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Archives for November 2012

Not Patching the AMT Will Affect the Middle Class

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Overview of AMT

The Alternative Minimum Tax (AMT) was created to ensure that high income taxpayers paid a minimum amount of tax each year by limiting certain deductions.  Everyone who files a tax return technically computes her tax liability under the regular tax and under AMT, and pays the higher tax of the two systems.

The purpose of this post is to explain how the AMT will hit many taxpayers who may not consider themselves super-rich if the AMT patch is not extended into 2012.

A very simplified explanation of the AMT is that the AMT begins with regular taxable income and adds back certain deductions.  Taxpayers take this sum and subtract from it the AMT exemption.  The remainder is subject to a 26% or 28% tax bracket.

What is the AMT Patch?

The AMT patch mainly refers to the amount of the AMT exemption.  In 2011, the AMT exemption amount was $74,450 for joint filers and $48,450 for single taxpayers.  If the AMT patch does not get enacted during the fiscal cliff negotiations, the AMT exemption amounts for 2012 will be $45,000 for joint filers and $33,750 for single taxpayers.

How Will Not Passing the AMT Patch Affect Taxpayers?

Michael and Kay are married and file a joint return.  Michael has wages of $50,000 and Kay has wages of $60,000.

They have the following expenses:

  • Property Taxes $8,000
  • State Income Tax $5,000
  • Charity $5,000
  • Mortgage Interest $10,000

If the AMT patch is extended, then Michael and Kay’s tax liability will be:

Regular Tax

Gross Income                                    $110,000

Less:

Property Taxes                 $8,000

State Income Tax             $5,000

Charity                           $5,000

Mortgage Interest           $10,000

Personal Exemptions          $7,400

Total Deductions                              $35,400

Taxable Income                                $74,600

Federal Income Tax                          $10,880

 

 

AMT

Regular Taxable Income                                     $74,600

Add Deductions Disallowed by AMT:

Property Taxes                                 $8,000

State Income Taxes                          $5,000

Personal Exemptions                          $7,400

AMT Income                                                      $95,000

Less: AMT Exemption                                          $74,450

Balance                                                            $20,550

Times 26% AMT Rate                                          $5,343

 

Since regular tax ($10,880) exceeds AMT ($5,343), Michael and Kay are not subject to AMT.  Their total tax for the year is their regular tax of $10,880.

However, if the AMT patch is not extended, Michael and Kay’s AMT will be:

AMT

Regular Taxable Income                                      $74,600

Add Deductions Disallowed by AMT:

Property Taxes                                 $8,000

State Income Taxes                          $5,000

Personal Exemptions                          $7,400

AMT Income                                                      $95,000

Less: AMT Exemption                                          $45,000

Balance                                                            $50,000

Times 26% AMT Rate                                          $13,000

Since Michael and Kay’s AMT of $13,000 exceed their regular tax of $10,880, their AMT liability will be $2,120 ($13,000 AMT less regular tax of $10,880) and their total tax for the year equals their AMT liability of $13,000.

Therefore, a couple that probably doesn’t consider themselves to be super-rich gets hit with a $2,120 AMT bill.

 

If you need help with small business taxes,

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Depreciation Limits on Heavy SUVs

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Since 2003, the Section 179 deduction has exceeded $100,000.  For a brief period of time, business owners could purchase SUVs with a gross vehicle weight rating over 6,000 pounds and write off the full purchase price via the Section 179 deduction.

Example:  It is 2003 and Andy buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since this vehicle’s gross weight rating was over 6,000 pounds, Andy could take a full $60,000 Section 179 deduction for the purchase price of the vehicle.

The party ended on October 22, 2004.  After this date, the Section 179 deduction is limited to $25,000 for SUVs with a gross weight rating between 6,001 and 14,000 pounds.

Example:  It is 2005 and Barney buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  Barney may then claim regular depreciation on the remaining $35,000 purchase price of the Escapade (which will be deducted over the 5 year life of the vehicle).

Depreciation per Year is as Follows:

                Section 179         Regular Depreciation

2005       $25,000                $7,000

2006                                  $11,200

2007                                  $6,720

2008                                  $5,040

2009                                  $5,040

 

The heavy SUV rule applies to Section 179 expense, it does not limit the amount a taxpayer can deduct through bonus depreciation.  Therefore, the heavy SUV rule will not affect the amount a taxpayer can deduct through 50% bonus depreciation for 2012.

Example:  It is 2012 and Opie buys a $60,000 Cadillac Escapade that he uses 100% for business.  Since the vehicle’s gross weight rating is between 6,001 and 14,000 pounds, the Section 179 deduction is limited to $25,000.  However, Opie may still claim the full amount of 50% bonus depreciation on the vehicle.   

Depreciation per Year is as Follows:

                Section 179         50% Bonus Depreciation               Regular Depreciation

2012       $25,000                $17,500                                      $3,500

2013                                                                                  $5,600

2014                                                                                  $3,360

2015                                                                                  $2,520

2016                                                                                  $2,520

As you can see, 50% bonus depreciation helps taxpayers accelerate the timing of their depreciation deductions.

The reduced Section 179 deduction applies only to vehicles that are SUVs.  The following types of vehicles are not considered SUVs and are allowed a full Section 179 deduction ($139,000 in 2012).

  • Vehicles designed to fit more than nine passengers behind the driver’s seat—for example, a shuttle van
  • Vehicles equipped with a cargo area that is not readily accessible directly from the passenger compartment and that is at least six feet in length.  Many pickups with full-size cargo beds will qualify for this exception
  • Vehicles with (1) and integral enclosure that fully encloses the driver’s compartment and load carrying device, (2) no seating behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield.  Many delivery vans will qualify for this exception

The IRS’ concern was that luxury SUVs which are purchased primarily for personal reasons were being rapidly depreciated.  The three exceptions above are for vehicles that are essentially purely business vehicles that have no personal pleasure element.

If you need help with small business taxes,

sign up for a FREE tax consultation.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230

 

Depreciation Limits for Business Cars

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The luxury auto limitations were developed because the IRS believed that there was abuse when taxpayers claimed depreciation deductions for business cars.  The concern is that business owners claim excessive depreciation deductions for luxury vehicles which have a personal enjoyment component to them.

Example:  Maximilian buys a new $50,000 Cadillac sedan that he uses 100% for business.  Automobiles are five year property and Maximilian would claim depreciation in the following amounts:

Year 1:                          $10,000

Year 2:                          $16,000

Year 3:                          $9,600

Year 4:                          $7,200

Year 5:                          $7,200

Total Depreciation:          $50,000

To combat this perceived abuse, the luxury auto limitations were enacted.  The luxury auto limit applies to passenger vehicles that have a gross unloaded vehicle weight of 6,000 pounds or less and are manufactured primarily for use on public roads.  Very few cars will exceed this weight limit and will therefore be subject to the luxury auto limitations.  When a vehicle meets this definition, it is subject to the following annual depreciation limits:

Year 1:                                                                  $3,160

Year 2:                                                                  $5,100

Year 3:                                                                  $3,050

Year 4 and each year thereafter:                               $1,875

Based on these depreciation limits, it would take Maximilian over 20 years to fully depreciate his car.

Also, based on the first year depreciation limit of $3,160, the IRS believes that cars costing over $15,800 are luxury autos ($3,160 divided by 20% first year depreciation rate).

Interaction with 50% Bonus Depreciation

In 2012, taxpayers are allowed to immediately depreciate 50% of qualifying assets.  In the context of this post, new (not used) vehicles generally qualify as qualifying assets.   Vehicles qualifying for bonus depreciation are allowed an additional $8,000 of depreciation in the first year.

In the above example, Maximilian would be able to deduct $11,160 in the first year ($3,160 plus $8,000 bonus depreciation).  Because of the additional first year depreciation, it would take a fewer number of years to fully depreciate the vehicle.

Less than 100% Business Use

When a vehicle is not exclusively used for business, the annual depreciation amounts must be reduced by the percentage that the auto is used for personal reasons.

Example:  Maximilian uses his car 80% for business and 20% for personal uses.  His annual depreciation expenses are as follows:

Year 1:                                                                  $8,928 ($11,160*80%)

Year 2:                                                                  $4,080 ($5,100*80%)

Year 3:                                                                  $2,440 ($3,050*80%)

Year 4 and each year thereafter:                                $1,500 ($1,875*80%)

It will take Maximilian roughly 17 years to fully depreciate the 80% of his car that is depreciable.

Special-Use Vehicles

The IRS’ main concern with luxury autos is that a business owner will gain personal satisfaction from driving his expensive business car.  There are certain vehicles that, because of their special uses, do not provide much personal satisfaction to the driver.  These vehicles include taxicabs, hearses, ambulances, and certain specially modified trucks and vans (that are designed in a way that makes non-business use unlikely).  These vehicles are not subject to the annual depreciation limits regardless of their weight.

If you need help with small business taxes,

sign up for a FREE tax consultation.

Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230