Important Tax Highlights in 2003

1. Alternative Minimum Tax (AMT) causes major headaches for taxpayers…and it’s not going to get better in the near future! In 2002, only 3% of taxpayers with AGI of $75,000-$100,000 will have to pay the AMT. In 2005, 32% of all taxpayers in that AGI level are expected to owe that tax. By 2010, almost 80% of all taxpayers in that AGI level will pay the AMT.
   1. What is the AMT? The AMT is a different tax system (if one weren’t bad enough) that has its own tax rate, its own set of deductions and its own exemption amounts. The AMT must be computed with the regular tax. To the extent the AMT exceeds the regular tax, the taxpayer has to pay both the regular tax and the AMT excess.
   2. What triggers AMT? High state and local taxes, medical expenses and most miscellaneous itemized deductions
   
   
2. Caution! Be careful about treating owner of a Subchapter S Corporation as an independent contractor. In one case this year, the S corp didn’t pay any salary to its president and sole shareholder. Instead, the company issued its owner a 1099. The owner also took from the company funds as needed. The owner reported the firm’s profits as dividends on his return, and the business didn’t pay payroll taxes. What did the IRS do? It treated the owner as an employee, treated the firm’s profits as its wages and assessed the company back employment taxes, penalties and all!
   1. Alternatives? 1) Pay the owner a reasonable salary; 2) Use an LLC and subject the payments made to the owner to self-employment tax. Ask us how to set up an LLC and whether it makes sense for you.
   2. Remember, the above example would also apply to an owner who takes no salary and just takes profits from the Company
   
   
3. Real Estate Companies take note: Like-kind swaps can be done via the Internet through an intermediary that operates a Web Site where prospective buyers can purchase the assets. Makes tax-deferral even easier!
   
   
4. The Standard mileage rate will DROP to 36 cents from 36.5 cents. The IRS says the drop is due to lower gas prices from July 2001 to June 2002. Apparently, all IRS employees take the bus to work because our gas bills have done nothing but go up in the past year!

FYI: This Acronym spells ACRS. ACRS is short for Accelerated Cost Recovery System and is one method by which us lawyers and accountants depreciate certain assets. It’s not used as much today since it has been replaced by MACRS, or Modified Accelerated Cost Recovery System.