Tax Alert

We understand exchanges and maintain one of the largest information databases to help you. Whether you’re in need of our services as your Qualified Intermediary, or just have questions, please call us (1-800-570-1031). Talk with us. Or visit our home page at http://www.realtyexchanges.com

==In This Issue===

è Announcement

è Special Report from Jim MaxwellLook Out for the Alternative Minimum Tax

è Announcement
We are very proud that Rich's and Jim's new exchange book, Federal Taxation of Real Estate Exchanges, was one of the featured publications at the Los Angeles Times Annual Festival of Books held at the UCLA campus in Los Angeles on April 24th and 25th, 2004. This annual festival is attended by more than 15,000 people. You can look over a detailed table of topics covered in the book at  New 1031 Tax Book  

è Special Report from Jim MaxwellLook Out for the Alternative Minimum Tax  

A lot of  income tax news has been focused on an old nemesis — the Alternative Minimum Tax (AMT). It’s in newspapers, business magazines and on television. This dangerous monster was introduced into the tax code almost forty years ago and has gone unnoticed by many—until now. It’s another tax system imposed on top of your “regular” tax. The calculation is one of the most convoluted and difficult ways to re-figure and extract more federal income tax out of your pocket.

Because the tax was never indexed for inflation, the income threshold—the point when taxable income passes into the area where it is subject to the AMT—has in effect been lowered and ambushing many an unsuspecting middle-bracket and higher income taxpayer.

To bring you up to speed, here is an edited and updated reprint of an award-winning article written many years ago by our Senior Tax Consultant, Rich Robinson. It's not meant to explain all the provisions of the AMT but to alert you to its presence.

In all recorded history, the creative genius of mankind has never been matched by the ingenuity of taxpayers in inventing techniques for avoiding the payment of taxes. Loopholes are discovered and exploited. New strategies are designed and promoted. Congress responds with complicated tax laws in an attempt to shut them down. The Alternative Minimum Tax (AMT) is a result of this never-ending battle.

The story of the AMT goes back to the late 60's. The media started the uproar by reporting that many taxpayers with income running into millions of dollars were paying little or no income tax. These taxpayers were able to reduce taxable income by astute tax planning and by taking advantage of various deductions in the tax laws. These deductions and tactics were promptly classified as "loopholes" and came under heavy attack. Bowing to back home pressure, Congress attempted to close them. They failed. Instead, they came up with a diabolic new tax that has gone down in history as one of the greatest sleight-of-hand methods for extracting money from the American taxpayer. I'll bet the scenario went something like this:

Scene opens in a smoke-filled congressional room in Washington, DC. Present are several Senators and Representatives discussing what to do about all those rich people making lots of money but paying no income tax.

"We've got to close those damn loopholes," Henry said.

"How?" asked Bob, "All the deductions people are using to cut their taxes are legal. If we repeal the deductions it will hit everybody, including millions of taxpayers who are paying taxes. Take depreciation, it's a legitimate business expense. We can’t take away capital gains treatment or depreciation to get to a few without hurting every business in the country. The same goes for contributions and all those other deductions used to escape paying taxes. Try it and I guarantee not one person in this room will ever get re-elected."

"Well," Henry said, "we've got to come up with something and for the life of me, I don't know what."

"I have an idea," said a soft voice. Everyone turned to see who had spoken. It was Sally, a newcomer only recently elected and an unknown to this group of old time politicians.

Sally continued, "If we can't repeal the deductions these people are taking, why don't we tax them on some of those deductions? You know, if they take more than we think is right."

"We don't tax deductions, we tax income," Bob said impatiently. "Where in the world did you go to school?"

Henry stubbed his cigarette in the ashtray and stood up. Rubbing his chin gently, he walked around the table to where Sally was sitting. "Just a minute, I think Sally might have something here. Let's hear more."

Sally explained. She believed a law could be written requiring the taxpayer to add up all the loophole deductions used on his return. Then a flat-rate tax would be imposed on this total. If this tax were higher than the taxpayer's regular tax, he would have to pay the higher amount. A floor or threshold would be provided to exclude the "little" taxpayers. "I know it would work - it's the easy way to tax those fat cats and it would sure make us look good back home."

No one spoke for several moments.  Then everyone looked up at Henry. The gleam in his eyes told you the old political fox was on to something big. "Great Scot, young lady. Do you realize you have discovered a new concept in American taxation? Just think, with your idea we can not only tax them on their income, we can tax them on their deductions too!"

"Just a minute, Henry," Bob said, "Before you get all excited about this, you had better stop and think. You can't tax deductions. Everybody thinks their kids are deductions. And besides, there's no way you are going to sell another "soak the rich" income tax to the public. What in the world would you call it?"

Henry sat down, reached into his case and took out an old, dog- eared book. As he checked several items in the book, his smile broadened into a wide grin. "We'll call it a minimum tax. Everyone believes people who make a lot of money should pay some tax - you know, a minimum tax. Why, the word minimum alone makes it sound so small and insignificant - they'll never know what hit them."

"I love it! I love it!” exclaimed Bob, "It's so American for everybody to pay a minimum tax — after all, it's only their fair share. But how in the world are you going to sell the idea of taxing their deductions?"

"That's a tough one," admitted Henry. "Even my copy of 'The Politician's Doublespeak Handbook' doesn't have the answer to that." He looked around the room for help. No one spoke for several minutes.

And then it happened. "I've got it," said Sally, "We want to tax certain deductions - the ones they are using to get out of paying tax. In other words, their favorite deductions. Another word for favorite is preference. We'll tax their preferences - their favorite deductions. It's perfect - a minimum tax on preferences." In that moment, the birth of the minimum tax was guaranteed.

Thus was born the Alternative Minimum Tax on preferences - a flat-rate tax designed to extract money from taxpayers whose use of "tax preference" items shields their income from regular tax. Born in the late '60's, AMT has been growing and getting more complicated every year. Its purpose is to ensure no taxpayer with substantial economic income can avoid taxes through the use of deductions, credits, exclusions, deferrals, and other shelters. It does this by taking away the favorable tax treatment for certain items. These Items are treated differently are called adjustments or preferences.

The idea is quite simple: First you figure your regular tax in the regular way. Then you figure your AMT following special rules. Then you compare the two. If your regular tax is higher than your minimum tax, you must pay the higher regular tax. If it's lower, you must pay an amount equal to your minimum tax. That's why it's called the alternative minimum tax.

For more detailed information and explanations, be sure to check with your tax professional. You can also visit http://www.irs.gov/pub/irs-pdf/f6251.pdf for a copy of the IRS form and http://www.irs.gov/pub/irs-pdf/i6251.pdf for a copy of the IRS instructions for figuring the tax.

This Newsletter is reported  by Realty Exchanges, A Qualified Intermediary, as part of our service program to the real estate community. This education service is designed to provide accurate and authoritative information, it is not meant as a substitute for your own CPA, professional tax advisor, or attorney.  Tax planning depends on your individual facts and circumstances. You should always consult with your own tax advisor to determine if the ideas and techniques discussed here apply to your situation.

Copyright 2004~Realty Exchangers, Inc~All Rights Reserved. No copyright credit claimed for material taken from U. S. Government Publications.