2006 AMT rules

I don't mean to offend you, but I have to point this out.

You've bought the Prius in 2006, so the tax credit applies. You can't un-buy the car, no matter what happens to the AMT rules.

Since you can't do anything to control what congress and the IRS do for the 2006 AMT rules, does it make any sense to know "It may be this way, or it may be that way?" Why not just wait till the final decision gets made?

Even if you have the ability to change your income situation to avoid the AMT, you really can't make a move till a decision is made. That decision might be made next week---or it might be eight months from now. How can you plan at all?

 

<div class='quotetop'>QUOTE(Rick Auricchio @ Apr 17 2006, 01:32 AM) [snapback]240776[/snapback]</div>

I can answer that question.

I usually get a small amount of money back on my taxes. Anticipating a return of over $5,000 (Federal and NY tax credit) I changed my withholding so about $100 less per week is taken out of my paycheck. If I would be subject to the AMT, and if the NY plan doesn't get approved because of budgetary reasons, I would readjust my witholding accordingly.

 

<div class='quotetop'>QUOTE(rdenneyutmb @ Apr 17 2006, 06:42 AM) [snapback]240851[/snapback]</div>

I, too, make estimated tax payments, to my state as well as to the US Treasury. It sucks. But it is not a Catch 22 because there is a "safe harbor" that we can use, though not one without drawbacks. We always have the option of paying enough in estimated taxes so that those payments plus our withholding equals our total tax liability for the previous year. If we do that, there will be no penalty even if our tax liability ends up being far greater than it was the previous year.

 

Thanks for not taking offense at my prior post. It could have sounded rather flip. I'm not an accountant, but after 20+ years listening to my accountant, some of this stuff rubs off!

Quarterly payments or withholding don't make a difference in your final tax liability, which is the important figure. Your tax liability is based on the amount and type of your income, not how much you paid during the year. Even if you paid no withholding or estimated payments, the final tax liability would compute the same. (Of course, the IRS requires periodic payments or you get a penalty.)

You must pay at least 80% of your estimated tax liability during the year. Withholding is normally set to do this. For those of us paying quarterly, we estimate and pay in four installments. The Safe Harbor rule allows us to prepay an amount equal to last year's final tax liability. This avoids the need to be clairvoyant.

A tax credit comes right off the bottom line of your tax liability. In 2005, however, the hybrid tax deduction was very different. A deduction affects your tax liability (so you'd want to prepay less during the year). A tax credit is easy: you just subtract it from the amount you owe for the year.

When you submit your return, you calculate the tax liability, subtract tax credits (as for the Prius), subtract the payments you've made during the year, and find out what's left. If there's more to pay, you pay. If you've overpaid, you get a refund.

So the point is that adjusting withholding or estimated payments will make no difference regarding the AMT. The AMT, as I recall, is triggered by the type of income you report. I think a lot of capital gains can trigger the AMT.

I don't know if there's much tax-planning you can do to try to avoid the AMT. Your accountant can estimate "how close you came" to the AMT for 2005, and what income items could have triggered AMT. Perhaps you sold a house, which you probably won't do again in 2006, so you'll be safe. Maybe you sold some stock, so you should avoid doing so in 2006.

That said, I agree that you could cut your quarterly payments if you could pre-plan your tax liability. Assuming your income remains about the same as 2005, you can use that figure, subtract the tax credit, and pay 1/4 each time.

If you hit AMT (no matter the old or new rules), you're screwed anyway. I don't know whether tax credits count when you're at AMT, which would really suck.

As for interest on money you overpay, it usually isn't that much. Most of us don't make huge quarterly payments, so there's not that much overpayment at stake. And with interest rates rather low, there isn't very much interest to argue about. When interest rates were above 10%, it was something to think about.

 

<div class='quotetop'>QUOTE(rdenneyutmb @ Apr 16 2006, 05:50 PM) [snapback]240644[/snapback]</div>

My analysis of the AMT is that whether you have paid AMT in the past or not, you need to compute what your total tax would be under the AMT calculation.

If this number is $1000 less than your tax under the normal calculation, you would not pay any AMT, but you would be able to take advantage of only $1,000 of the federal tax credit for the Prius. (I reviewed the statute and ran this analysis by my accountant, and unless the IRS comes our with a differing interpretation, that is our read at this time.)

You can however, increase the difference between your tax under AMT calculation and your normal tax by reducing certain variables. It seems that the big items that might be changed is to pay certain itemized deductions in the following (2007) tax year, since the large deductions, such as state and local taxes and mortgage interest tend to trigger AMT.

For example, we will not pay our property taxes in November 2006 and instead pay in January 2007, same with respect to our state estimated income taxes.

Finally, it may make sense to not even take a deduction that you are qualified to have, if taking such deduction denies you a tax credit. The deduction is worth only say 28 cents on the dollar (assuming a 28% tax bracket) whereas a credit is worth 100 cents on the dollar.

For example, we probably will not take the minimum standard deduction, but will instead itemize our deductions, not take certain deductions for interest expense on real estate, so that we can take advantage on the whole credit. The economic effect of this is that our credit is really only worth 72 cents on the dollar for part of the credit, but that is still a deal.

Note that by delaying payment of some of these taxes, we incure the cost of paying interest on them, but given the short time frame and the rather low interest rates on the delayed payment, it is still worth doing.

I have attached the 2005 Form 6251 for computation of the AMT and the instructions. I also attached the actual legislation (excerpt of the whole legislation).

I developed an excel spreadsheet to work through this, but it really does not lend itself to use by others, due to so many unique variables.

George

P.S. Be aware too that you take other credits, before you take the hybrid credit and that you cannot carry the credit forward to the next tax year.

 

<div class='quotetop'>QUOTE(Mardikes @ Apr 17 2006, 10:33 AM) [snapback]240972[/snapback]</div>

More information on this is in the following post:

http://priuschat.com/index.php?s=&showtopi...ndpost&p=257227

 

A couple of observations...Some friends of ours who just bought a HyCam (CamBrid?) hit the AMT in a previous year and now believe they will qualify for the full credit regardless. (I do not know that that is the case, just reporting hearsay...and I HAVEN'T spent a lot of time listening to our accountant because it makes me go :wacko: .)

Other than that, we figure we need to get our TurgidTax as early as possible and figure out as closely and early as we can what our final numbers will be, and make sure we pay our property tax in December instead of in April if that will help us out. (This is not as difficult as it might otherwise be, since I run the QuickBooks at DH's business so can do early, extrapolated W2s.)

 

Update...DH just figured our taxes. AMT and all, we'll get a credit of about (only) $400 less than the $4150. Better than a kick in the teeth, but not as good as it should be, but, hey, whaddya expect for upper middle class from this guvamint? We even looked at filing separately, but I don't earn enough for it to help, despite stuff like medical bills.

I guess we either need to earn less or way more.

What the hell...for us, $400 isn't that much...but it still feels like a guvamint cheat. Gosh. How surprising.