Answers in Accounting and Tax

The simple answer is, no. The proposed "Buffett" rule is in addition to the existing AMT. Under the Buffett rule, all taxpayers with income greater the $1,000,000 per year must pay a minimum 30% federal tax rate. This means that they will only be eligible to take deductions up to the 30% threshhold.

While the Buffett rule is not a replacement for the AMT (which affects taxpayers with incomes substantially lower than $1MM), it is similar in theory to the the AMT. The AMT, or Alternative Minimum Tax, calculates a minimum tax rate by backing out certain deductions for high income earners. Well, originally the AMT affected only high income earners, but over time as Congress has failed to increase the minimum income levels with the rate of inflation, the AMT has begun to kick-in for earners we might consider "middle class".

What I find most interesting about the so-called "Buffett rule" is that it applies to ordinary income above $1MM a year. Most very wealthy Americans have the abiliy to reduce their reported ordinary income in any given tax year. Capital gains from investments accounts, as well as many forms of interest and dividend income, are not calculated as ORDINARY INCOME for tax purposes. It is very likely that many wealthy American taxpayers will find ways to shift their income away from ordinary income and below the $1MM threshhold, avoiding the Buffett rule altogether.

D -

The proper method would be to have communicate with ING and MMLI the error, and request of ING that they reverse the rollover to the extent of the error ($1,700+). After ING reverses the transfer in this amount, then MMLI would disburse to you the excess amount.

It involves a bit of effort on your part, or on the part of your financial advisor, presuming that you may be working with one. Regardless, it is best that it be corrected now to avoid complications down the road.

Best Regards,

Mark A. Trewitt, CLU, ChFC, AEP, CFP

Plans fail for lack of counsel, but with many advisers they succeed. Proverbs 15:22, NASB

Dorinda,

Recently, I found the following on the IRS website for another client;

How long should I keep records?

The length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years. You file a fraudulent return; keep records indefinitely. You do not file a return; keep records indefinitely. You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later. The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to assets? Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

What should I do with my records for nontax purposes? When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.

You may give up to the annual exclusion amount ($13,000 in 2012) to any number of people every year, without facing any gift taxes. Recipients never owe income tax on the gifts. So, you could give up to $13,000 to your daughter and $13,000 to your son-in-law in 2012 with no one owing gift tax. Your wife may also give $13,000 each to your daughter and son-in-law, so, you could technically give them up to $52,000 without triggering gift tax. So, the general rule is: $13,000 per year, per spouse, per person!

In addition to the annual gift amount, your can give a total of up to $5 million starting in 2012 in your lifetime before you start owing the gift tax.

Titus, The general rule with gifting is $13,000 per year per person. I would recommend discussing this with you accountant but you should be able to gift a total of $52,000 to your daughter and son-in-law. This is because you and your wife can each gift $13,000 to each person, adding up to $52,000. Again, speak with an accountant to be sure there are no other variables that will change this for you.

Unfortunately after you deal with the creditors the tax man shows up. The IRS does consider forgiven debt taxable income. And every lender who agrees to accept more than $600 less than you originally owed them are required to report it to the IRS by filing the 1099C.

A tax deduction is an amount that reduces your taxable income, whereas a tax credit reduces your amount of tax owed.

To illustrate, assume that you make $50,000 and are in a 20% tax bracket. A $2,000 deduction would reduce your taxable income to $48,000, and you would owe $9,600 in tax. A $2,000 tax credit would reduce your tax bill dollar for dollar, so your tax would be $8,000 ($50k x 20% less $2,000). In the real world, there are phase-outs, exclusions, and other provisions that can make it extremely difficult to calculate the true value of a credit or a deduction, unless you have tax software or are working with a qualified tax preparer who has tax software.

A tax deduction is an expense or an amount of money which lowers your taxable income. It is subtracted "off-the-top" from the amount of money you made throughout the year, your gross income. Once all deductions are subtracted, this amount is known as your adjusted gross income, or AGI. The standard or itemized deductions are subtracted from the AGI, yielding your taxable income. This is the number which determines the amount of tax that you owe. A tax deduction is something that reduces the overall amount of taxable income you have and will reduce the amount you have to pay.

Tax credits, on the other hand, are dollar-for-dollar reductions which are subtracted from your tax liability. Let’s say, for instance, that you qualify for a $100 tax credit. The government is, in essence, saying to you “We are giving you credit for having already paid $100 in tax." Therefore, $100 is subtracted directly from the amount of tax that you owe. A tax credit will put money in your pocket. This type of incentive will reduce the amount of tax owed by an individual to the federal government.

The best strategy when figuring your tax bill is to gather all of the information that you can about which credits and deductions you may be eligible for. Maximize both. And don’t overlook any state-specific deductions and credits where you live.

The best advice is for any individual to talk to a CPA or professional tax preparer to make sure that you qualify.

Jack - A 1031 exchange is typically used by someone who wishes to dispose of appreciated real estate that they own. By exchanging the appreciated property for other real estate (typically income-producing property) in a "like kind" exchange, the seller can defer realization of capital gains. This somewhat arcane provision of the tax code would not appear to be applicable to your situation, since you are a cash buyer.

Depending on how much money you intend to invest, you may want to consider investing in publicly- traded real estate investment trusts (REITs) instead of holding real property. You would get the benefit of professional management, diversification, liquidity, and asset protection. Although the capitalization rates (the net return on your capital investment) of REITs may be lower than some direct investments, the risk is usually less too.

You may find it useful to consult with a fee-only advisor to ensure that you have considered all of the risks and costs associated with a direct investment in real estate, compared to more liquid alternatives. Feel free to comment back with additional questions or thoughts.

A standard deduction is exactly that: a standard amount that is available to everyone, regardless of specific deductions that may be available to you. In general, someone who does not have much in the way of itemized deductions (home mortgage interest, state and local income taxes, property tax, charitable deductions, etc.) can simplify their tax return by taking a standard deduction. Itemizing involves more work, but it can reduce your overall tax bill.

What a nice wedding gift. There are several ways to handle this. Edward and Paul both pointed out your options within the annual gift tax exclusion limits.

Another technique if you wish to make a gift greater than $52,000: make a gift of $52,000 in year one, and make a loan of the balance of the amount you wish to provide as a down payment. Then "gift" the principal and interest (up to $52,000 each year) due in the following years until the loan is retired. You will most likely owe tax on the interest amount - check with your tax advisor - but with rates so low the loan could be structured so as to not create a significant additional liability for you, and still be at a market rate. This technique would preserve your lifetime credit.

If estate planning is not a concern --- your estate is less than $5 million ($10 million with your spouse)--- then you might elect to utilize a portion of your lifetime credit, although this would require some additional paper work and record keeping, and could present a problem if the estate tax exclusion limit reverts to a lower limit in the future. Good luck and congratulations to your daughter and to you and your wife!

The annual exclusion amount is $13,000 per person. So, in your case, you and your wife may gift up to $13,000 each (total of $26,000) to any person. (It's unlimited to your own spouse.) If you each gift $13,000 to both your daughter and her future husband, that's a total of $52,000 ($13,000 x 2 x 2). This isn't taxable to the recipient or to you. And you don't have to file gift tax returns if your total gifts to these people do not exceed these limits this year. If that's not enough, you may gift more and it still isn't taxable. If you need to gift more than that, make sure you consult your CPA and estate planning attorney about how to do it. Be aware that current gifting and estate tax laws are set to expire on 12/31/2012 unless Congress does something to extend them or amend them before then.