Alternative Minimum Tax or AMT

Not surprising at all, I have a question on what is AMT. Alternative Minimum Tax or AMT was created as a way to ensure that taxpayers pay at least a minimum amount of tax. Over the years the tax laws have changed so that there is a large segment that are not subject to this minimum tax but with the roll into 2013, the AMT is something that the majority of us will now need to be aware of and concerned with. A good tax preparer or accountant can help you with this. The AMT has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Additionally, some income which is not subject to the regular tax is included in the AMT calculations. Your tax under AMT rules may be higher than your tax under regular tax rules.

Some adjustments that many of us use in preparing our taxes that can make you subject to the AMT are:

itemized deductions for state and local taxes

medical expenses

other miscellaneous expenses

mortgage interest on home equity debt

accelerated depreciation

exercising (but not selling) incentive stock options

tax-exempt interest from private activity bonds

passive income or losses

net operating loss deduction

foreign tax credits

exercise of stock options and

investment expenses

This is not all inclusive but it is a list of the primary drivers.

The AMT will impact more of the populations as stated in the previous post (see below). If nothing changes and the tax breaks expire and the AMT is adjusted as expected, the exemptions will go from $48,450 to $33,750 for single and head of household filers, from $74,450 to $45,000 for married people filing jointly and for qualifying widows or widowers, and from $37,225 to $22,500 for married people filing separately.

As an example if you made $110,000 and then deducted out $50,000 in various approved deductions, you may find yourself with $60,000 in taxable income and in a 15% tax bracket and paying $9,000 in taxes. With the AMT (this is an oversimplification but gives you an idea of what the difference might be) you would get your exemption of $45,000 and let's say $10,000 in certain allowed deductions and you still end up with $55,000 taxable income for the AMT. Your AMT tax would be 26% which means that you would pay $14,300in taxes, an increase of $5,300 or 58% more tax paid.

You can get credit in future years for paying the AMT but as you can see, this can have a significant impact to the bottom line, especially when added to the expiring tax cuts.

Also remember, ALL OF THIS IS SUBJECT TO CHANGE as our illustrious leaders negotiate the nations debt crises with our tax dollars.

Source: Code Section 55(d)(1). Lower exemption levels mean that more taxpayers will be subject to the alternative minimum tax calculations.

Expiring Tax Cuts

Many of you probably are not aware that I have done taxes for over a decade and am an RTRP. In doing my continuing education and thinking about the fiscal cliff, it made my stomach turn to think about the tax increases coming our way.

It is important to note that their will be tax increases with the fiscal cliff problems but we already have a number of increases that are happening just because the Bush era tax cuts are expiring. Here is a list of some of the more significant tax increases not counting any that come out of the negotiations over the next week.

The AMT and Capital Gains changes will be a shock and impact many that don't realize it is coming. I have bolded the information that I think will impact traders at the highest level but all of this is important.

The Social Security payroll tax reduction in place for the last two years will increase 2% from 4.2% to 6.2%. This will mean an average of $40 less per paycheck for the average American.

The Child Tax Credit will decrease from $1,000 per child to only $500 per child. Ouch! A $1,000 impact for a two-child family.

The American Opportunity Tax Credit (for educational expenses) will decrease from $2,500 to $1,800 per student (and revert back to being the Hope Credit).

The tax rate on long-term capital gains will increase from 0 to 10% for lower income taxpayers and from 15% to 20% for those with higher incomes.

The tax rate on qualified dividends will increase from 15% to the taxpayer’s ordinary income rate (up to 39.6%).

Itemized deductions and personal exemptions will again be limited/phased out for higher income taxpayers.

The Alternative Minimum Tax ”patch” will disappear and the exemption amount will decrease to $48,450 for single taxpayers and $74,450 more married taxpayers.

Approximately 27 million more Americans will be subject to the AMT.

The Adoption Tax Credit will be reduced to $5,000 from $12,650. It will not be refundable but taxpayers will be able to carry forward unused amounts.

Coverdell Education Savings Account contributions will be limited to $500 per student (down from $2,000 per year, per student).

Income Tax Rates will increase from last year’s 10%, 15%, 25%, 28%, 33% and 35% to 15%, 28%, 31%, 36%, and 39.6%. Yes, that is right some of the lower income tax rates will increase by 50%. How's that for not impacting middle and lower class America?

The maximum Long-Term Capital Gains tax rate will increase from 15% to 20%.

The “Marriage Penalty” returns… Married couples will no longer get an equitable percentage of the single taxpayer amounts for the standard deduction, the 15% tax bracket or the earned income tax credit.

The Child and Dependent Care Credit amounts will decrease due to lower percentages, lower eligible expenses and an lower AGI phase-out.

The top rate for the Estate Tax will increase to 55% (up from 35%) and the exclusion amount will be reduced to $1,000,000 (down from last year’s $5,120,000). So to save money and in the words of Mr Charles Dickens ``If they would rather die,'' said Scrooge, ``they had better do it, and decrease the surplus population.

The Section 179 Deduction will be reduced to $25,000 with a qualifying property limit of $200,000 (down from $139,000 and $560,000 respectively). Bonus Depreciation will be eliminated.

A Random Rant: Nonfarm Payroll = NonFull Story

Nonfarm Payroll = NonFull Story

Today nonfarm payroll report showed unemployment fall to 7.8% but that is not the real story. Remember that unemployment is not the percentage of the workforce that is unemployed, it is the percentage of the workforce on unemployment benefits. From last month to this month our workforce increased by 418,000 people and we created 114,000 jobs which means we still have 304,000 new workers that are without jobs. Because they are new to the workforce, they don’t qualify for unemployment and therefore are not in the unemployment percentage. This month we also saw 342,000 people lose their unemployment benefits not due to getting a job.

I think the number that should be reported is percentage of employed workers. If we look at the total number of people employed as a percentage of the workforce, this provides us a very different number. This number has been steadily getting worse and is at about 91% which would mean that 9% of the workforce is truly unemployed. This still does not account for the under employed or discouraged workers or those holding multiple jobs that would not be seen in that data either. My data source www.bls.gov (just dig a little deeper into the numbers)

House of Cards Swaying

This week, citizens of Spain were revolting in the streets over new austerity measures in attempts to reduce the future debt obligations and to qualify for the bailout funds. Even after the austerity measures, consultancy group Oliver Wyam determined that Spain’s banking industry would need an additional 59.3 billion euros to deal with the economic turn down. This is 59.3 billion euros in addition to the austerity measures and nearly 100 billion in bailout funds. In addition to this bad news, Germany, the largest economy and likely saving grace of the eurozone has seen a significant drop in manufacturing and the business climate report.

Back on our side of the pond, we saw one of the largest net withdrawals of funds from mutual funds in the U.S. by institutions in months regardless of the promise of QE3. We also saw a worse than expected Chicago PMI, falling consumer sentiment, GDP falling short of expectations and lower than inflations numbers and a terrible month for real estate. The house of cards is beginning to sway, the question is how long can new cards be added to sustain the already shaky house.

Video of the GBP/AUD Setup

Video of the GBP/AUD setup

a couple of trades

the aud/usd seems to be oversold now and i like a buy here for a return to 1.07. i also like the fxa diagnol trade where the june 102 call is bought and the 106 april is sold and where we can roll it out to may and june . if we are caled away in june we will make more than $400 on a modified cost basis of $240. not a bad trade and a could be modified to increase the net gain.

here is the undervalued stock of the year RIMM. the stock is solid fundamentally and should be able to hit $30 in the next two months. this is another diagnol. buy june $13 sell april $16. $2.50 cost that should adjust down to $1.90 with a potential of $3.15 or more

FXA updated

You have to love the move today. The diagnol spread discussed yesterday is up 45 cents or 25% today alone. It looks promising to continue. We will watch for an opportunity to take of the short side or the whole position, depending on how it stalls at near term resistance.

Buy on FXA options

The options on the forex ETFs are pretty cheap right now. I was looking at the fact that the AUD/USD has fallen back to a key support. The cost for a 105 September call would only cost $2.40 today. That is $240 per contract, the nice thing about an option here is we can sell an August call above the last resistance area near 108 for 60 cents and lower our cost to $1.80 or $180 per contract. Though the spot market may drop and could stop out a 180 pip stop loss, this would not be a concern to this position. We could see price fall as far as it wanted to and as long as it rallies back, back above 108, we can and will gain $120

GBP setting up for a pounding.

The GBP has pulled back to key support again. Sellers have not been able to get the GBP/USD to break through this support ner 1.50 over the past 3 months. With today's doji, tomorrow should provide the next directional move. A move above the high today should see the pair retest 1.63 but I am anticipating this is the time we see support broken and a drop to 1.56 if not 1.54

EURO Euphoria?

The euro rallied today on "optimism European policymakers will be able to control a political and debt crisis in Portugal". Now why would you rally on the ability to control a political and debt crises. That is like saying "I just cut off 3 fingers but I am confident I can control the bleading, hurray!!!" I expect the joy to be short lived which should lead to a drop in the euro in the near term. In fact, i really like the EUR/CHF short here. Take a look. Shorting EUR/CHF at 1.2870 stop of 1.3010 and an easy target of 1.250

Pounded the GBP/USD

We called the GBP/USD trade on the 29th expecting it to hit in 2-3 days but we hit in 1 day, a little quicker than expected but who can complain.

The pair has consolidated now and a break down below 1.5440 will see the pair test 1.5350 for a scalp. A break below 1.5350 will likely see the pair fall 800 pips or more. I, however, am expecting to see price break below 1.5440 and give a head fake to the 1.5350 followed by a bounce and a reversal.

Buy on GBP/USD (or FXB)

The GBP/USD has shown a lot of strength as the dollar has sold off today. If price clears the high 1.5520, price should continue to 1.5630 within 2-3 days. This is a 1 to 1 risk reward as we will be placing our stop below the lows of 1.5350.

A trade on FXB, scalping options on a currency ETF, we would buy a 155 call near 1.10 and we should be able to see it for 1.60 within the 2-3 day time frame.

Buy Puts on Boston Scientific

This is a quick scalp trade for a quick gain. If BSX closes below 7.61 on the hourly charts, I am planning on buying the 7.50 put for approximately 19 cents. Price should fall within 2 days to at least 7.10 if not lower. This move will increase the value of the put to 40 cents for a quick doubling of the trade. If price goes above 7.90 after triggering the trade, exit the trade at about 8 cents. This is about a 2 to 1 RR and I would give it 75% probability.

Head and Shoulders on CMG

Looking at CMG they have completed a nearly perfect, symmetrical head and shoulders pattern. The neck line, which has been violated today, gives more than $35 for the target. A Feb, at the money put could generate a $22 gain on a $13 investment. An out of the money short call may be a better way to trade this, selling the $230 Jan for $4.60 and letting it decay for the next 25 days.

The comming collapse of the Euro?

The euro has traded in a 200-300 pip range over the past 20 days. The swings have been wide and volatile. This has been difficult to trade in the short term but is setting up for what may be the next big move. The consolidation is testing a longer term fib and short term fib levels. If price break through the 1.35 we expect price to drop 750 pips if not 1000 pips back to the previous annual support at 1.25.

Though some feel the problems with Greece or minuscule for the euro zone economy as a whole, this may be a symptom to a larger economic condition. Spain's debt was already down graded and Germany is discussing leaving the euro. If many more negatives appear economically, the euro zone may spin into a major downward trend and possibly a 50% correction.

A couple of random scalps

Here are a couple random scalps I took on the 15 minute candles when prices became overbought and oversold.

USD/CHF bought on the break, targeting a 25 pip move as shown by the higher trend line.

The Gold position already broke and hit my profit target. I won't be surprised to see a larger move in gold back to 995 and just as likely 986

CAD/CHF long?

I am really liking the consolidation on this pair right at the 50% channel area. I am watching for a bounce and a break above the short term resistance to run back up to the top resistance channel. If the pair doesn't break by morning I will tighten my entry further.

Maybe an entry at .9770 and a target of 1.0050. Stop below the trend line and tightened to below the most recent low after I make a new high.

When is the best time to trade forex?

I have been asked when is the best time to trade in the forex market. That is similar to asking when is the best time to exercise. Some people like to exercise in the morning and watch the sun rise, others like to go to the gym during the best meat market times and flex in the mirror. It comes down to preference and what you are trying to accomplish.

My preferred trading times are between 8am - 11am EST for scalping/intraday trading and around 5pm-8pm Eastern. The earlier times gives me the best volatility for the scalping and the later times gives me the quietest market to plan the longer term, multiple day trades (the price action from news is already shaken out).

This is just my view, what's yours?

Boy that looks swollen

The CAD/CHF has run from 92.75 up to 1.0050 in the past 3 weeks. The price looks very extended. The question is when is it coming back down and how far. If price breaks and closes (daily candle) below 1.0000 again, this is the confirmation to a short position back to 97.85. After a pull back like that, the swelling will have gone down enough to get back into bullish trades on this pair.

I am the ShadowTrader (fx)

www.shadowtrader.net