Tax planning is an important tool that some CPA’s use. Although April 16th (17th for those states that celebrate Patriot’s Day (Massachusetts and Maine) is approximately 4 and 1/2 months away, estimating your 2006 income taxes can save money and cash flow or give you as much time as possible before taxes are due.
On several instances calculations can determine that there is enough tax payments made during the first 3 quarterly estimate payments to cover your entire tax. When this occurs you don’t have to make the 4th estimated tax payment. This helps your cash flow.
Sometimes the calculation shows that you will owe alot of money, the earlier you know how much you will owe the longer you will have time to put the funds together.
Although the 4th Quarterly estimated tax payments are due by January 15th, it may save Federal income taxes to prepay your state estimated tax payment, either the original amount or an adjusted amount based on the tax planning. The reason It may save income tax is two-fold. First you must itemize deductions in preparing your tax return. Second, there is an add on tax called the Alternative Minimum Tax (AMT) that disallows taxes and miscellaneous itemized deductions as well as having additional adjustments that have the potential to create the add on AMT tax.
It is important to note that each year more and more people become subjected to the AMT tax.
The AMT was originally added to the Internal Revenue Code in 1969, going into effect in 1970. The AMT was to create a tax on income even when the regular income tax was either $0.00 or very low. It was originally set up to make certain that the wealthy paid some taxes.
In a brief issued by the Congressional Budget Office (No. 4, April 15, 2004), the conclusion was clear:
- Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow.