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Tax News
Don't Suffer The Alternative - The Alternative Minimum Tax That Is: Reduce The Effect Of AMT By Using TaxACT 2007 PreviewCEDAR RAPIDS, IA--(October 24, 2007) - The individual Alternative Minimum Tax (AMT), implemented in 1969, is a parallel income tax system that was created to prevent 155 wealthy Americans from aggressively using tax credits, deductions, and legal tax shelters as tools to help them avoid having to pay federal income tax. The idea was simple: Create a minimum tax that ensured everyone pays Uncle Sam his due. Fast forward to present day and you'll find millions of middle-income Americans are now getting snared by the AMT. The main reason the AMT now reaches into the pockets of the middle-class is because regular income tax brackets are indexed for inflation but the AMT thresholds are not. The result has been the steady expansion of households who find themselves hit by the AMT -- especially households with a large number of children, education credits, residential energy credit and / or state and local taxes. Why haven't Americans been clamoring for an immediate overhaul to the AMT? Thus far, the full effects of the AMT have been deferred by Congress enacting a series of temporary patches -- boosting the amount of the AMT exemption. The last temporary fix to increase the exemption, however, expired at the end of 2006. If Congress fails to ratify another provisional one-year increase in the next few months, the number of households paying the AMT will escalate exponentially from approximately 4 million in 2006 to nearly 23 million for 2007. To determine if a taxpayer owes tax under the AMT, filers must calculate their taxes under both the regular tax and AMT systems -- making the "Alternative Minimum Tax" tax a bit of a misnomer considering taxpayers must pay the higher of the two. The biggest factor impacting AMT filers is that they are no longer eligible to claim certain deductions and exemptions (i.e. education credits, child care credits, and the deduction for state and local taxes). Sound complicated? It can be if taxpayers don't plan ahead and use the tools that are available to them as a significant portion of taxpayers may be surprised when they are suddenly hit with a big tax bill, plus possible penalties come next April. Some planning tools are even free, such as the tool offered by 2nd Story Software®, Inc., -- makers of the popular tax program TaxACT. "It seems unlikely that lawmakers will fail to pass another patch to serve as a quick fix to hold down the reach of the AMT. Guessing wrong, however, could prove costly. Unfortunately, there are a vast number of factors that will trigger the alternative tax for any given taxpayer," says Stephanie Behrends, spokeswoman for 2nd Story Software. "TaxACT Preview is a taxpayer's ally allowing users to perform what-if scenarios to determine their estimated tax liability. Users simply need to step through the TaxACT interview entering their forecasted income and deductions for the tax year by answering simple questions in layman's terms. TaxACT simultaneously calculates your projected tax with the regular tax system and the AMT system based on the taxpayer's tax bracket and the most recent tax information available." Behrends continues, "TaxACT Preview provides valuable forecasting information. TaxACT Preview will compute the AMT and limit tax credits as appropriate based on the 2007 draft version of Form 6251 - Alternative Minimum Tax - for Individuals (the amount if Congress doesn't pass an extension) to show the full impact of the AMT; or, estimates can be based on the 2006 Form 6251 instructions (assuming Congress enacts the same temporary patch to AMT as last year)." Visitors need only to complete the site's free online registration to gain access to TaxACT's Online Deluxe Preview version at www.taxact.com to generate a forecasted federal and state income tax refund or liability amount -- providing users with valuable insight into their tax situation. Once the Final version of TaxACT releases in early January 2008, users can easily finalize their tax return and print and/or e-file their federal tax return for just $9.95.
Lump Sums To Multiple BeneficiariesA lump-sum distribution to two or more beneficiaries may qualify for averaging and capital gain treatment, so long as the plan participant was born before January 2, 1936. Each beneficiary may separately elect the averaging method for the ordinary income portion, even though other beneficiaries do not so elect. Follow the Form 4972 instructions for multiple recipients.
Interest On Marital Property SettlementsParties may agree to pay interest on property transfers relating to divorce settlements when payments are to be made over time. The actual property transfer is generally a tax-free exchange. According to the Tax Court, the interest is separate and apart from the property transferred. The deductibility of the interest paid depends on the nature of the property transferred. Interest allocated to residential property, for instance, is deductible as residential mortgage interest; interest allocated to investment property is deductible as investment interest subject to the net investment income limit.
Pre-1974 Capital Gain Portion Of DistributionIf you were born before January 2, 1936, and a portion of your lump-sum distribution is attributable to plan participation before 1974, you may treat it as ordinary income eligible for averaging, or you may elect to treat it as capital gain taxable at a flat 20% rate; choose the method on Form 4972 that gives the lower overall tax.
Conversion Of Traditional IRA To Roth IRAIf in 2009 you converted a traditional IRA to a Roth IRA, the conversion amount is included in Box 1 and in Box 2a of Form 1099-R as a taxable distribution. The entire conversion amount is taxable on your 2009 return, except for any portion allocable to nondeductible contributions.
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