Question

1- A tax client wants to know the difference between getting a tax deduction and a tax credit. Compare and contrast the two concepts.

2- Please inform your tax client why they are now paying an Alternative Minimum Tax. They have not had to pay this tax in prior years. Explain to them how they might legally avoid this tax in the future.

3- Your tax client has a large capital loss carryforward from prior years. Explain to them the difference between the taxation of capital assets versus ordinary income. Also, please explain to them the erosion of the value of the capital loss carryforward based upon the time value of money.

Answer 1

(1)- tax deduction can only lower you taxable income and the tax rate that is used to calculate and result is larger refund of your withholding.

- tax credit a credit reduce your tax giving you a larger refund of your withholding but certain tax credits can give you a refund even if you have no withholding.

(2) you are paying AMT or not, or how close you come to paying it,is to look at your form 6251 from last year

. compare the tentative minimum tax to your regular tax(tentative minimum tax should be the line above your regular tax)

AMT AVIOD BY MANY WAYS SOME OF THE EXAMPLE ARE:

-adjustable gross income minus your standard or itamized dedeuctions and qualified business income is your taxable income

- in calculating the AMT you can not take itemized deduction for state and local tax income

-if you have taxable state tax refund on your regular tax return

(3) capital loss carryover is the amount of capital losses eligible to be carried farward into future tax year.the amount of total capital loss exceed total capital gain can only be deducted up to maximum of $3000 in a tax year

   -capital losses that exceed capital gains in a year may be used to offset ordinary income up to $3000 in any one tax year

- due to eash-salr IRS rule investor need to be careful not to repurchaces any stock for loss within 30 days, or the capital loss does not qualify for the benificial tax treatment.