As any sleep-deprived, raccoon-eyed accountant can tell you, just over a month remains in the busy tax season.
Those of you who have been cozying up to TurboTax or working with tax pros may have a good handle on your taxes. This year we’ve seen issues with international assets, IRS emails, and the perennially fiendish Alternative Minimum Tax.
Any funds abroad? Many of the international families in Boulder County have at least $10,000 combined in all financial accounts (including retirement plans) in other countries at some point last year.
So what? Every year they must file Form TDF 90-22.1 (the name itself is bureaucratically foreboding) by June disclosing all these accounts to the U.S. Treasury Department. If you don’t, you could be subject to heinous civil penalties that could exceed 50 percent of the value of the accounts if done willfully. Go to IRS.gov and query “FBAR” for more information knowing that you may want an expert’s help with this.
This year we’ve seen a number of e-mails threatening IRS penalties and audits, and claiming the existence of long-forgotten tax refunds. The IRS does not initiate contact with taxpayers via e-mail. Watch out for these fraudsters.
Then there’s the insidious parallel tax system called the Alternative Minimum Tax (AMT). Before William Shatner was using his Hitchcockian frame to pitch cut rate hotel rooms, the lean Captain Kirk would sometimes get stuck in an evil parallel universe where new rules applied to almost all situations. That’s the AMT. You can’t count on the tax world you’ve known.
The AMT ensnares many in Boulder County with our high wages and cost of living. About 8 percent of those with an adjusted gross income of $100,000 to $200,000 are affected. Fully 76 percent of those with an AGI of $200,000 to $500,000 are caught in the AMT.
All of us must compute taxes under two rules — the regular rules and the AMT rules. The IRS then requires that you pay the highest tax from the two methods.
AMT just has two tax brackets — 26 percent on the first $175,000 in taxable income and 28 percent above that for joint filers. The highest AMT bracket is 7 percent lower than the highest regular tax bracket. At first glance, the AMT sounds like a good place to be.
The AMT system throws out many common deductions such as property and state income taxes. Miscellaneous itemized deductions such as employee business expenses, tax prep and investment fees are also tossed aside. Medical deductions are limited and some home equity interest is not includible. Municipal bond interest may be taxed.
Joint filers do get a $74,450 AMT exemption you can deduct from your income, but this starts disappearing with an AMT income of $150,000 by 25 percent of your income above this level. You’re in the 35 percent (effective) bracket after all.
The friendly side of our tax system can give you all sorts of benefits for children. You get to subtract an exemption of $3,700 in 2011 for each person in your family. The AMT dispenses with this and traps higher income families as a result.
Well at least the AMT gets the one-percenters like Buffet and Romney, right? Many of the rich folks derive much of their income from capital gains and qualified dividends. Your schadenfreude is derailed once you learn they get the same 15 percent tax rate the rest of us do.
To determine if you’re in the dreaded parallel universe, look on line 45 on your 1040 this year and take steps to limit it in 2012.