Alternative Minimum Tax and Federal Income Tax Withholding Changes

How are we supposed to keep up with all the tax code changes?  That’s a question a reader emailed in after reading about the First Time Home Buyer Credit and other tax deduction changes we covered the last two days.

It’s certainly not an easy task, which is why a whole army of tax prep software, tax prep services, and tax attorneys exist to help us file our taxes each year. If you are using a program like Turbo Tax or some other tax software, you can install the latest updates when it prompts you to download them. If you’re in the middle of working on your tax return make sure you have your current return backed up before you update your software.

If you’re hiring someone else to prepare your taxes, include that as one of the questions you ask when screening for the right company or accountant to hire.  Ask what training and tools they use to keep up to date on the latest tax code changes.

Here are a few more tax changes for 2008 and one change for 2009 regarding federal income tax withholding. 

AMT Exemptions

For 2008, the exemptions on the alternative minimum tax (AMT) are $46,200 for single taxpayers and heads of households, $69,950 for married couples filing joint returns, and $34,975 for married couples filing separately. Unless Congress steps in, the exemption levels will drop to $45,000 for married filing jointly, $33,750 for singles and heads of household, and $22,500 for married couples filing separately.

Parking & Transit Passes

Employees won’t be taxed on up to $220 a month of employer-paid parking, up $5 per month from 2007. The cap on tax-free transit passes their employers can give workers rises to $115 a month, up $5 a month from 2007.

IRA Withdrawals & Donations

For 2009 only, you can choose not to take your Required Minimum Withdrawal from qualified plans or IRAs. This applies whether 2009 is your first year, or you have been withdrawing for a while. It does not apply if you postponed your 2008 First Required Minimum Distribution to the first quarter of 2009.

For 2008 and 2009, IRA investors age 70½ and older can donate up to $100,000 of their IRAs to charity without having to report the withdrawal as income.

Federal Income Tax Withholding 

The American Recovery and Reinvestment Act of 2009 (the Stimulus Plan) passed last month includes a provision for the reduction of Federal Income Tax withholding for many employees during years 2009 and 2010. Called the “Making Work Pay,” tax credit, it includes a 6.2 percent reduction of Federal Income Tax withholding.

If you qualify for this credit you should see a reduction in your federal income withholding beginning this month or next. The IRS site cautions that:

“Individuals and couples with multiple jobs may want to submit revised Form W-4 forms to ensure enough withholding is held to cover the tax liability for the combined income.  Publication 919 provides additional guidance for tax withholding.”

Taxpayers won’t have a check mailed to them from the IRS like last year’s economic stimulus check, instead the change should show up in your paycheck says IRS Commissioner Doug Shulman:

“Since employers and payroll companies will handle this change, people typically won’t need to take any additional action. The IRS will continue working to implement this and other provisions of the new law as quickly as possible.”

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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