Facts about the Alternative Minimum Tax (AMT)
The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.
Here are six facts the Internal Revenue Service wants you to know about the AMT and changes for tax year 2010.
- Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher income taxpayers who could claim so many deductions they owed little or no income tax.
- Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
- You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
- The AMT exemption amounts are set by law for each filing status
- For tax year 2010, Congress raised the AMT exemption amounts to the following levels: $72,450 for a married couple filing a joint return and qualifying widows and widowers; $47,450 for singles and heads of household; $36,225 for a married person filing separately.
- The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,700 for 2010.
If you want further information on the AMT and your tax situation, please contact my office.
Death in my family
Here is a repost of an article I did back when I first started blogging. Or somewhere there abouts. I am reposting it in referance to things now past.
Just to clarify, I am not a gruesome sort.
Earlier today my ex-wife phoned me (thank you Dee), to announce that my mother, sent a package to our daughter. In it, contained a painting that my grandmother had painted back in 1979, (our daughter is only 7) one that I could probably (if my brain worked that way) remember having seen being done. {If I were to guess, I’d say the Italian village.} Also in this package where a few other knickknacks, a photo of my grandmother and my daughter together, and finally an obituary from the Newspaper.
It was for my Grandmother, she passed away on October 18th, 2009 at the age of 92.
I make no secret that my relationship with that side of my family is not all it should be, yet at the same time I believe that my mother, by not telling me, even after the service, damaged this even further.
I haven’t called my mother to give my condolences. Until today, I had not known I needed to. And now, given the situation, I am not sure I will.
Publicly I want to say this to my mother, “I always thought you to be insensitive, as far back as I can remember. When I would listen to you and whatever husband you had at the time talk of days events, I was able to determine that you were/are a cold calculating woman. I learned a lot from you. What I learned helps me deal with the IRS representatives, and clients who are unwilling to pay. Sadly, you and I went different directions however. I am a people person, and in my opinion, you are still all about the all mighty dollar. By your not telling me about your loss, and my loss, I see that as a death of our relationship.
Good bye mother.”
WHEN A LOVED ONE DIES. . .
For this post I am showing one of the responses I received in my cry for help on the 1041 situation I am currently having. (Again now fixed/solved thanks to a college some 1200 miles away.) As a few of you will see this was no help to my situation as I am fully aware of everything that is written here. Despite how irritated I was by this reply I felt this was valuable information for a non tax pro and that it should be out there for you, if and when you need it. Bruce
“When a loved one dies, somebody must step up to the plate to handle all the resulting tax issues. This person may be identified in the decedent’s will as executor of the estate. If there isn’t a will, however, the probate court will appoint someone to be the administrator. In either case, it’s often the surviving spouse or another family member who takes on this responsibility.
Regardless of which route you take to get there, your duties as executor are essentially the same. The executor’s job is to identify the estate’s assets, pay off its debts and then distribute whatever is left to the rightful heirs and beneficiaries. He or she is also required to file any necessary tax returns and pay any taxes. Should this not be handled properly, the IRS can come after the executor personally for tax underpayments (plus penalties and interest) — even if he or she has hired a professional to deal with the paperwork. So if you find yourself in this role, you need to take the responsibility seriously.
Here’s an overview of four major steps you need to consider:
1. Filing the Final 1040
Step No. 1 is to file the decedent’s taxes for the year of his or her death. This final 1040 covers the period from Jan. 1 though through the date of death. The return is due on the standard date, meaning April 15, 2008, for someone who dies in 2007. If the decedent was unmarried, the final 1040 is prepared in the usual fashion. When there’s a surviving spouse, the final 1040 can be a joint return filed as if the decedent were still alive as of year’s end. The final joint return includes the decedent’s income and deductions up to the time of death plus the surviving spouse’s income and deductions for the entire year.
Be sure to keep a careful eye on medical expenses. If large uninsured medical expenses were accrued but not paid before death, you — as the executor — must make an important choice about how they’re treated for tax purposes. Along with any medical expenses paid before death, you can choose to deduct the as-yet-unpaid expenses on the decedent’s final 1040 to the extent they exceed 7.5% of adjusted gross income. (Final medical expenses can easily exceed 7.5% of AGI, especially when death occurs early in the year before much income has been earned.) This is an exception to the general rule that expenses must be paid in cash before they can be deducted.
Alternatively, if the estate is subject to the federal estate tax (which is only the case if it’s worth more than $2 million for someone who dies in 2007) you can choose to deduct the accrued medical expenses on the decedent’s federal estate-tax return (more on that below), rather than the decedent’s income-tax return. Obviously, if no federal estate tax is owed, this isn’t an option. But when estate tax is due, deducting accrued medical expenses on the estate-tax return is usually the tax-smart option. Why? Because the minimum estate-tax rate is a whopping 45%, while the decedent’s final federal income-tax rate could be as low as 10%. Plus the full amount of the accrued medical expenses can be deducted on the estate-tax return (not just the excess over 7.5% of AGI).
2. Filing the Estate’s Income-Tax Return
In addition to filing the decedent’s final income taxes, you may have to file the estate’s income tax as well. (Understand: This is entirely different from the federal estate tax, addressed below.) Essentially, what happens here is that once the individual has died, any income generated by his or her holdings after death is now part of the estate. And that income doesn’t escape the reach of Uncle Sam.
The estate’s first income-tax year begins immediately after death. The year-end can be Dec. 31 or the end of any other month that results in an initial tax period of 12 months or less. You must file Form 1041 (U.S. Income Tax Return for Estates and Trusts) by the 15th day of the fourth month after the year-end. So for a person who dies in 2007, the deadline will be April 15, 2008, when the “standard” Dec. 31 year-end is chosen.
If you’re dealing with an estate with annual gross income below $600, you don’t need to worry about Form 1041. So tiny estates are off the hook, as are those that can be wrapped up very quickly, before $600 worth of income accumulates. There’s also no need to file Form 1041 when all the decedent’s income-producing assets bypass probate and go straight to the surviving spouse or other heirs by contract or operation of law. This is what happens, for example, with real estate owned jointly with right of survivorship, with retirement accounts and IRAs that have designated account beneficiaries and with life-insurance proceeds paid directly to designated policy beneficiaries.
If the estate you’re in charge of is required to file Form 1041, I recommend hiring a tax professional with plenty of experience in this arcane area of the tax law.
3. Filing the Estate’s Estate-Tax Return
The federal estate-tax return is filed on Form 706 (United States Estate Tax Return). Assuming the decedent didn’t make any sizable gifts before dying, no estate tax is due, and no Form 706 is required, unless the estate is worth over $2 million for a person who dies in 2007. Sizable gifts are those in excess of $12,000 to a single gift recipient in a single year ($11,000 for gifts in 2002-2005; $10,000 for gifts during 2001 and earlier). If sizable gifts were made, the excess over the $12,000 (or $11,000 or $10,000) threshold is added back to the estate to see if the $2 million threshold is surpassed.
Form 706 is due nine months after death, but the deadline can be extended up to six months. Remember: While life-insurance proceeds are generally free of any income tax, they are usually included in the decedent’s estate for estate-tax purposes — even though the money may go directly to policy beneficiaries. In fact, life-insurance proceeds are the most common cause of unexpected estate-tax bills. An exception to this rule though is if the beneficiary is the surviving spouse: Assets inherited by a surviving spouse (including life-insurance payouts) aren’t included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is the so-called unlimited marital-deduction privilege, and it’s the most common reason why many large estates don’t owe any federal estate tax.
If you’re the executor of a substantial estate, you probably should hire a tax pro even if you’re fairly certain no estate tax is actually due. If you’re correct, the cost to confirm your conclusion will be minimal. If you’re wrong, filing Form 706 isn’t for amateurs. Also, a good estate-tax pro may be able to find some perfectly legal ways to substantially reduce the tax bite or even make it disappear completely.
4. The Miscellaneous Details
If you’ll be filing Form 1041 and/or Form 706, you need to get the estate a federal employer identification number (EIN). This is analogous to an individual’s Social Security number. Apply for the EIN by filling out Form SS-4 (Application for Employer Identification Number). (It can be downloaded from the link.)
Next, you should file Form 56 (Notice Concerning Fiduciary Relationship), which notifies the IRS that you’ll be acting on behalf of the estate regarding tax matters. This form can also be downloaded from the Web (but wait until you have the EIN in hand). It ensures you’ll receive any notices shipped out by the IRS (lucky you).
Then it’s time to open a checking account in the name of the estate with some funds transferred from the decedent’s accounts. As the executor, you have the legal power to do this. But make sure you have the estate’s EIN, because the bank will ask for it. Use the new account to accept deposits from income earned by the estate and to pay expenses — such as outstanding bills, funeral and medical expenses and of course those darned taxes.
Unfortunately, once you’ve done all this, your work might not be finished. You may also have to file state income-tax returns and perhaps a state estate-tax return as well. Sorry.”
Though somewhat out dated in the numbers and the years, the information is worthy. As for the source, I will let you know at a later time.
Are Credit Card Statements Sufficient Documentation for the IRS?
Written By: Steve Sildon
For those running small or home-based businesses, you may have gotten in the habit of using a credit card to charge items for your business. The nice thing about using a credit card, especially a small business credit card, is that card issuers typically provide year-end expense statements that itemize and categorize expenses, nicely and neatly. Especially at tax time, this is a nice feature for a credit card to have.
There is some confusion, however, for some small business owners about what constitutes legitimate documentation for tax purposes on their business expense deductions. Simply put, is your credit card statement good enough to document your business expenses for the IRS? If you’ve been convinced that using your credit card statements as proof enough for your business tax deductions, depending on who you ask, you just might be in for a rude awakening at tax time-even if you e-file.
Regarding business expenses, some tax preparers implore their clients to always save hard copies of their receipts, no matter what, of all their “ordinary and necessary” business expenses as proof of these expense deductions. Other tax preparers indicate that merely keeping your credit card statements, in most cases, should be satisfactory enough.
In fact, both may be right. To be safe, keeping hard copies of the actual receipts (preferably with notes about the specific purchase on the back of the receipt) is the safest and most defensible approach that you can take. Using just your credit card statements for documentation is generally not a good idea for a few reasons, but having them is certainly far better than having no documentation at all. In fact, in certain circumstances, credit card statements might just be enough proof. The IRS has warned tax professionals and businesses alike, however, that, at the very least, you’ll also have to have additional supporting documentation on top of the card statement itself to prove your tax deduction.
In some cases, your credit card statement might simply be the only documentation that you have, specifically for merchants and vendors ordered from online or by telephone where written order confirmations were not provided. In that case, you should keep your own notes and records about those purchases in your files, including the dates, the credit card used for the transaction, the items purchased, and the vendor used.
The IRS requires that any legitimate expense qualifying as deductible for your business must be “both ordinary and necessary.” An ordinary expense is one that is “common and accepted” in your specific trade or business type and a necessary expense is one that is also “helpful and appropriate” for your trade or business. Having an expense item on a card statement for purchases made at Staples, Office Depot or any local office supply store doesn’t automatically qualify the purchase as a legitimate business expense. That’s simply not proof enough. As far as the IRS is concerned, you could have easily just loaded up on iPod accessories, stereo equipment or video games (all of which are sold at Staples, Office Depot). The IRS suggests that business owners keep all the original store receipts that itemize the details of the items purchased. Ideally, the receipts should also have notes on the receipt indicating the business purpose for the items as well.
Scanning the receipts and storing them on a computer is another method that the IRS says is OK, but IRS knows about and fully understands the ease with which these digital files can be manipulated. If you are audited by the IRS and you show up with scanned images of your receipts, they will assuredly test their authenticity by cross-checking some of the scanned receipts with the original copies of the same receipts.
Another legitimate concern of business owners is fading that occurs on the original receipt paper, a fairly common occurrence. In addition to scanning the receipts, you can also make copies and file them alongside (or stapled to) the original receipts for your records as added insurance for record-keeping purposes.
While saving credit card receipts is preferred and certainly the most defensible method, there are instances, however, when a credit card statement will suffice. For example, many small business owners who take out their customers for coffee, meals or other entertainment purposes might not have all of their actual receipts because of disorganization or simply because they might have misplaced or even lost some of these receipts. Just because you’ve lost receipts does not mean that you cannot legitimately deduct them as business expenses. If you have a car expense or vehicle mileage log that tracks your mileage and vehicle expense items or an entertainment expense item log, you can use those as supporting documentation for the items in question on your credit card statement. To be legitimate and verifiable, however, business owners will need to verify who, what, why, where and how the items in question were purchased. What was the specific item? Where was it purchased? With whom and for what purpose were the items purchased? If you can provide answers to those questions and support it with documentation, you can legitimately expense the items.
The bottom line is that, as a business owner, you should make it a general practice to save all of your credit card receipts, no matter what. There’s no doubt that the physical receipt is the most ideal and simply the best evidence that you can provide for legitimizing any expense. In some instances, however, you just might not have a hard copy of the actual receipt. You can legitimately deduct these items in question, but if, and only if, you can provide sufficient supporting documentation in lieu of an actual receipt for items that you purchased.
Steve Sildon is a Senior Contributing Editor for Credit Card Assist. Steve writes about a wide variety of personal finance and credit-related topics, including credit cards, debt consolidation and credit repair.
Be sure to check out the Carnival of Pecuniary Delights No. 1: The Madoline Hatter Pecuniary Art Edition. it is a must read for us all.
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