Tad Borek wrote:

- quote -

Oh, raspberries. You're just manipulating his taxable income. These
are all voluntary actions on his part. He could just as easily adjust
these items to favor a sell-immediate-buy strategy as the other way around.

-Will

william dot trice at ngc dot com

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"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

Yes, it is the default number if Congress fails to act each
year. I thought the way the point ended up being presented
was somewhat unclear, as though the actual AMT exclusion
suddenly jumped from $45k to $66,250. It did not.

Re another AMT patch being passed:
- quote -

The vote on the latest patch was Senate 88-5 and House
352-64. This is with a Congress that is Democratic
(narrowly) and so, one would think, leans towards increasing
tax revenues. From my reading and with the current tax code
(knock on wood), the number of people potentially ensnared
each year by leaving the $45k figure alone is too
overwhelming for the typical member of Congress to accept.

As you know, the AMT is controversial, with much pressure on
to reduce the number snared by it. Senator McCain among
others wants to eliminate it altogether. (Not faulting him;
just trying to point out that far more seem to either oppose
it or want it indexed more to inflation than those who want
it to stay at $45k.) The trend for several years now is for
it to rise or stay the same as the previous year.

Just trying to balance the tenor of your posts with a
different viewpoint, one I think is supported by the numbers
in a few ways, before anyone goes to a lot of extra effort
to re-arrange their financial plans. I could be missing
something, but so far I have doubts jIM is going to face AMT
soon, based on the info he gave us and the recent history of
the AMT.

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Elle wrote:
- quote -

Elle, it's not misleading, it's the current tax code, and almost every
post in this thread has mentioned the patch. My point in using the
current figure is to illustrate both why jIM is currently in AMT, and
why a patch would take him out of it.

It is a good point to address though -- will the patch pass again? Last
year was the first where it seemed possible that it wouldn't. It got
hung up on pay-go and only passed in December because the Democrats
caved on that (too many hedge fund managers are donors I guess).

It seems likely that a lame-duck administration will pass some tax
legislation, but BushCo doesn't exactly love the electorate in the top
AMT states (CA, MA, NY, CT). They've seemed focused on extending the 15%
rates, changing the estate tax, and reinforcing some of the oil/gas tax
preferences. AMT reform might not be high on their list (it wasn't in
2007) so may need to be veto-proof to pass. I think it should, but what
if it doesn't?

Back to jIM - that side business gives you flexibility to do
late-in-year tax planning around AMT, which you can't do with a 401k at
work. If the patch doesn't pass and you end up in AMT you might be able
to defer most of the coaching income into a solo-401k. With a patch,
maybe you prefer the Roth. As long as you have the 401k set up by
12/31/08 you would have both options open, making the choice as late as
4/09.

-Tad

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"TB" <borekfm[at]pacbell.net> wrote
- quote -

I wonder whether that $45,000 figure is somewhat misleading.
To clarify for the thread, every year since 2001 Congress
has issued what is popularly called a "one year patch" to
alter the AMT exemption. For MFJ, the AMT exemption amounts
have been as follows:

2001 = 49,000
2002 = 49,000
2003 = 58,000
2004 = 58,000
2005 = 58,000
2006 = 62,550
2007 = 66,250

If tax law reform ends up being major for any given tax
year, then AMT exemption amount and related parameters could
change radically. But if here is major tax law reform, all
bets are off anyway. Regardless, what we hear most about
these days is not major reform. Instead, we often hear of
how the AMT's parameters need appropriate indexing to
inflation, for one. So I would expect the trend above to
continue.

I think the focus for Jim's case should be more on the
following facts:

1.
He does not owe AMT for this year. How far is he from owing
it? Using the IRS calculator at
http://apps.irs.gov/app/amt2007/index.jsp?ck, MFJ, two kids,
and $28k of deductions (= $20 for
mortgage interest and $8k for state and property taxes), it
seems jIM
would not have to pay the Alternative Minimum tax until his
and his wife's AGI income was north of $240,000.

2.
He expects his income to drop next year, due to a change in
his wife's work status. (I am sorry, jIM.)

Congress prepares and passes into law the aforementioned
patches with a view of keeping X taxpayers paying the AMT.
If jIM's income does not do anything extraordinary, I would
expect he would remain out of the AMT zone next year.
Besides, with enough experimenting with AMT figures, and
assuming no radical change in circumstances, far more than
anything else what will be key to whether jIM owes the AMT
is taxes paid to state and local entities (be they income,
real estate, sales, property, or other state and local
taxes). If he does not expect these to change much, then I
would not worry about the AMT.

As always, a second check or more of the above is welcome.

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jIM wrote:

- quote -

You got it. And if you go over, a bit of IRA deposit to get back in
line. It's simpler than it sounds, but doe smean some homework/effort in
November.

- quote -

Well, that's my reward here, bring up some approaches that aren't too
common or well known. All I ask in return is when you finish your tax
return you just say "hey honey, Joe saved us $xxx."
JOE

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On Feb 14, 2:38*pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

So I assume you suggest (for tax planning purposes) to get the
paystubs, mortgage statements and similar around Dec 5, plug into TT,
and see where things sit tax wise. If it looks like I have room to do
a Roth conversion, then do a partial conversion with my rollover.


- quote -

Did not think of this. 72(t) is a commitment, where as a Roth deposit
is optional. I like flexibility.

thx

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jIM wrote:

- quote -

TurboTax come out in November. You'll be very close to knowing where you
stand. I say convert to that level, and if you go over, use deductible
IRA to go back under in March.


- quote -

This is just my avoidance of things that can get more complex. 15 years
hence you will have money in both places. You will be able to take Roth
money out with no year to year need to track minimum withdrawals. You
then use the IRA to convert to Roth, some early in the year, the rest in
December to top off bracket.
This is my special trademarked strategy for avoiding the need for 72t.
If in the second year, you get an inheritance or have a bag of money
fall on you, you don't have to continue the withdrawals. 72t is a
commitment.

JOE

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- quote -

can I do a conversion in February for the prior tax year? If NO, then
how do I figure out in December what the top of my tax bracket is?

Feb of 09 I am doing 2008 taxes. Can I convert some of my rollover
(no taxes paid on it yet) to a Roth for 2008 tax return?

- quote -


My plan was this:
72(t) enough to pay mortgage. My paycheck currently covers mortgage
payement and contributions to 401ks, savings accounts and IRAs. We
could more or less live off my wife's paycheck if mortgage was paid
from other funds.

Then convert a portion of the account the 72(t) was made from to a
Roth (capping out tax bracket).

More than likely this 72(t) thing would be from age 50-59.5 (that's
the rule -right?-withdraws must be taken for 5 years or until age
59.5). At age 59.5, most assets would be in the Roth.

- quote -


huge help, taxes are not my strong suit by any means.

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jIM wrote:

- quote -

The above is how I would approach it.

- quote -

I'd convert enough each year to "top off" the 15% bracket but not go
higher. Keep in mind - if you have post-tax (non-deducted) IRA money,
you have to pro-rate the conversion, you can't choose all pre-tax.

- quote -

Well, the Roth can be used for the early withdrawals, so that may help.
You may find the paperwork easier to take a Roth withdrawal, and covert
the amount you intended to 72t. Think about that.

- quote -

Hmmm, I am not 100%, but I think it's a 2 step process, recharacterize,
then do the IRA you want.

I hope this continues to help.
JOE

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On Feb 13, 4:51*pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -


Joe good call.

"married filing jointly or
qualifying widow(er) $83,000 or less a full deduction.
more than $83,000
but less than $103,000 a partial deduction.
$103,000 or more no deduction. "

So the question changes to

Roth or deductable?

If in 15% bracket, Roth makes sense (because withdraws will probably
be in 25% bracket).
If in AMT territory, deducatable IRA makes sense
If in 25% bracket, deductable IRA should be considered (and convert to
Roth if I am ever in 15% tax bracket again).

Then the next question is
How to determine how much traditional/rollover IRA I would want to
convert to a Roth? I think if this is on the table, would I want the
deductable IRA not commingled with the rollover for one reason or
another?

With the planning issue of I want some assets to 72(t) in about 18
years (early retirement) kept in mind.

And an aside question- can Roth contributions be recharatorized to a
DEDUCTABLE ira contribution? If I run my taxes in Feb of 09 (with 5k
of Roth contributions from Jan-Aug 08), and find the AMT nightmare is
real, can I file a form with T Rowe Price to convert to a deductable
IRA and redo the tax return for 2008 FY in Feb of 09?

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jIM wrote:
- quote -

Say a tax return has 100k in salary, 20k mortgage interest, 8k state
taxes, and you're married w/2 kids. Nothing else on it. Law says
essentially "compute regular tax and AMT, pay whichever is higher."

Regular tax: take 100k, deduct 4 exemptions [at] $3500 = 14k, and 28k in
itemized deductions, leaving 58k in taxable income. Tax is ~$7900.

AMT: take 100k, deduct 20k mortgage interest, and the AMT exemption of
$45,000 (for MFJ), leaving 35k in taxable income (no deduction for state
taxes, no added exemptions for 2 kids). The AMT tax rate, at this income
level, is a flat 26%, so tax is .26 x 35k = $9100. That's higher than
$7900 so you'll see the $1200 difference added to your return for AMT.

The "AMT patches" increase that $45,000 exemption. Last year it was
raised to $66,250 (MFJ). With that patch, in the example above, AMTI is
100 - 20 - 66.25 = 13,750 and at 26% the tax is much lower than $7900 so
you pay the regular tax of $7900.

You can see why it's hard to say why someone's in AMT. It's a
combination of things...here it's having 4 exemptions, and state taxes
as itemized deductions, plus that low $45k AMT exemption level. And the
variations that can get you into AMT get much more complex as you add in
different types & levels of income and deductions. Huge mess!

-Tad

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jIM wrote:


- quote -


- quote -

Sleep is good, after June you won't remember what sleep was.
If you are NOT covered by the plan at work, there is no income limit for
IRA deductibility.
If you are covered, the above phaseout applies. And you can use the
rules to make some decisions now for 07, by using the deductible IRA if
you are in AMT land (which I think you're not, but you should see that
pretty easily on the tax summary.)

If your income is going to drop (you are correct - AGI must be under
$100K), and since your exemptions go up, the conversion from any IRAs to
Roth is up for consideration in 08.
JOE

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- quote -


But the lines which state "if covered by a plan at work" should trump
the section you referred to, correct? My understanding is my section
trumps yours. I will re-read that after I get some sleep.

If anything this would help the AMT situation, as we can afford to put
more into 401ks and less into Roths (we have 10k going into Roths
which could be redirected to good 401k plans).

Outside of fact I have made more than half my Roth contributions for
2008 already anyway ($625/month).

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On Feb 13, 5:03*pm, Tad Borek <bore...[at]pacbell.net> wrote:
- quote -

Tad- the detailed post is teaching me how little I know about taxes.
I appreciate the assistance.

Our property taxes are escrowed. I also have more than enough in the
bank to pay them early (12k in emergency fund, property taxes are 5k,
paid 2X a year at 2.5k each).

I am somewhat confused how paying more taxes triggers the amt, but I
don't need to change the tax code, just know how it works.

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On Feb 13, 9:41*pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

property tax is more than 5k.
federal taxes paid were 11k. only owed 8k
state tax was 3k, I believe.

I do not have return in front of me, so feel free to question the
math.

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jIM wrote:
- quote -

Want to clarify this? Is that state income tax? 12K is property tax and
interest? How much for each? Property tax is bad for AMT as is State
income tax, but interest is ok. I don't make the rules, just observe
them.....




- quote -

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jIM wrote:
- quote -

Jim, I think I'll play the lottery today...my guesses were 105k and 28k. =)

That's all I entered really and with that, under current tax law, you
owed ~$1250 in AMT. If the 105k is lowered to around 88k, there's no
more AMT, if you have 4 exemptions. Increased 401k deferrals could do
that if you both have active plans, but that might leave you strapped
for cash which is probably worse than paying some AMT.

But you'd said "20k in mortgage interest" so I split the 28k in
deductions into 20k in interest, 8k in state income + property taxes.
This matters, how your itemized deductions break down...the higher your
state taxes, the higher AMT would be.

Again, if the AMT scheme is changed to that of last year's "patch",
there's no AMT whether you're at 105k or 88k. It's a little early to do
AMT planning for 2008, but something to keep in mind to revisit later in
the year. E.g. if it looks like AMT won't change you might decide to
increase your 401k contributions and skip an 08 Roth IRA contribution.

-Tad

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jIM wrote:

- quote -

I will help.
Since the link is to a page that goes on and on, I'll ask you to scroll
down to " Table 1-2. Effect of Modified AGI 1 on Deduction if You Are
Covered by a Retirement Plan at Work"

It states the $83K-$103K Phaseout.

And confirms my point that the retirement rules are so convoluted, that
otherwise bright people are not able to wade through the mess.
TAD's point on AMT needs to be noted though. I missed that, not
realizing you may very well be in AMT land, welcome to our nightmare.
JOE

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- quote -

I've noticed a fairly steady decline in ETR over the past two decades
since I had a regular career. I attribute this presidental policies.
It didnt make a whole lot of difference whether I live in a state with
a tax or had a mortgage. I believe I've had all combinations of such.
One seminal event was Clinton's restoration of long term capital
gains.
And the second was Bush's phased-in income tax cuts.
Incidentally my ETR fallen from 34% to 28% during this period
for Fed+FICA+State. Fed alone is around 17%.
I dont think this trend will last :-(

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jIM wrote:
- quote -

I think the reasons for AMT in 2008, given your income level, are your 4
exemptions, plus state income tax and property taxes.

You can't change your exemptions, but if you can shift the timing of
state tax payments it can reduce AMT. Not everyone can do that but the
basic idea is shifting payments into non-AMT years. Pay a shortfall in
2007 Ohio income taxes during 2007, for example, instead of when filing
in April 2008. Some people can shift their property tax payments forward
or back in a similar manner. The goal is, reduce the state taxes that
are actually paid (by withholding or by check) during AMT years.

If you increase your 401k contributions enough, you should get your
income below the range where AMT kicks in. For 4 exemptions I think that
should happen somewhere around the $88k level for your net earned income
(roughly: salaries, plus Schedule-C net income, minus 401k contributions
and 1/2 of your Self employment taxes). But it depends on your exact
itemized deductions. And really other things factor into 401k
contribution rates...if you're in AMT you just work under the assumption
that a dollar of deferral saves you 26 cents in federal taxes (even if
you're nominally in the 15% tax bracket).

Again, I want to emphasize that this could all go "poof" with another
AMT relief bill, and that is probably your best hope for 2008. The 2007
AMT exemption levels were more than enough to get you out of it. Maybe
eyeball all this in August-Sept and see if you should shift gears then.
Really the only place you can have much impact is higher 401k deferrals,
for your primary jobs or perhaps for the coaching biz if it produces
enough income.

-Tad

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