Avoiding Year-End Tax Traps


you will owe the higher amount.

When the Gordons filled out both 2002 returns, their income under the AMT was $27,000 higher than their regular income tax after they added back state and local taxes and a $10,000 capital gain.

“One thing we plan to do to avoid the AMT is to pay our state and local taxes in January 2004, which will reduce our itemized deductions,” explains Thomas Gordon. “We also plan to reduce our taxable income for 2003 by delaying some of our billings to our customers until January 2004.”

Anita T. Conner, a CPA and principal with a Philadelphia certified public accounting firm bearing her name, says the following scenarios should signal a red flag as to whether you might have an AMT bill this year:

You’ve had to pay the AMT in a previous year. Chances are you may face it again, unless your financial situation has changed dramatically. For example, your income has decreased due to a job loss.

You have itemized deductions such as medical expenses, state, local, and real estate taxes, and certain mortgage interests. These are added back when calculating the AMT.

You have a capital loss carryover to offset capital gains. Capital loss carryovers are not allowed when configuring the AMT, so you would have to pay tax on this.

You have tax-favored stock options. If your employer has awarded you incentive stock options, you have to treat the excess fair market value of the stock over your cost as income for AMT purposes.

Rebalance Your Portfolio
The end of the year is a good time to look at the mix of your investment portfolios, especially if yours didn’t return at least 10% in 2003, says financial planner and CPA Edward Fulbright of Durham, North Carolina. If you have some holdings that have appreciated significantly, now may be the time to cash in. You also might want to sell a few losers, for poorly performing assets can offset any capital gains you might have. Even without gains, up to $3,000 of investment losses can be used to reduce regular taxable income.

Rebalancing your portfolio before the end of the year is even more critical this year because the capital gains and dividend rates have been reduced to 15% for the four highest tax brackets and to 5% for the two lowest tax brackets. The new lower dividend rate applies to the entire year. The capital gains rate reduction, however, did not go into effect until May 6. Any gains earned prior to May 6 will be taxed at 20% while gains realized after May 6 will be taxed at the lower 15% rate.

“This is really helping a lot of people lower their tax bill,” says Fulbright. “I have seen clients lower [their] tax liability by $3,000 or $4,000 because the dividend tax rate dropped from as high as 38.6% on the federal side to 15%.”

One of those clients is Robert Chapman, a 54-year-old adjunct assistant professor of management and special assistant to the dean of North Carolina Central University’s School


×