock I purchased?

Thanks,
Jay

My reply:
For 2008, since you will be filing MFJ, if your taxable income falls between $16,050 and $65,100, you will be in the 15% tax bracket. For 2008 through 2010, capital gains and certain qualified dividends will be taxed at 0% for taxpayers in this tax bracket.

This 0% rate would apply to your adjusted net capital gains. Your adjusted net capital gains includes any qualified dividend income (the dividends that are not treated as investment income) and your net long-term capital gains less your net short-term capital losses, not including any gains from the sale of collectibles, qualified small business stock and depreciable real property.

Based on the information that you provided to me, I cannot think of any reason why your plan would not be allowed; however I would run a tax projection to make sure that your large capital gains do trigger Alternative Minimum Tax (AMT).

Best wishes,
Gina

Anne writes:

Hello Gina,

I have some clients who may benefit from the new 0% capital gains starting in 2008. I have some clients that are sole proprietors, giving them some room to potentially get themselves into the required tax bracket needed to obtain this capital gain rate. So, my question arises from the “too good to be true” thought. Here is one example of my client situation. He has an LLC, which will more than likely show a loss, rental units that usually show a loss, reported on schedule E pg 1, and a Sch C which could show income, although they have purchased a fair amount of equipment that could be written off, due to the 50% bonus depreciation & S179 deductions. So, I think he could easily get his income down to a point that he falls into the 10-15% tax bracket. It seems too good to be true that he can take all this depreciation in order to get into the bracket, so I’m thinking there must be some rules that I’m not seeing. What are your thoughts?

My reply:

Hello Anne, it’s great to talk to another professional!

The main thing that I’d watch out for with the Long-Term Capital Gains (LTCG) rate is Alternative Minimum Tax (AMT). As you’re probably aware LTCGs can phase out the AMT exemption and personal exemptions triggering additional Federal tax liability. In addition, there may be issues with the state and local taxes. If your client will incur a large LTCG for state tax purposes they will most likely want to itemize their deductions on their Federal return. This may reduce their Federal liability, but state and local tax payments need to be added back when computing Alternative Minimum Taxable Income (AMTI); thus most of the value of the state and local tax is lost for AMT purposes. So when you run your tax projection for them don’t forget to calculate AMT.

Best wishes,

Gina

Debbie writes:I can pay my property taxes in 2007 and claim them in 2007, or pay them in January and claim them for 2008. In 2007 we are in a higher tax bracket than we will be in for 2008. So, it makes sense to use the property tax (and state income tax) deduction this year, but only up until the point when it would trigger AMT, right? In other words, the most efficient way to work it would be to pay as much of the property tax bill in 2007 as would bring our AMT amount close to the regular tax amount, right? Or, do I go ahead and pay the whole property tax bill and state tax in 2007 because I’m in a higher bracket? Thanks!

My reply: Hello Debbie! Assuming they do not change the law, and they are working on it, so they might, then you have the right idea.

Ideally, you’ll time matters so that you reduce the amount of your 2008 regular tax liability precisely down to your 2007 AMT liability. Anything higher wastes some of the available deduction, because payment of state taxes does not reduce your AMT liability. Anything less causes you to pay more than necessary in 2007, because you have failed to reduce your regular tax liability to the AMT amount.

By the way, to the extent you overshoot, and end up “wasting” some of your state income tax deduction, keep track of that. If you get a state income tax refund, some of it will be attributable to the “wasted” deduction, and therefore won’t be taxable.

Again, all the above is assuming they do not change the law.

Best wishes,

Gina

Bill writes:I’ve had to pay AMT for the last two years. This year, I have an unusually large income. It seems to me that if I take this income all at once this year, I’ll avoid AMT. I believe I’m calculating this correctly because while the deductions disallowed by the AMT have stayed the same in size, my taxable income has gone up. Therefore, the additional income is being taxed at the top tax rate instead of the lower AMT tax rate. Does this make sense? I need to stop paying this dreaded AMT and if taking all this income in one year will let me get out of this mess I’m ready to do it.

My reply: Hello Bill!

Actually, your email of the situation is mathematically correct, but if you can actually control the income you take this year, I don’t understand why you would want to pay more tax than you have to. My only clue in your post are your words “dreaded AMT”.

AMT stands for Alternative MINIMUM tax. This is the MINIMUM amount of tax that you must pay. Yes, putting yourself into a higher tax bracket will get you out of it because you’ll be paying at a higher tax rate.

It seems to me that you’re saying you’d prefer to increase your income, and be taxed at, say, 33% or 35%, and have no number showing on the AMT line on your return as opposed to paying some AMT and being subject to a marginal rate of 28%.

The calculations you should be doing, with your CPA, is what combination of income over the next few years will allow you to legally pay the least amount of tax required by law. Stop worrying about whether the tax is computed based on the “regular” system or the “AMT” system and just look at the numbers and see what combination of income will allow you to keep more of your money.

As it appears to turns out in your situation, AMT is not necessarily a “bad” thing to be avoided at all costs. AMT can actually help you pay less in taxes.

Best wishes, Gina

www.GLGcpa.com

Carl asks: The past two years I have listed some charitable donations on our Schedule A, but they have been cancelled by the AMT. Since my wife retired in 2006, I expect to avoid the AMT this year. Can we use those same donations from previous years this year, since they did us no good in the years they were made? I didn’t think so.

My response: Carl, you seem to be pretty confused about how AMT works, but don’t feel bad, it’s yet another complicated layer in our tax system. The AMT is a completely separate calculation from your regular tax calculation, but in order to make things “simple” we have one form to compute the difference between the two different taxes.

The “differences” on the AMT form are referred to as “adjustments” or “preferences”. As far as itemized deductions are concerned this adjustments include:

1. State and local income taxes

2. Home equity loans and lines of credit, if not used for home improvement

3. Medical expenses must exceed 10% of AGI instead of 7.5% to be deductible

4. Miscellaneous itemized deductions Contributions are not disallowed with the AMT calculation; therefore, even if you were paying AMT, you were still receiving the benefit of any deductions that you made.

Anyone who pays AMT should seek the advice of a qualified tax professional, because not only is the calculation itself complicated, you may be entitled to a Minimum Tax Credit in future years. The Minimum Tax Credit (MTC).

The MTC was created in an attempt to avoid double taxation when a preference item on AMT reverses itself. This calculation should only be done by a qualified tax professional.

Best wishes, Gina

You have already been bombarded with “tips” and ideas of how to get those last minute tax deductions in order to reduce your taxes or even get yourself a nice refund. These tips usually include:

• Paying property taxes in December instead of January to increase your itemized deductions
• Making an extra mortgage payment to increase your interest expense deduction.
• Now that sales tax has been extended, there are ads telling you to buy a new vehicle before the end of the year and deduct your sales tax
• Pay your investment fees in December instead of January as another way to increase your itemized deductions
• Paying your medical expenses in December instead of January

While all of the above are good suggestions to decrease you regular tax you may inadvertently subject your self to AMT by doing so. Since more and more taxpayers are being caught in the AMT trap, you shouldn’t increase your deductions at year end without first doing a little tax planning to figure out if you will be subject to AMT. If you find that you will be subject to AMT then instead of trying to increase your deductions you should be trying to decrease your “non-AMT” deductions and increase your income. Some ways to achieve this include:

• Pay your property taxes in January instead of December (assuming you won’t be hit with a penalty)
• Do not make any extra mortgage payments in December
• Wait until next year to pay any medical expenses if the total of your medical expenses do not exceed 10% of your adjusted gross income
• Pay your employee business expenses, union dues, investment expenses, etc. in 2007
• Spread the exercise of your stock options over multiple years
• Redeem savings bonds or CDs before year end
• Sell short-term securities for a gain before year end

Every time they try to simplify the tax code it gets more complex, which means that every year is more important than the last to do tax planning in order to avoid or minimize any unexpected tax situations such as AMT.

If you had to pay alternative minimum tax (AMT) due to deferral (timing) adjustment items, you are entitled to a minimum tax credit (MTC) which you can claim in a year that your regular tax is greater than your AMT. The MTC prevents the double taxation of income and the disallowance of deductions due to the relationship between the regular tax structure and AMT structure. The MTC has an unlimited carryforward period. Deferral adjustment items are usually the result of having a different basis (usually your cost less depreciation or commission plus improvements or other items) under the regular tax system than the AMT system. Deferral adjustment items can either increase or decrease alternative minimum taxable income (AMTI) and include:

• Depreciation after 1986
• Exercise of Incentive Stock Options (ISO)
• Gain or Loss on the sale of property
• Loss Limitations (limited due to at-risk rules and basis rules)
• Passive Activities
• Long-Term Contracts
• Intangible Drilling Costs (IDC)
• Circulation costs
• Electing large partnerships
• Mining Costs (other than oil and gas)
• Estates and Trusts
• Research and Experimental Costs

It is very important to keep track of both your regular tax basis in these items as well as your AMT basis, such that you do not overpay your taxes or miss out on the MTC. There are other items, called AMT exclusion items which include claiming a large number of exemptions, the standard deduction, interest from private activity bonds or large itemized deductions that can cause you to have to pay AMT, but you don’t get to claim MTC for these items. Most taxpayers have a combination of deferral adjustment items and AMT exclusion items. This is an area of the tax code which is very complex and best left to your tax adviser to determine the exact amount of MTC you are entitled to receive.