Fiducial, an international provider of professional outsourcing services for small businesses and individuals, reported five tax questions that seem to be high on taxpayers' minds this tax season. According to Fiducial, recent tax law changes are creating increased confusion and questions about:
- Whether to opt out of bonus depreciation for new property purchases;
- Who must file amended returns for reporting dividend income;
- Who should claim education tax credits - the parent or child;
- Who must pay the Alternative Minimum Tax; and
- How to maximize losses on the sale of securities.
"With the number of tax law changes, the tax code has become more confusing than ever before," said Andrew Martin, Fiducial's manager of tax services. "The IRS has written and then rewritten new tax rules, leaving the door open to wide-ranging interpretation by accounting professionals and financial institutions."
Fiducial offered some perspectives on why these five topics are generating taxpayer interest:
Bonus Depreciation on New Property Purchases - Take It or Leave It?
Businesses are allowed to take an additional 30 percent in depreciation for new property purchased after September 10, 2001 and before May 4, 2003 and 50 percent for new property purchased between May 5 until September 11, 2004. However, the poor economy has reduced many business owners' income in 2003 -- which means they may be better off claiming these bonus deductions in future years when their income is expected to be higher. For 2003, many are deciding whether to "opt out" of this bonus depreciation, thus negating some of the tax advantages they believed they were getting when they made their purchases.
Revised 1099 Forms - Return to Sender
The tax act of 2003 significantly changed the tax rates applied to certain types of dividend income reported to taxpayers from brokerage firms that generate 1099-DIV forms. These changes, involving certain exceptions and other complicating factors, are causing so much confusion among the firms preparing the 1099 forms that many brokerage houses, mutual fund companies and other firms had to revise and then reissue these forms to their customers. Taxpayers who have already filed their returns based on the 1099-DIV form must amend their returns, while taxpayers who have yet to file must spend additional time making sure that their forms are correct.
Education Tax Credits - For Mom, Dad or Child?
There has been a fair amount of publicity surrounding tax credits available for tuition and fees paid to universities and other institutions of higher education, like the Hope Scholarship Credit and the Lifetime Learning Credit. There are several restrictions on the credits, however, and this is causing confusion about who actually qualifies for the credit. The credits are generally not available for higher-income taxpayers and can only be claimed by the parent if the child is claimed as a dependent on the parent's tax return. Children can claim the credits, but only if they actually pay the tuition or fees, which can be accomplished, Martin says, through gifts from the parents.
To Pay or Not Pay the Alternative Minimum Tax
Originally instituted in the late 1960s as a means of ensuring that high- income people didn't escape paying taxes all together, the federal alternative minimum tax (AMT) now impacts more than three million taxpayers annually -- many of whom would consider themselves middle class. Because inflation was not factored into the AMT when it was created, many Americans who were not intended to pay the tax are doing so today. According to Martin, the main cause is increased exemption amounts and high state income tax deductions. Taxpayers should make sure that their preparers are accurately computing their AMT.
Maximizing Stock Market Losses to Lessen Tax Burden
With the number of taxpayers who suffered stock market losses over the last several years, many are thinking about ways that those losses can help reduce their tax burden. The losses can only be taken, however, if the security was actually sold or is deemed to be worthless.
Also, the losses must first be applied to offset capital gains and then can be applied to offset ordinary income to the maximum amount of $3,000. After that, the loss must be carried forward and used in future years. With the lower tax rates of today, the capital loss offsets are not as valuable against capital gain income as they are against ordinary income, and taxpayers who sold securities as a year-end tax planning strategy are finding that they may have taken losses prematurely.
Those who neglected to monitor the worth of their securities are finding that they have missed out on deductions, as worthless securities can only be taken as a loss in the year of worthlessness.