Credits can help all taxpayers reduce their tax burden
The alternative minimum tax (AMT) is a separate tax system established to keep the wealthiest corporate and individual taxpayers from paying less than their perceived fair share.
If you are subject to AMT, you may benefit from the minimum- tax credit in future years.
Conversely, the earned-income credit is a refundable credit available to low-income individuals who have met certain requirements.
Both are worth considering to save on your tax bill.
Alternative Minimum Tax
So how do you know if you'll be subject to AMT?
Each year you must calculate your tax liability under the regular and AMT tax systems. If your AMT tax liability is greater than your regular tax liability, you must pay AMT.
Calculation of AMT starts with regular taxable income and then adds back items that are not permitted for AMT purposes. Some of the more common AMT triggers include, state and local income taxes, real estate or property taxes, and certain miscellaneous itemized deductions.
There are a few guidelines to follow to help avoid the AMT impact:
» Subject to AMT in the current year? Consider postponing deductible expenses such as real estate or personal property taxes (which aren't deductible for AMT purposes) to next year.
» Subject to AMT in the following year? Consider paying deductible expenses in the current year when you'll be able to benefit from the deduction.
» Always consider the impact that selling assets may have on AMT liability.
» Always consider AMT when doing year-end planning. Knowing where you stand will help you make tax plans to minimize any AMT liability.
While it is often difficult to gauge the effects that AMT, you can protect yourself by doing advanced tax planning and evaluate transactions that may be subject to AMT. Taxpayers should keep track of prior AMT tax liability as they may be able to recoup through minimum tax credits in subsequent years. In general, the amount of minimum tax credit that may be claimed is the difference between your regular tax and tax liability computed under AMT rules in a year when you are not subject to AMT.
The earned-income credit (EIC) is a refundable credit available to certain low-income taxpayers that can help reduce taxes and sometimes mean a refund. And for many who work hard but don't earn a high income, this credit can help them keep more of what they earn.
To claim the credit the taxpayer must meet all of the following conditions:
» Meet certain adjusted gross income thresholds.
» Have at least one qualifying child who lives with you. If there is no qualifying child, you must meet other qualifying conditions.
» You must not be a qualifying child of another taxpayer.
» If you are married, a joint return must be filed.
» You must not claim the foreign earned income or housing exclusion.
» You and your spouse's Social Security number must appear on the return.
The maximum 2007 credit allowed for taxpayers with one qualifying child is $2,853; with two or more qualifying children the credit is $4,716; with no qualifying child the credit is $428.
Some taxpayers find it daunting to calculate this credit. The IRS provides an online program to help filers, the "Earned Income Tax Credit Assistant," via its Web site: www.irs.gov.
Remember to consider these credits when filing your tax return this year.
Hongchay Vixaysack is a senior tax associate in the Honolulu office of Grant Thornton LLP. She can be reached at Hongchay.Vixaysack@gt.com