What Triggers the Alternative Minimum Tax (AMT)?

The AMT with rates of 26% and 28% is a particularly vicious tax that may hit you if you have any of the following circumstances during the year:

1. Large state and local tax deductions under itemized deductions which are not deductible for the AMT. I find this is the most common reason for AMT.
2. Large miscellaneous itemized deductions which are not allowed at all for AMT.
3. Many dependents. The standard deduction and the personal exemption deduction are not allowed for AMT.
4. Tax exempt income from private activity bonds.
5. Large long term capital gains or qualified dividends. Both are taxed at the same rate for the regular tax and the AMT. However if you have a large amount of such income, the regular effective tax rate is reduced and can bring AMT into play on the other taxable income.
6. Exercise of incentive stock options. If the stock is sold before year end in the same year of exercise, then there is no add back to alternative minimum taxable income.

You compare the regular tax to the AMT and pay the higher of the two. The AMT is calculated on form 6251.

Tax Extenders

On December 19, the President signed into law " the tax increase prevention act of 2014" which extended some 55 popular tax provisions which had expired 12/31/13 to 12/31/14. Businesses can take advantage of bonus depreciation which is available for new fixed assets and the max section 179 depreciation which has increased from $25,000 to $500,000. Individuals can deduct the larger of sales tax or state income tax. Teachers can deduct what they spend on supplies up to $250.

I hope everyone has a very merry Christmas.

Real Estate Taxes

Property tax is deductible on your tax return when paid out of escrow to the taxing authority not when you make your monthly payments to the escrow account. Penalties and interest paid on late payments are not deductible. Special assessments for sidewalks,sewer upgrades, etc. are generally not deductible because they may increase the value of your property. In the year of sale of property, the property tax is prorated between the buyer and seller on the closing statement and can be deducted for the period of ownership.

Tax Extenders

The House has passed a package of 55 tax breaks for businesses and individuals that had expired on 12/31/13. The tax breaks will be effective for 1 year through 12/31/14 only but may be extended for future years at the end of next year. The Senate will likely vote on the package this week and then it will go to Obama who could veto it. The package includes such popular provisions as bonus depreciation, increased section 179 expensing for fixed asset additions, and sales tax deductions. Stay tuned.

Top Ten Ways to Reduce Taxes Right Now

You still have some time in 2014 to take steps that will beneficially affect your tax situation. Here are my top ten.

1. Clean out your closet and basement and make donations to Goodwill. Keep the receipts and a record of items donated. You can value the items using the valuation guide at salvationarmyusa.org.
2. Organize your 2014 tax documents and receipts for deductions in one file folder. Summarize the receipts and give the totals to your tax preparer. In general, do not send the receipts to your tax preparer.
3. If you have a business on the cash basis, delay mailing bills until late December so that payments won't be received until 2015.
4. Write a check to your favorite charity or donate appreciated stock. Be sure to get an acknowledgement letter from the charity for donations of $250 or more.
5. Consider converting your regular IRA to a Roth if you can do so without increasing your taxes. This would apply if you have enough itemized deductions or net operating losses to offset your taxable income after the increase from the Roth conversion.
6. Invest in Georgia municipal bonds or other state and local bonds. The interest is tax free from both federal and state tax if you invest in bonds from your state of residence. Municipal interest is tax free from federal tax regardless.
7. Sell investments that will generate losses to offset any capital gains plus $3,000.
8. Buy supplies and equipment for your business before year end. Pay January rent in December.
9. Estimate your volunteer mileage for the year.
10. Increase your retirement plan contributions to the max.