Here comes the tax man.
As you survey the damage from your 2009 tax return, keep this in mind: your tax bill may be surprisingly higher next year.
The Alternative Minimum Tax (AMT) exemption was $70,950 for married couples in 2009. The exemption drops to $45,000 in 2010. If Congress does not extend taxpayer relief from 2009, you will want to be prepared to pay moreand maybe a lot more.
The AMT system was designed to keep the wealthiest of Americans from paying little in taxes because of their high itemized deductions. The system, unfortunately, was never indexed for inflation as normal tax brackets, standard deductions, and exemptions are. For this reason, AMT has been creeping into the middle class for some time now. In 1970, only about 19,000 people owed AMT. Now millions are paying it. Most vulnerable are taxpayers with income over $75,000, several children, and some large deductions.
Congress has approved legislation every year or so to provide relief to taxpayers but the last "patch" ended in 2009. Under AMT, normal income tax deductions become "tax preference items" and are no longer deductible. These include:
Personal exemptions Deductions for state and local income and property tax Incentive Stock Options (which may generate AMT income even when sold at a loss) Home equity loans and other mortgage interest not incurred in buying, building or improving your personal property Other itemized deductions subject to the two percent AGI Limitation
You do, however, still get to claim your mortgage interest and any charitable contributions you've made.
There is much debate as to whether or not the government will provide such relief for taxpayers this year. Since the current administration has promised not to raise taxes (but is in dire need of additional revenue), some believe that allowing AMT to revert to previous levels will provide much needed revenue and allow them to keep their promise.
Of course, there will be a great deal of pressure from INFORMED taxpayers to provide relief.
So, what can you do to prepare?
Practice the art of skillful timing. If you believe you might fall prey to the AMT this year, you might consider increasing federal withholdings from your pay check now. If there is no tax relief this year, you'll have a jump start on paying the additional tax that will be owed. If we do see tax relief later this year, simply reduce your withholdings.
If you normally deduct unreimbursed business expenses, try working with your employer on coming up with a solution that would allow you not to have to deduct these expenses, because you'll likely lose them. For example, see if your employer would pay these expenses for you and just reduce your salary by that same amount.
Give to a local charity if you have extra cash. This deduction is still allowed under AMT. Make sure that your unused clothing is donated instead of thrown away. Remember to keep accurate records of items donated in case Uncle Sam wants to question you. The Salvation Army is an excellent resource for determining a value for donated items.
Just a few things to keep in mind as you file your taxes this year.