Avoid Fiscal Cliff Panic

As you can imagine, I have heard a lot of panic from clients since the election results came in last month.  Some panic is warranted, as most acknowledge that the 2% payroll tax reduction will not be extended, capital gains will likely be increased to 20% or 25% at most, and that tax rates will likely be increased for married couples with AGI over $250k.  However, when it comes to capital gains, panic can actually be very detrimental and cost you much more in taxes than you would think.

Naturally, you would assume accelerating a large capital gains to take advantage of the 15% rate would result in large tax savings, but unfortunately the alternative minimum tax erodes the tax savings if you are a high-income taxpayer.  In fact, most of the time it results in an overall tax rate between 20% and 25%.  Why this happens is very complex and even CPAs get frustrated in fully understanding the alternative minimum tax, but here is the best explanation I could find.  Basically, if a large amount of your income is long-term capital gain income and you are a high-income taxpayer, the AMT tax can kick in and erase the benefit of the 15% rate.  We witnessed this quite a bit back in 2010 when financial advisers worried about the expiration of the 15% rate and advised their clients to sell off their low basis stock.  It sounded like a great idea at the time, but when preparing the tax returns in 2011, many were surprised at how AMT tax erased much of the benefit.  Well, the same thing can happen for tax year 2012 if you give in to panic.

Before you make any big moves on capital gains before year-end, talk to your CPA and and have them run a projection to see what the true impact would be.  It may just be that there is no need to panic.

Year-End Planning for 2008

With a little over a month remaining in 2008, it is important to start year-end planning for tax year 2008 as there are still a number of things you can do to save on taxes and avoid costly mistakes.  

If your income has increased from 2007 or you have some big, one-time gains, it is crucial that you pay 100% of your estimated state tax in the form of a estimates by 12/31/08.  If you have been paying state estimates all year, you will still want to have your CPA estimate your taxable income to see if the 4th quarter estimate needs to be adjusted as estimates are always based on the prior year.  If you are lucky enough to live in Washington or another state without state income tax, you still should watch out-of-state income and keep documentation on sales tax paid on big ticket items.

Why is it so important to pay your 4th quarter state tax estimate by 12/31/08 rather than the 1/15/09 deadline listed on the coupon?

Well, the reason is twofold:

  1. By paying the state tax within the taxable year, you increase your itemized deductions as state income tax is one of the vital itemized deductions if you live in a state with income tax.
  2. You also avoid possible alternative minimum tax (AMT) tax consequences in future years by paying your state tax in the taxable year.  If you have significant income in one year and lower income the next year but you fail to make the 4th quarter state estimate until January (or worse – you pay in April or after with your return), then you could end up with AMT tax in that subsequent year with the lower income as state income tax is a preference item for AMT.


There is a lot to think about for 2008 tax planning, and I hope to cover many of the different opportunities and tax traps in the next few weeks in upcoming posts.  However, talk to your CPA sooner than later – it will could end up saving you a considerable amount tax and a lot of regret.

Possible AMT Patch Battle Complicates Year-End Planning

It is that time of year again…and I am not talking about Christmas shopping or the recent snow showers. No, it is actually time once again for last minute tax planning for 2007 and calculating your 4th quarter estimated tax payments. Well, this year Congress is adding some complication to your planning and calculation…as well as frustrating the IRS and tax software programmers.

If you haven’t been following the latest developments, then you will definitely want to tune in this week as the Senate returns to take up the House Bill H.R. 3996 that would once again “patch” the AMT (alternative minimum tax) problem by raising the AMT exemption for a year so that millions of households are not affected. An AMT patch is usually not a problem for Congress to pass – in fact, that has been the solution for the past couple years. However, this time we have a Democratic lead Congress that reestablished the pay-as-you-go system (PAYGO), and basically the hold up on the patch is a fight over a matter of principle that could end costing many of us some big tax dollars. I don’t really want to get into the politics of this, but basically the Democrats want to have tax offsets to pay for the $50 billion in lost revenue and the Republicans argue that no tax offset is needed because AMT was never intended to tax to the extent it currently is and therefore it really isn’t “lost” revenue. Regardless of where you stand on this, time is running out and the big problem is how it affects your year-end tax planning.

For those of that are required to pay estimated tax payments, this could really affect you. If your income is fairly consistent and you are paying in 100% of the prior year tax liability (110% if your AGI was over $150k), then you don’t have as much to worry about in your year-end planning – although you should still pay attention to the AMT patch developments as it could mean more tax liability due on April 15th, 2008. However, those of you that are not paying in 100% of the prior year liability to safe harbor yourself against penalties will want to be very careful in your year-end tax planning. If a deadlock on the AMT issue prevents passage of a patch bill, then your tax liability for 2007 could higher than you had projected.

I don’t want to make too much out of this as it may become a moot point by the end of the week, but just make sure you keep informed on the issue and be cautious with your 4th quarter estimated tax payment if you are not paying safe harbor amounts. Also, if you have a CPA prepare estimated tax calculations in the next month, please make sure you understand what the numbers are based on. Most CPAs will probably base estimates on the AMT patch being passed, but you might have them calculate the effect on tax without the patch just to make sure you safe for 2007.

To read more about the AMT, please check out the following links:
New York Sun Article
Investors.com Article