Monday, September 24, 2007

AMT May Catch Middle Class Taxpayers in 2008

As reported by CNN Money, many middle class taxpayers might get hit with an unexpected tax bill next year.

David Lifson, president of the New York State Society of CPAs, tells clients who could be candidates to sock away 1 percent to 2 percent of their gross income, so that if it turns out they do have to pay AMT in April, they'll have the extra cash on hand. If they don't, he said, then they'll at least have some enforced savings.

Broadly speaking, you might be at risk of having to pay AMT if more than one of these situations apply:

* You live in a high-tax state. State and local income taxes are not deductible under AMT as they are under the regular federal income tax code.

* You have kids. Personal exemptions are disallowed under the AMT.

* You take a lot of miscellaneous deductions, including unreimbursed business expenses. They, too, are disallowed under the AMT.

* Your household gross income exceeds $100,000.

Jeanguenat and enrolled agent Marc Standig are telling clients to do what small things they can to minimize their tax bite, such as maxing out their contributions to tax-advantaged retirement plans and tax deductible IRAs.

For those who may be AMT candidates, Lifson and Standig also advise boosting tax withholdings on their paychecks if they have a lot of other income - such as dividends or a big bonus - that have few or no withholdings but which they will owe tax on come April 15. That way, they may avoid underpayment penalties.

This is another aspect of inflation that many people may not realize. However, the tax rate on capital gains (which is the kind of tax that Warren Buffet pays) stays at the same low rate.

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