4 Tricky Forms That Can Make Your Taxes More Difficult
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Believe it or not, there seems to be one thing just as certain in all walks of life as death and taxes: sadistically confusing forms that make preparing your taxes bafflingly difficult every single year. By themselves, these four administrative gauntlets justify the often-incredible cost of hiring an experienced accountant rather than brave the eye-glazing paperwork yourself. Even the catch-all Form 1040 has become almost unfathomably complicated due to ongoing overhauls to the U.S. tax code. However, if you have already lamented the postcard-sized 1040’s seemingly absurd complexity added to the most basic income taxes, take heart. It could always be worse.
Form 6251: The Alternative Minimum Tax Inferno
This form verifies whether or not you will enter a value on Line 45 of Form 1040, the alternative minimum tax (AMT) that recalculates income tax with specific tax preference items added back into adjusted gross income under separate rules to ensure you pay at least the minimum tax after all allowed deductions. Unfortunately, Form 6251 is both indispensable in determining whether you are subject to the AMT and roughly equivalent to filling out a whole other 1040. Yes, it is that intricate. If the 1040 gives you no trouble, this form feels like a redundant waste of time instead of an aggravating puzzle — annoying and dull, but not exactly perplexing. On the other hand, those left in the weeds by the 1040 as it is, Form 6251 only piles on the confusion.
Form 8801: Another Level of AMT Hell
If you typically qualify for the AMT, congratulations are in order: you get to carry forward those previous AMT credits every year and calculate the amount of carried-forward credit now available to you on Form 8801. Credits are typically accrued through such temporary situations as exercising an incentive stock option, but those who pay the AMT due to an ongoing circumstance such as state income-tax deduction won’t qualify. Figuring all this out to claim whatever credit might be available means first determining your regular AMT via Form 6251. Next, you then need to separate the taxes such as incentive stock options and depreciation that will reverse next year and can qualify for a carried-forward credit. Income-tax deductions and various itemized deductions neither reverse in a subsequent year nor qualify. Nevertheless, rest assured, the credit is worth the mental gymnastics.
Form 8903: Domestic (Deduction) Disturbances
Suppose you grow and sell whole-bean coffee. However, you import the bags in which your beans are sold in stores. There’s good news and bad news. Luckily, your beans qualify for a “domestic production activities” deduction documented on Line 35 of Form 1040. This rule allows the deduction of a percentage of income from certain business activities. This is a popular and valuable deduction among farmers and craft-makers, to name a few groups among a surprisingly broad array of filers. Here comes the bad news: the packaging does not qualify since it was not made in the United States. Plenty of producers must separately scrutinize and allocate raw material and component costs and income one-by-one in their grown or made goods just to maximize their deductions and leave no money on the table. Advice from a quality sales tax consultant could go a long way.
Schedule D: Familiarity Breeds Contempt
Reporting capital gains and losses using the Schedule D form may be a familiar maze to many filers. Don’t let that fool you into thinking familiarity breeds anything but contempt. There are a number of capital-gains tax rates to navigate from a 5-percent tax lower-income taxpayers fork over on gains from sold stock to a whopping 28-percent hit on certain collectibles. After that, there’s still the standard income-tax rate on short-term capital gains and a potential 25-percent rate applied to gains if you sold real estate on which you claimed any measure of depreciation. Deducing each capital gain’s correct rate requires a mind-boggling series of unintuitive calculations on Schedule D’s second page. Taking into account what you paid for something before you sold it is another hurdle entirely, but it is a must to determine the cost basis of your investment. The legwork takes many filers by surprise almost immediately and leaves them hopelessly in the dark without a professional’s insight.
Here is arguably the most valuable takeaway from sizing up these four particularly nightmarish forms known for making taxes more difficult: accountants are costly for a reason. The U.S. tax code is plenty chaotic. They have spent years of ongoing professional education training to recognize a certain order. Tax law is excruciatingly precise, but a veteran accountant’s services pay for themselves year-after-year by saving their clients copious money through their meticulous eyes for details a layman isn’t likely to recognize. You can pay more now for a greater likelihood of paying Uncle Sam less, or you can simply fork over more to the government now and let that be the end of it.
Anica is a professional content and copywriter who graduated from the University of San Francisco. She loves dogs, the ocean, and anything outdoor-related. You can connect with Anica on Twitter @AnicaOaks.
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