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Owning a boat can have other fringe benefits provided that you are tax savvy. |
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By Bill Horst & Jennifer Furey Navigating disappearing tax deductions
As you’ve weathered the storm of preparing your 2003 income taxes, did you ever imagine that you’d be one of the more than 2 million people obligated to pay Alternative Minimum Tax (AMT)—and that doing so would make you lose the deduction for your secure boat loan?
Under the Internal Revenue Service’ (IRS) regular tax code, a deduction is allowed for interest paid on a loan for your seafaring home away from home. Under the rules of AMT, berth-, galley-, and toilet-equipped boats are not considered qualified residences for a tax write-off. Thus, boat owners paying AMT lose the deduction for their second home.
‘What the heck is the AMT,’ you ask? This separate tax structure originally targeted the super-rich—those making above a certain income and who benefited from a large number of tax loopholes. With its own distinct set of tax rates and deductions, the AMT significantly minimized those benefits resulting in a tax liability for individuals who would otherwise pay little or no tax.
Sounds like a reasonable thing for the IRS to institute, right? Maybe not. When you factor in that the AMT’s tax brackets have not been adjusted for inflation-- and that tax cuts in recent years have reduced regular income tax liability—the stage is set for much greater exposure to AMT than ever before. The result? Many people whose income has grown with the economy are now obligated to pay AMT. While only 19,000 people owed the AMT in 1970, when it was first established, more than 30 million are expected to pay AMT in 2010.
What’s a boat owner to do?
The cold, hard truth is that the IRS says you must figure your taxes both ways – using the regular tax computation and the AMT method—then pay whichever is greater. Your tax advisor can help you with some planning techniques, such as rearranging your tax preference items, to help ease the burden if you determine you must pay a higher alternative tax.
There’s a beacon of hope, for instance, for boat owners paying taxes in 2005—especially if you own a business or have income-producing investments, such as a rental property or S-corporation. Your tax planner will tell you if any of these entities can help you effectively and legally take advantage of a write-off for the interest paid on a boat loan.
About the authors: William J. Horst, CPA, CMA and Jennifer Furey, CPA
Bill Horst is the Managing Partner of William Vaughan Company, a Maumee, Ohio-based CPA firm that employs some 55 people. He has been with the firm for more than 25 years. Jennifer Furey joined William Vaughan as a Certified Public Accountant in 1997.
The William Vaughan Company has provided personalized, high quality services in the areas of auditing, accounting, tax, and management consulting for more than 45 years. You can reach Bill or Jennifer by calling 419.891.1040, 1.800.267.0930 toll-free or e-mail info@wvco.com
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