California 540 AMT Defination of "miscellaneous itemized

[rbargin]

I used H&R Block TaxCut for preparing my 2006 rerturns, both Federal and CA.

I had an Fed AMT of 5469, which I have no doubt is correct.

After asking me several ?s, TaxCut said I did not owe any CA AMT. Whereas
when I calculated the CA Amt offline using Schedule P manually, I came up
w/owing 226.00.

In drilling down into TaxCut's minisheets, the difference appears to devolve
around what is the appropraite miscellaneous itemized deductions figure to
use :

For miscellaneous itemized deductions (adujsted for difference between Fed
and CA law) TaxCut used the $35,836 whereas line 26 of 1040 Sch A is 41,964.
The difference appears to be $6,108 in "unreimbursed employee expenses". The
remainder of the deduction is attributable to a 37,469 investment loss on an
IRA. Thus:

6108
39
37469
--------------
43616
less 2% AGR
-----------------
41964

Of this TaxCut uses the figure 35,836 for state AMT (CA miscell deduction)
purposes. Does this make sense?

[Lion]

Nondeductible IRA?

I'm not a CA preparer, so will leave that discussion to others, but just a question re your IRA loss: Did you really have a $37,469 basis in your IRA? Was it a Roth or nondeductible Traditional IRA? And, did you distribute all IRAs of that type so you could deduct your loss in that year? (I saw lots of people with low Traditional IRA balances convert them to Roths while low, so taxes would be low, but didn't see many take distributions while balances were low.)

Re your CA AMT question: how do the CA instructions tell you to compute CA AMT? Do you use the number from your federal Schedule A? Or, is that just your starting point, and then you apply CA law to calculate your CA itemized deduction before adding back to get your CA taxable income for CA AMT purposes? (Not at the office where I could lay my hands on a CA booklet, and not enough time to search and read online before I go to see a client.) Some CA preparers will respond, I'm sure....

[Bees Knees]

rbargin

Don’t be offended if nobody answers your question. This is a forum for tax professionals to exchange information with each other. Your post reveals that you are not a tax professional, and that you could be trying to deduct something you are not entitled to deduct (an IRA loss).

When I see an error on a do it yourself return, I immediately lose all confidence in the rest of the return and suspect other major problems. My suggestion to you is to take your tax return to a professional and have the entire return checked for theory accuracy. Any answers you get on this board will be incomplete as we cannot see all the entries you have made on your return.

[rbargin]

I'm not a CA preparer, so will leave that discussion to others, but just a question re your IRA loss: Did you really have a $37,469 basis in your IRA? Was it a Roth or nondeductible Traditional IRA? And, did you distribute all IRAs of that type so you could deduct your loss in that year? (I saw lots of people with low Traditional IRA balances convert them to Roths while low, so taxes would be low, but didn't see many take distributions while balances were low.)

Re your CA AMT question: how do the CA instructions tell you to compute CA AMT? Do you use the number from your federal Schedule A? Or, is that just your starting point, and then you apply CA law to calculate your CA itemized deduction before adding back to get your CA taxable income for CA AMT purposes? (Not at the office where I could lay my hands on a CA booklet, and not enough time to search and read online before I go to see a client.) Some CA preparers will respond, I'm sure....

1. I checked the Roth IRA issue out very carefully w/several CPAs and w/the IRS. It was a relatively complex situation (for me anyway) which involved a one time conversion of a traditional IRA to a Roth IRA in 1998 where I paid all the tax on the funds converted over the first 4 or 5 years in installments. I lost 1/2 the value during the dot.com meltdown and w/drew the rest to avoid bankruptcy. Yes, I know it would have been exempt in a bcy. The withdrawal therefore was not premature and all the tax had already been paid. I liquidated all Roths (there was only one). The difference between my original converted amount (the basis) and what I withdrew was deductible as a loss. There was no taxable significance to the w/drawal itself.

2. CA AMT Sch P calls for plugging in a value from line 26 of Schedule A federal return and this is key, "adjusted for differences between CA and the federal retrun. I simply added the employee business expense and Roth investment loss - there appeared to be no adjustment. My tax program plugged in about 10K less that me and I have no idea where the figure came from - it was in a worksheet but was not a calculated value. I don't have any exotic exceptions or credits from the CA schedule.

3. I also have a ? about the Fed AMT. From what I understand if the AMT was caused soley by disallowed
Schedule A deductions including employee business expenses and my IRA investment loss, there is no carryover. The AMT is permanent. Is that right?

[veritas]

Do you ever

pay for advice? Or do you pretty much shop around for the freebies?

[rbargin]

rbargin

Don’t be offended if nobody answers your question. This is a forum for tax professionals to exchange information with each other. Your post reveals that you are not a tax professional, and that you could be trying to deduct something you are not entitled to deduct (an IRA loss).

When I see an error on a do it yourself return, I immediately lose all confidence in the rest of the return and suspect other major problems. My suggestion to you is to take your tax return to a professional and have the entire return checked for theory accuracy. Any answers you get on this board will be incomplete as we cannot see all the entries you have made on your return.

You jumped to conclusions by characterizing what I did w/the IRA as an "error". This is an issue I looked into very carefully. re: the IRA loss, see my explanation above on this thread. I vetted that issue thru several professionals including several CPAs. This return was relatively simple other than the AMT. I am a licensed atty and have a workable understanding of basic tax law, altho clearly I am not a tax professional. In retrospect, if I knew I was going to run into the AMT, I would have had a professonal doit. It was unexpected.

In my opinion (and many, many others), the AMT is extremely inequitable. Congress should have indexed and/or done away w/the AMT instead of decreasing taxes for the most wealthy individuals in this country. That would have been just as stimulative to the economy. W/so many people getting trapped w/in its tentacles, it no doubt increases the work of your profession and makes it more difficult for middle income people to prepare what should have been a simple tax return.

[veritas]

Amt

was instituted so rich people would have to pay at least a minimum tax. Guess your rich.

[Bees Knees]

You jumped to conclusions by characterizing what I did w/the IRA as an "error". This is an issue I looked into very carefully. re: the IRA loss, see my explanation above on this thread. I vetted that issue thru several professionals including several CPAs. This return was relatively simple other than the AMT. I am a licensed atty and have a workable understanding of basic tax law, altho clearly I am not a tax professional. In retrospect, if I knew I was going to run into the AMT, I would have had a professonal doit. It was unexpected.

Sorry for jumping to conclusions. However, If I jumped on an attorney message board and started to talk about incorporation does nothing to protect me personally from liability in a single shareholder corporation, you'd probably be able to tell I was not a professional and a little ignorant as to the law.

Since we are on the subject and you got some free AMT advise from some tax pros, let me ask you a legal question. Why do attorneys tell single owner businesses they should incorporate when the one suing can simply name the individual in the lawsuit in order to do an end run around the corporate limited liability issue?

[rbargin]

Sorry for jumping to conclusions. However, If I jumped on an attorney message board and started to talk about incorporation does nothing to protect me personally from liability in a single shareholder corporation, you'd probably be able to tell I was not a professional and a little ignorant as to the law.

Since we are on the subject and you got some free AMT advise from some tax pros, let me ask you a legal question. Why do attorneys tell single owner businesses they should incorporate when the one suing can simply name the individual in the lawsuit in order to do an end run around the corporate limited liability issue?

re: this board, to be honest, I was unaware it was only for professionals. At 2 a.m., maybe I missed the disclaimer about being a preparer.

re: your legal ?, I will do my best. I am a CA attorney, but don't practice corporate law and in fact work in non-tradtional career, academic medicine in-house Director of Strategy.

Generally, incorporating a business shields the principals, ie. the Directors, Shareholders etc. from individual liability from the perils of the marketplace. In so doing, it encourages risk and fosters innovation. This is true even for a mom and pop business. Yesterday's Steve Jobs in a garage is today's Apple/Pixar. Concedely, some atty's may recommend incorporating a lemonade stand. (I am not sure how "personal liability" issues play out in SubChapter S and LLCs vs G corporations, but I believe the same shield is in place).

Business people lose the corporate liability shield if they fail to observe the formalities of being a corporation, ie. use corporate assets as a personal playground. Lawsuits may allege this inorder to "pierce the corporate veil" and hold the principals liable. However, it is an abuse of process to throw this claim into every lawsuit w/out evidence it such conduct took place. There has to be a colorable claim or the attorney has acted unethically by filing a groundless claim and requiring the prinicpal to get his/her own attorney (sometimes). Attoneys can be disciplined for this.

Most states operate w/notice pleading and often bare allegations are made w/out a whole lot of supporting facts.

I actually don't have an answer on the AMT. It appear on the Fed AMT I can't carry it over because the reason for the AMT is that the items in question that caused it lower deductions as opposed to shifting income or deductions from one year to another. On the CA AMT, I think that the TaxCut program simply erred/malfunctioned. It's clearly no substitute for an accountant/CPA.

[veritas]

Who pays taxes?

Our visitor expressed frustration with the AMT. I think we wholeheartedly agree with the unfairness and the complexity of AMT.

However I take umbrage with the statement made about having the wealthy pay more instead of getting tax cuts.

In the year 2004 the top 1% earners paid 36.89% of the total personal income taxes. Which is an INCREASE from 2003 and 2002. They ARE paying more.


The top 5% paid 57.13%

The top 10% paid 68.19%

Conversely the bottom 50% paid 3.3%.

So it seems to me we need to raise taxes on the bottom 50% for equity.

[Bees Knees]

Generally, incorporating a business shields the principals, ie. the Directors, Shareholders etc. from individual liability from the perils of the marketplace. In so doing, it encourages risk and fosters innovation. This is true even for a mom and pop business. Yesterday's Steve Jobs in a garage is today's Apple/Pixar. Concedely, some atty's may recommend incorporating a lemonade stand. (I am not sure how "personal liability" issues play out in SubChapter S and LLCs vs G corporations, but I believe the same shield is in place).

Business people lose the corporate liability shield if they fail to observe the formalities of being a corporation, ie. use corporate assets as a personal playground. Lawsuits may allege this inorder to "pierce the corporate veil" and hold the principals liable. However, it is an abuse of process to throw this claim into every lawsuit w/out evidence it such conduct took place. There has to be a colorable claim or the attorney has acted unethically by filing a groundless claim and requiring the prinicpal to get his/her own attorney (sometimes). Attoneys can be disciplined for this.

Most states operate w/notice pleading and often bare allegations are made w/out a whole lot of supporting facts.

A good textbook answer. However, we both know a person can spend a ton of money defending himself from frivolous claims in the discovery process long before any court gets to hear the merits of the case.

The reality is that a single shareholder corporation has basically no defense in protecting his personal assets from a lawsuit, except in purchasing liability insurance. But then if you have liability insurance, what did the corporate shield do for you?

Example: Me and Armando start a construction company. We incorporate so that my personal assets and Armando’s personal assets are protected in case one of our houses falls over and hurts someone. Shortly after moving into one of our newly constructed homes, the house falls over in a thunder storm. The homeowners sue our corporation, and me and Armando personally for shody construction work, claiming too many nails missed the studs on the roof. The corporation is sued for performing the work, and me and Armando are sued for miss use of the nail gun, and a whole host of other malpractice issues. Oh we followed corporate formalities to the T. That isn't the issue, as the client suing us has deep pockets and a Big City attorney on his side.

Are you telling me I can defend myself by telling the lawyer suing me he can be disciplined for filing a frivolous claim? Who is to say it is frivolous? That’s my opinion. His opinion is I am a hack and shouldn’t be trusted with a nail gun. How many hundreds of thousands of dollars do I have to spend before the court hears the evidence and says only my corporation can be sued, I’m just an employee?

Without liability insurance, the corporate shield is as worthless as the paper it is written on. So why bother with a corporation? Why do I keep getting clients who formed a corporation solely for liability protection?

[Lion]

Answers, sort of

3. Yes.

2. I live across the county in CT, so will leave this for others. (Or, make an appointment with your friendly, local tax preparer.) However, IF, that's IF, CA law adjusts the Federal Schedule A Miscellaneous subject to 2% total in any way, then it probably makes the same adjustment before adding it back for CA AMT purposes. You could see if your CA itemized deduction total is the same as your Federal in TaxCut. Go through the TaxCut worksheets line by line to follow their computations and then compare with a pencil and paper calculation in a CA booklet following the CA instructions for calculating your CA AMT.