No one like taxes. And paying standard income tax is bad enough. But, as MarketWatch recently pointed out, if you fall into particular categories of taxpayers, you may be ambushed by other taxes that surprise you. Knowing what these taxes are is the first step to making sure you’re prepared to deal with them.
The Alternative Minimum Tax (AMT)
The AMT is a separate tax system that applies to some taxpayers. It hits certain types of income, and disallows certain deductions. The maximum AMT rate is 28% rather than the 39.6% that would otherwise apply to these taxpayers under the regular tax system.
The AMT was designed to ensure that the rich, who benefit from myriad federal tax breaks, still pay their fair share of taxes. However, the rules weren’t written very well, and the AMT usually captures more upper-middle-income taxpayers than the truly rich. It’s a problem for upper-middle-income folks because they may have enough regular tax deductions to pay an average regular tax rate lower than the AMT rate, but because they’re forced to take the AMT, they pay the AMT rate.
Here are a few factors that increase your chances of being hit by the AMT:
- Your income is $250,000 or more.
- You have a lot of deductions for state and federal income, as well as property taxes under the regular tax rules.
- You have a spouse and several kids (four or more dependent deductions).
- You took an in-the-money incentive stock option (ISO).
- You have a significant deduction for home equity mortgage interest.
- You have several write-offs for itemized deduction items.
Social Security Tax and Self-Employment Tax
If you’re an employee, you’ve probably noticed that 6.2% of your wages is taken out in a Social Security Tax, up to the annual wage ceiling. Your employer also pays 6.2%. If you’re self-employed or a a partner in a corporation or an LLC, you pay the entire 12.4% yourself.
Tax on Social Security Benefits
Even though you paid Social Security tax on your income as you were earning it, 50%-85% of your Social Security benefits will be hit with federal income tax. Many people are taken by surprise at the amount of taxes they owe on Social Security benefits, particularly because it seems like double taxation. But it’s reality.
Paying taxes is never fun, but planning ahead can make it a little easier. If you’d like to talk through your tax situation, or if you have questions, feel free to give me a call at (864) 836-3136 and we’ll set up an appointment.