Minimum tax, maximum bother
BOSTON — This is a big year for tax changes in the US.
"All the changes seem to hit at once this year," says Karl Baumann, a accountant in Wellesley, Mass.
Easier capital-gains rules, and growing alternative-tax burdens are among the biggest issues for his clients, he says.
After much wrangling in Congress this decade, the furor over capital-gains-taxes has settled.
A 1997 law lowered tax rates profits from the sale of most assets to between 10 and 20 percent, but taxpayers had to own them longer 18 months instead of one year. Even more complicated rules applied, depending what month a stock was bought and sold.
"The biggest change this year is the simplification of Schedule D, capital gains," says Mr. Baumann.
Most assets have to be held for only a year and are taxed at 20 percent for most taxpayers. Those in the 15 percent income-tax bracket pay only 10 percent on most long-term capital gains.
Some assets, however, carry higher rates. Property for which you claim depreciation, such as rental property or home-office space, incurs a 25 percent tax.
And the highest rate goes to collectibles such as art. If you profit from selling them, you'll most likely owe Uncle Sam 28 percent of your gain.
Short-term capital gains - assets held for less than one year and sold at a profit - also get different tax treatment. Such gains are taxed at ordinary income rates, which range from 15 to 39.6 percent depending on your status and income.
Another change: Filers who list capital gains distributions from mutual funds can record them on IRS Schedule D, rather than filing them separately from other capital gains on Schedule B.
Use Schedule B for dividend income.
Alternative minimum tax
This year's added deductions and tax credits bring a nasty surprise for some taxpayers.
Rising wages and a booming stock market are pushing many taxpayers over the line into "alt min" tax, experts say.
The alternative minimum tax was designed to keep wealthy taxpayers from using loopholes that would have let them pay little or no tax," says Mark Luscombe, a tax analyst for CCH Inc. in Riverwoods, Ill.
"The aim," he says, "was to make sure that everyone ... with significant income paid at least some tax."
But it harks back to the days when the maximum tax rate was 70 percent, and there were lots of loopholes, and those days are gone.
It's complicated, and it means that some taxpayers have to calculate taxes in two utterly different ways - then pay the higher of the two amounts.
The alternative minimum tax takes effect when you have a lot of deductions under normal tax rules or large capital gains under "alt min" rules.
"It mostly hits people with two jobs, a big mortgage, and lots of kids - not the truly wealthy," says Baumann.
Under "alt min" rules, for instance, deductions for mortgage interest and personal and dependent exemptions don't count. But exercising a stock option does count as income.
Some things that might trigger alternative minimum tax, according to Mr. Luscombe, include:
*Lots of itemized deductions.
*Lots of personal exemptions.
*Exercising a stock option.
*Taking out a home equity loan or refinancing your mortgage.
*Taking property depreciation deductions.
The only way to know if you're subject to the alternative minimum tax is to figure your taxes both ways, Luscombe says.
The IRS says that the number of Americans paying alternative minimum tax rose from 132,103 in 1990 to 447,898 in 1996.