Mark Twain said, “What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin“ and Barry Goldwater reflected, “The income tax created more criminals than any other single act of government.“ Einstein and Churchill had their own lowly views on the topic. While we may chuckle and agree with the sentiments of these famous gentlemen, we can neither run from nor ignore the unsavory topic.
Perhaps more so than ever, the many facets of the U.S. tax system are a tough pill to swallow. For decades taxpayers have been grousing about the Alternative Minimum Tax (AMT). And while AMT remains an important consideration for understanding your income-tax liability, there is now a longer list of things to keep in mind.
Let’s take inventory of the current state of affairs — the regular tax along with new tax brackets, the alternative minimum tax, and the net investment-income tax. Each holds a myriad of details. Read on for a primer on what each may mean to you.
The regular tax now has seven brackets ranging from 10 percent to a maximum of 39.6 percent. Essentially, this means both a higher maximum rate as well as numerous increments to consider. Many taxpayers in the lowest brackets are living at roughly the poverty level. Other taxpayers are impacted by both tax bracket as well as personal exemption phase out and limitations on itemized deductions. The impact will be felt by individuals with adjusted gross income as low as $150,000 for married taxpayers filing separately. Those filing single will see the effect at $250,000 and the threshold is $300,000 for those married filing jointly.
AMT consideration begins at modest income levels and includes various phase-outs, add backs and limitations as well as interplay with maximum capital-gains rates in certain situations. Suffice to say, complications abound when it comes to AMT.
As for capital-gains rates, there are three to consider (ranging from 0 percent to 20 percent) plus special rates for depreciation recapture and gain on collectibles.
The highly publicized net investment-income tax is a boot in the pants not just for individuals with net investment income, but for taxpayers with modified adjusted gross income in excess of $250,000 for married taxpayers filing jointly ($125,000 if filing separate) and $200,000 for other taxpayers. Many individuals are surprised when they see the impact of the tax even though they have little or no gross investment income. On the positive side of the equation is the allowability of certain deductions from gross investment income including investment interest expense and certain investment-related fees.
While it is important to understand how your current tax liability is being calculated, a forward-looking perspective is critical in terms of timing of income and deductions. Did you know, for example, that a ROTH distribution does not increase either net investment income or modified adjusted gross income but distributions from traditional IRAs do increase modified adjusted gross income? Clearly, as you work to maximize what you keep after taxes, future tax brackets are extremely important as is the type of income.
All this consideration requires a bit of diligent homework. What is a taxpayer to do? Consult with your CPA to get a clear picture of how all the details apply to your tax situation now, and into the future.
Gail Kinsella is a partner in the accounting firm of Testone, Marshall & Discenza, LLP in Syracuse. Contact Kinsella at firstname.lastname@example.org