Gotcha: The Alternative Minimum Tax

The Alternative Minimum Tax was established in 1969 as an alternative tax system for individuals that were able to avoid paying taxes while still earning above average incomes. The system is not indexed to inflation and over time has been applied to more and more medium income households. Recent changes to the tax code have attempted to minimize this negative and unexpected event.

Taxpayers find when their taxable income reaches a certain level and they have the right mix of tax adjustments that the AMT applies and increases their taxes for the year. Accountants are at times able to move spouses out of the AMT tax by filing them separately and shifting mortgage deductions and child deductions to the spouse will less income.

For 2009, the AMT levels were raised which will help reduce it’s affect on middle America. Based on your filing status the levers are now $70.950 for married couples filing jointly and widows/widowers, $46,700 for single filers and heads of households, and $35,475 for married couples filing separately. There are a couple deductions for AMT including tax on the purchase of a new automobile, and state and local taxes.

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Many people have been troubled by the impact of the financial crisis on their savings. If you are retired, you probably know that there is an annual minimum distribution that you are required to take from your IRA if you are 70-1/2 or older, that is, you must take money out every year, or you are penalized on the funds. However, if you do not need the money to live on, you may consider it a disadvantage to have to cash something out at the moment, because you might want to leave your investments in place to recover, rather than sell them and make the paper loss into a real loss.

Although this requirement still applies to 2008 taxes, the rule has been suspended for 2009, which means that you are not penalized if you choose to leave your investments in place this year, and not take any money out. In that way, you can continue to get the tax advantages on the returns rather than being forced to sell when the markets are down.

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Credits to Reduce Your Taxes

A tax credit reduces your tax bill by the exact amount of the credit and is therefore the number #1 way to reduce your tax burden. And for some will little income, credits can actually create a refund beyond what was paid to the government for the tax year.

Child Tax Credit

For each child an individual or a couple have, they receive a tax credit of $1,000 above the $3,500 child tax exemption. There are income limits on the $1,000 credit which are $75,000 for single tax payers and $110,000 for married couples. At these two levels the credit begins to phase out. There is also an Additional Child Tax Credit that you may be eligible for if you are not eligible for the Child Tax Credit.

Earned Income Credit

For taxpayers that do not earn above certain thresholds, the earned income credit provides a large credit which often is more than what the individual paid into the federal tax revenue fund. If a taxpayer has two children and earns less than $41, 646 a year or a taxpayer has one child and earns less than $36,995 a year or a taxpayer with no children earns less than $15,880 a year, they are eligible for the credit.

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