Alternative Minimum Tax (AMT)

June 28, 2007 at 8:59 am 2 comments

You could be subject to AMT for the first time and pay a higher tax bill than before. According to CNNmoney, about 20 million taxpayers have no idea whether they need to pay quarterly taxes and avoid underpayment penalties. What the IRS is saying in essence, we aren’t paying enough in taxes.

There is an attempt by Congress to shield these 20 million taxpayers for 2007. But this is a short-term fix and is not a priority for politicians who are concentrating primarily on healthcare and immigration issues.

What would this temporary fix do exactly? According to CNNmoney, it would “increase…the amount of income that may be exempted from your AMT calculations. Those income exemption levels haven’t kept pace with the times since the AMT’s inception almost 40 years ago.”

Even if Congress gets to it in time, 5.4 million taxpayers will be subject to AMT. Last year, 4.2 million tax filers paid AMT. And, this group might also be subject to the underpayment penalty “if they don’t do a fairly good job of figuring out what they’ll owe now and pay estimated taxes throughout the year. Based on interest rates for the first two quarters of this year, you might owe between $75 and $80 for every $1,000 of tax underpaid…”

It’s recommended that taxpayers calculate their tax liability twice, once under the regular income tax code and once under the alternative minimum tax. Then, pay the amount that is higher.

“Why can’t you just pay the bill you owe when you file your taxes and not be penalized for underpayment? The way the IRS explains it, the U.S. income tax system is pay-as-you-go. That is, the taxes you owe on your income should be paid as you make the income.”

How do you know if you should be filing estimated taxes?

  1. If you know you will owe at least $1,000 on top of the taxes already withheld, and
  2. If the amount “withheld from your income throughout the year is less than 90 percent of the taxes you owe for 2007 or 100 percent of the taxes you owed in 2006 (110 percent if your adjusted gross income exceeds $150,000)”

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Source: CNNmoney.com

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Entry filed under: Taxes.

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2 Comments Add your own

  • 1. mattdabbs  |  June 28, 2007 at 3:41 pm

    What do you do if you made $10,000 one year and paid no taxes. The next year after graduation you start a new job in May making $4,000/month. You could not have guessed that in January to pay the right amount in quarterlies. Also, once you get the new job and you fill out the estimated tax forms it says that you don’t have to pay quarterlies if you did not pay tax the previous year. Sounds like a mess. That was my situation last year.

    Reply
  • 2. chaka42  |  June 28, 2007 at 5:50 pm

    Yea, it’s difficult to make calculations on numbers you don’t even know yet. We’ll be in a similar situation soon. We want to have another baby and I’d like to stay home for a couple of years. Our income will be quite different.

    Thanks for commenting. 🙂

    Reply

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