There are few things that are more
confusing for taxpayers than the
U.S. Tax Code. Changes to it have adversely affected more and more taxpayers, some of whom never expected
to be impacted. Consider the Alternate
Minimum Tax (AMT), for example,
which Congress enacted in 1969 to make
sure taxpayers could not use tax benefits to avoid entirely paying any substantial amount of income tax. They did not
account for inflation, however.
The AMT affected only 19,000 taxpayers in 1970. Experts now estimate that it
will impact 31 million taxpayers by 2010
if it is not changed. This will affect a lot
of taxpayers who would not have been
affected by AMT just a few years ago. It
also creates expanded needs for awareness of significant tax changes among
taxpayers and a greater demand for
financial consulting services to help
them stay abreast of the changes that
might affect them.
Smart Business spoke with Steven H.
Gross, CPA, a principal of Skoda, Minotti
& Co. about tax law changes that can
affect taxpayers’ 2006 returns and what
to look for in 2007.
What tax law changes will affect taxpayers’
2006 returns?
There are two significant changes to be
aware of: those related to the ‘kiddie tax’
and Alternative Minimum Tax (AMT).
Let’s start with the kiddie tax, which is
levied on the unearned income of children.
Prior to 2006, children under 14 years
of age were subject to this tax. Now, children under 18 are subject to it. A child is
subject to the kiddie tax when his or her
unearned income — that is, interest and
dividends — exceeds $1,700 per year.
Children would be taxed at the same
rate as their parents. Thus, the kids are
not able to take advantage of the lower
tax brackets. That change can affect a lot of returns, so it’s something of which
taxpayers should be aware when preparing their 2006 tax returns.
Who should be concerned about AMT?
Generally, taxpayers whose gross
income is more than $75,000 and either
have write-offs for personal exemptions,
taxes and home equity loan interest,
and/or own their own businesses or rental
properties … the list goes on. The complexities associated with AMT make it
imperative for taxpayers to consider how
changes to it will impact their returns —
and to work with their tax advisers if they
have any related concerns.
What AMT changes have to be considered?
The government has instituted a refundable credit, which can help some taxpayers. It used to be called nonrefundable,
which meant taxpayers could only get the
credit to the extent they weren’t in AMT.
Now, even if taxpayers are in AMT, they
may qualify for the credit. This rule will
be very important to anyone who exercised an incentive stock option (ISO)
more than three years ago.
Can taxpayers do anything at this point to
affect their 2006 tax returns?
One thing is to make IRA contributions. Taxpayers have until April 17 to do
so. The maximum for 2006 is $4,000.
Taxpayers 50 years of age or older can
add a $1,000 ‘catch-up’ contribution.
People who are self-employed also have
until April 17 to make their retirement plan
contribution. However, if they apply for an
extension on their personal return, they
have until Sept. 15 to make their pension
plan contribution and until Oct. 15 to make
their profit-sharing plan contribution.
How about charitable contributions as a
way to affect 2006 tax returns?
It is too late to make them now. Only
those made up to Dec. 31, 2006 can be
claimed on the 2006 return.
What tax-related matters should taxpayers
keep in mind for 2007?
Taxpayers should be aware of the
Pension Protection Act of 2006, which
includes several tax-related implications.
One key point to keep in mind is that the
act allows taxpayers over 70-1/2 years of
age to make tax-free distributions up to
$100,000 from an IRA to a charity.
There are a couple benefits to this
process. First, it helps taxpayers who don’t
itemize their deductions, because they
might not have enough interest or taxes on
their return to exceed the standard deduction threshold. Second, the process may
satisfy the required minimum distribution
qualification for someone.
STEVEN H. GROSS, CPA is a principal with Skoda, Minotti &
Co., a CPA, business and financial advisory firm based in
Mayfield Village. Reach him at [email protected] or
(440) 449-6800.