Finance Tax Time

During a beautiful summer day, it is easy to forget some of the things you have to take care of. If you filed an extension on your taxes earlier this year, the deadline is approaching.

Highly disciplined Americans are known for always being organized and getting their taxes filed on time. They plan ahead for their taxes and then meet with their tax professional to get the returns prepared. A few weeks prior to the first deadline, the file their taxes and prepare for next year. Yeah, right. While this is true for many people, there are a number of us that file extensions.

When filing an extension, we all swear on our mother’s grave that we will get on top of the situation well before the extension period runs out. Well, did you? If not, the clock is ticking and it is late in the fourth quarter of the football game.

For corporate filings, the tax extension period is coming very fast indeed. If you were supposed to have filed on March 15th, you had the right to file for an automatic 6 month extension. This means September 15th is now the magical filing date for your returns. Since corporate returns tend to be complex, now is the time to get working on them.

Of course, most people file extensions for their personal tax returns. In a change from previous years, you are now given an automatic 6 month extension. The previous relief was only 3 months. Regardless, this now means that you need to have your tax returns filed by October 15th. While that may seem a long way off, you still need to get hopping on the process. Getting a second extension is much more difficult these days.

As with the original filing dates, you can e-file your tax returns. This tends to make life a bit simpler, but keep in mind you need to keep copies of the returns. You should also get verification that the returns were actually sent to the IRS.

Human nature being what it is, you will probably read this and yawn. If you do, you run the risk of being in panic mode in a month or two when the filing date looms large. Don’t say you weren’t warned!

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More and more taxpayers are finding a hidden tax on their individual tax returns. This tax was originally designed to not allow taxpayer in the higher income brackets take advantage of tax driven policy like deducting:

• A lot of itemized deductions
• High local and state tax deductions
• Child exemptions
• A Mortgage deduction

Just to give you a sense of who might get caught. If your joint income is below $150,000 you are allowed a $58,000 AMT exemption. What that means is that you can safely deduct up to $58,000 of the deductions listed above without incurring the AMT tax However, once taxable income climbs above $150,000 the exemption is phased out by 25 cents for every dollar earned above that until finally at $382,000, there is no exemption at all. This year only 1.8 percent of married couples with two kids and an adjusted gross income between $75,000 and $100,000 will be subject to AMT. However, about 73% of the taxpayers earning income above $382,000 will experience AMT.

The following tax planning strategies should be reviewed to help individuals counter the AMT and plan successfully for their financial future:

1. Acceleration of Ordinary Income. Individuals who expect to owe should consider accelerating ordinary and short-term capital gain income and deferring into the next year. Possible deductions to defer include state and local income taxes, real estate taxes, and miscellaneous itemized deductions subject to the two percent floor, which are not deductible under the AMT system. This planning technique is contrary to typical advice, but it may lower the ultimate tax bill.
2. Acceleration of Expenses. Individuals who are not subject to the AMT in 2005, but who will be in 2006, should accelerate expenses that are not deductible for AMT purposes into 2005. Also, they should consider selling private activity bonds and or paying off home equity debt if the interest expense is not deductible for AMT purposes.
3. Blend Tax Rates between years. Some of the differences between the AMT and regular tax systems are merely matters of the timing when deductions are taken. For instance, the AMT generally requires slower depreciation than is permitted for regular tax purposes. Other differences are permanent; for example, state income taxes can never be deducted under the AMT system, while under the regular system, they are deductible when paid. Paying AMT in one year may generate a credit against a future year’s regular tax, particularly when adjustments are due to timing differences. Overall, an individual may be better off if AMT is paid in a previous year in order to gain a credit in a later year. Perform a multi-year analysis to anticipate the effect of planning techniques used in 2005 on future years.
4. Stock Option Exercises. Consider whether any exercised incentive stock options should be disqualified (a disqualified disposition) before year-end to minimize the AMT liability, especially if the stock has dropped in value.
5. Beware of the AMT Traps. Watch out for other AMT traps, such as income from private activity (municipal) bonds, which is taxable under the AMT. In addition, certain mortgage interest, such as from a home equity loan, is subject to AMT if the funds from the loan are not used to buy, build, or substantially improve a primary or second home.
6. Utilizing Lower Capital Gain Rates. Taking advantage of lower capital gains rates can produce AMT implications in several situations, so be careful to consider the overall tax situation before taking any action. For example, the bargain element associated with the exercise of an incentive stock option is subject to AMT. Similarly, any large capital gain may raise your state and local taxes to a level that would trigger AMT. The resulting AMT could wipe out some or all of the benefit expected from the lower capital gains rate. This makes it particularly important to plan on a multiyear basis for transactions that could trigger the AMT.
7. Perform an AMT self diagnosis. Falling victim to the AMT has many possible causes, but individuals may be particularly prone to AMT if any of the following issues exist: - Large state and local tax deductions - Large long-term capital gains - Large deductions for accelerated depreciation - Large miscellaneous itemized deductions - Mineral investments generating percentage depletion and intangible drilling costs - Research and development expenses - An exercise of incentive stock options - Tax-exempt income from private activity bonds.

If one or more of these conditions affects you, you should discuss your AMT situation with your tax adviser, as soon as possible. Planning now will help net savings today, and it will best position individuals for the future.

Alan L. Olsen is the managing partner at Greenstein, Rogoff, Olsen & Co., a top Bay Area CPA firm. He focuses on developing innovative strategies for business enterprises and individuals. A specialist in income tax planning, he frequently lectures and writes articles on tax issues for professional organizations and community groups. His website is ranked one of the top in the nation, featuring tax tools and business leadership articles: http://www.groco.com

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I’ve had this article sitting here on my desk, staring me in the face for a good two months now. I kept meaning to publish it except for the fact that it doesn’t apply to the vast majority of people that read my work. So I would put it off.

You see, this article is targeted at the nearly 50% of Americans that don’t pay any income tax each year. Again, not my typical reader.

But tax time is upon us again and April 15th is around the corner so I figured why not once again set the record straight even though the vast majority of people that need to hear the message will never visit here. That message is you DO pay taxes. I don’t care how much money to “get back” each year you DO pay taxes.

America is at a dangerous time in her history. We are precariously close to the tipping point where more people than not are going to be living off the benefits of government without paying for them. At least in perception.

Make no mistake, this is the goal of many, which is to make a minority of Americans beholden to the whim of a majority and fund this country. Again, at least in perception.

Why do I keep saying “at least in perception”? Because even though many Americans pay little or no direct income taxes to the Federal Government they are paying out the nose in hidden taxes, fees and surcharges. And in case you are wondering, yes this is going to be another pitch for the Fair Tax (www.fairtax.org).

Economics are simple. When you buy a good or service you pay for the cost of everything that goes into that good and service. Oh, and by the way that also means that every time “Big Business” gets hit with a new tax by the Nanny State that is included in that price.

That means the cost of Social Security, Medicare, and other mandated programs those companies are told they must contribute to is wrapped into the cost of that $18,000 new car you just bought. It also means that included in that cost is also every fee, surcharge or tax the company is required to pay. It all gets passed along to you, the consumer. Oh and also included in that is also the millions paid out each year in attorney’s fees paid to help comply with an archaic tax code which no one understands.

These all get passed along to the tune of 20-30% added cost in every product you buy. Think about how much that is each and every year. If you spent $20,000 that is $4,000 to $6,000 you paid in taxes even if you didn’t owe Uncle Sam a dime and got every penny back.

But it’s all hidden from view, which is perfect for the Federal Government. Because as long as the soon to be majority of citizens who don’t owe any visible money each year to Big Brother don’t know they are paying taxes they won’t want to change the system. They wont want to change the system and what is worse it means that in all likely hood tax rates on the minority will go up and up and up.

Regardless of what you think you do pay taxes. Even if you receive a government check every month, you pay taxes. Even if you never earn another dime in your life you still are paying taxes to the federal government. Every time you buy something it happens.

So why shouldn’t we remove the complicated tax code and these hidden costs and replace it with a simple and visible 18-23% sales tax on all goods and services? Because it will raise taxes on the poor? Nope. It’s still less than they are paying now, on average, with imbedded and hidden taxes. And with the proposed monthly prebate which gives all American citizens a refund for taxes on expenditures up to the poverty level there really isn’t a reason.

Oh - silly me I forgot. There is a reason. That reason is bureaucrats who want to keep the vast majority of Americans ignorant while they continue to accrue power by administering a system that not even they understand. The perfect bureaucracy. And that bureaucracy will lead to an America our founding fathers never envisioned.

J.J. Jackson is the owner and Lead Editor of American Conservative Politics - The Land of the Free (http://www.thelandofthefree.net) and American Conservative Daily (http://www.americanconservativedaily.com). He is also the owner of American Infidel T-shirts (http://www.cafepress.com/americaneagle04).

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