I’d like to take a few minutes to highlight two important tax laws that will likely affect you. The most immediate concern is the Alternative Minimum Tax and the second is the expiration of the Bush-era tax cuts at the end of this year. Let’s take a look at what each means to you and your tax refund.

The Alternative Minimum Tax (AMT)

Congress originally crafted the AMT in 1969 to ensure that 155 high income taxpayers paid at least some minimum tax on income that was otherwise sheltered from tax through legal deductions. Since then, the AMT has gradually snared more taxpayers, not because of their rising incomes or aggressive tax deductions, but because Congress did not index the AMT formula for inflation. As a result, the AMT traps more and more middle class folks each year. Last year, approximately 4-5 million taxpayers paid AMT. If Congress does nothing to adjust the AMT formula, experts believe it will affect more than 30 million taxpayers in 2010– an increase of over 400% in just one year!

You are more likely to be affected by the AMT if you have income over $100,000, have large deductions for state taxes (those living in high state tax regions like NY, CA and NJ) and/or medical expenses, and claim a large number of personal exemptions (like for your kids). Unfortunately, there is little you can do to mitigate this tax other than to defer paying taxes and medical expenses into 2011, if possible. On the brighter side, most tax experts are confident Congress will eventually tinker with the AMT rules to avoid affecting millions more American taxpayers. But best of all, when it comes time to file your return, TurboTax software will be updated with the latest tax laws to ensure it’s easy for you get the biggest refund possible.

The Expiring Bush-era Tax Cuts

Much has been written about the Bush tax cuts that expire at the end of 2010. Basically what this means is that if Congress does nothing, tax rates will revert to what they were back in 2000. That means higher tax rates not just for the affluent, but for almost all taxpayers. For example, today the tax rates range from 10% to 35% based on income. Back in 2000 the tax rates ranged from 15% to 39.6%. So even the less affluent would see their tax rate increase next year by 50% just by having the Bush tax cuts expire.

One element of the Bush tax cuts that has not received much attention is the “marriage penalty”. This refers to the additional tax a couple pays by filing jointly instead of filing two single returns. Under Bush, the tax code was adjusted to virtually eliminate the marriage penalty. However, if the tax cuts expire, the marriage penalty comes back since the standard deduction and tax brackets for couples would be less than twice as large (actually 167%) as those provided to single filers.

Congress has yet to act on the expiring tax cuts, but we expect to see action sometime after the November 2010 elections. Absent quick action, taxpayers may see less take home pay in January to reflect the higher tax rates. Fortunately, the Bush tax cuts do not affect your 2010 tax return, so stayed tuned to find out what happens here.

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Bob Meighan, our go-to tax guy, breaks down what these changes are and how they could affect you in an interview with ABC News NOW.

Still have questions?  Leave them in the comments and we will try to help answer them in Bob’s upcoming blog post.

The law offers a tax break similar to that already available to taxpayers on their federal taxes, but with different limitations.  Most affected taxpayers can exclude forgiven debt of up to $500,000 from their 2009 California taxable income.

Lenders “forgive” or cancel mortgage debt when they cannot recover what they are owed. The amount forgiven is generally the difference between what is owed on the mortgage and the home’s value on the open market.  Debt forgiveness typically occurs when people lose their homes in foreclosure, abandon them, give them back to their lenders or have their debt modified by the lenders.

Here is a good example from the Examiner:

“Say you borrow $500,000 and buy a house with it.  You stop making your payments, and the house that was put up as collateral is seized and sold (foreclosed).  After the auction, the bank clears only $300,000.  The $200,000 shortfall is money you received and spent, so according to our government’s income taxers you “made” $200,000.”

California had offered debt forgiveness tax relief along with the federal government for 2007 and 2008, but now has extended and enhanced it for tax years 2009 through 2012.  Prior to 2007, forgiven debt was usually counted as taxable income to the mortgage borrower.

For more information about the April 12 law, see Mortgage Forgiveness Debt Relief Extended on the California Franchise Tax Board website.

TurboTax will be updated to include this tax law change on April 20th.  Taxpayers that need to file before that can follow the instructions in this FAQ.

On Feb. 8, residents of Hawaii were notified that all state tax refunds will be delayed until July 1, 2010. Guess not everything is perfect in paradise!

Hawaii made the call in an effort to mitigate the State’s projected $721 million revenue shortfall for this fiscal year, which ends on June 30, 2010. Apparently, delaying the refunds will provide an estimated one-time savings of $275 million which will go toward balancing the state budget.

Hawaii will release taxpayers’ refunds beginning in July on a first-in-first-out basis. This ensures that early filers will receive their refunds first. So there’s no need to wait if you are getting a refund.

Hawaii is also advising taxpayers that the best way to get their tax refund is to e-file it and have it directly deposited into their bank account.

If you’re using TurboTax to prepare and file your Hawaii state tax return, you will see notice of this delay in the Print and File section. E-file confirmation emails from TurboTax will also remind customers impacted by this delay that their state refund will not be available until after July 1.

Beginning July 2010, taxpayers can contact the Hawaii State Taxpayer Services Call Center at 808-587-4242 or 1-800-222-3229 (toll free) for information on the status of their refunds.

Just who qualifies as a middle class these days? The Middle Class Task Force says that the majority of Americans describe themselves as middle class or working class. “Middle class families are defined by their aspirations more than their income,” its report says. Those aspirations include home and auto ownership, retirement security and college education for children.

To help American’s achieve those goals, the Obama administration has come up with several tax proposals. The president addressed these initiatives in his State of the Union address:

Automatic Retirement Savings for Workers

Roughly half of the American workforce—some 78 million workers—does not have a retirement plan at work. The administration would like their employers to automatically enroll employees in a tax-deferred retirement plan, known as a workplace IRA.  (Employees will be able to opt-out of the plans.)

Contributions to these plans will be voluntary for workers. The smallest firms—although the White House didn’t specify how small—would be exempt.

To encourage workers to save in these automatic plans along with other qualified retirement accounts, the Savers Tax Credit will match contributions. The proposal calls for matching 50% of the first $1,000 of retirement contributions by families earning less than $65,000. There’s a partial credit for families earning up to $85,000.

The automatic retirement savings is based on a large body of research in the area of behavioral finance that shows people save more when decisions are made for them. A study from the Employee Benefit Research Institute finds that employers adopting automatic enrollment in their 401(k) retirement plans have also generally increased the “employer match” to participant’s accounts—in some cases, by a significant amount.

Boost Childcare and Dependent Care Tax Credit

There is some additional tax relief for an estimated 38 million Americans who are providing unpaid care to an aging relative. And many of them are part of the sandwich generation—they are also caring for their children while looking after elderly family members. The administration wants to practically double the child and dependent care tax credit for families earning less than $85,000 a year. (Credits will rise from 20% to 35% of qualifying expenses.)

Almost all eligible families making under $115,000 a year could see a larger credit, too. Families could claim up to $3,000 in expenses for one child or $6,000 for two children. The maximum credit for a family with two children making $80,000 a year would increase from $1,200 to $2,100.

Student Loan Relief

Recent college graduates are often saddled with more than $23,000 in debt. In a tough economy with few jobs, they are struggling to pay off their student loans. The administration is calling for a cap of student federal loan payments to 10% of a student’s income (above a basic living allowance).

Here’s how it works: the monthly payment for a single borrower earning $30,000 who owes $20,000 in college loans would be $115 a month – as opposed to $228 a month under the standard 10-year repayment plan, according to the plan. The income cap could cost the government about $1 billion over the next five years, estimates Mark Kantrowitz of Finaid.org.  “This proposal would yield meaningful repayment relief to hundreds of thousands of borrowers whose federal student loan debt exceeds their income,” Kantrowitz says. “It would cut their monthly payments by one-third and forgive the remaining debt sooner.”

You can find more information about the tax proposals from this White House Fact Sheet.

Sandy Block, personal finance reporter for USA Today recently covered the news in her column. One clever reader even commented that this is a ‘Botax.’

Plastic surgeons are mounting a vigorous defense against the tax, claiming it will unfairly target middle-class women. Apparently, elective plastic surgery is no longer just for wealthy women who take their little purse dog in a Louis Vuitton to lunch. According to the American Society of Plastic Surgeons, 86 percent of cosmetic surgery patients are women, and 60% have an annual income of $30,000 to $90,000.

But it makes me wonder who else will be up in arms? Angelina Jolie’s lips may have an issue with the tax. How many wannabe Hollywood starlets who think they need bigger boobs will be willing to pay extra to get a DD if the taxman gets his cut too? What about poor Joan Rivers, for pete’s sake!

Women face much more pressure than men to look young and attractive. That’s true regardless of how much money you make. I’ll tell you upfront that I’m for plastic surgery. In fact, I’m for anything that helps you feel more confident and better about yourself, and if getting a tummy tuck or a facelift does it, more power to you.

I’m not alone, by the way. More than 55 million cosmetic surgery procedures will be performed in 2015 predicts a recent study in Plastic and Reconstructive Surgery. This more than quadruples the number of procedures performed in 2005. It’s a result of increased consumer awareness, direct-to-consumer marketing and advertising, and the prevalence of non-surgical options.

I don’t think the 5% tax, estimated to raise about $5.8 billion in the next 10 years, will deter people who want cosmetic surgery from getting it. Nor do I expect people will rush to their local plastic surgeon to get in under the wire. What I do believe is that if you’re going to get some work done, taking time to make a thoughtful choice that is right for you is a good thing.

What about you? If you’re thinking about a new nose, would you do it sooner if you could to avoid the added tax?

Earlier in the tax season, California refunds were delayed. Taxpayers didn’t get any IOUs; California was just saying the checks were late. (I filed my California return the last week in January and didn’t get the refund until mid March.)

The State of California is sending IOUs to taxpayers.

Starting July 2nd, California taxpayers are getting IOUs, also known as a registered warrants, in place of their tax refund checks.  The IOU is not redeemable until October 2, 2009 however there will be 3.75% annual interest included with the redemption. Originally some large banks were offering to accept the IOUs now at full value.  Then they would redeem the IOU in October and get the interest too. However it sounds like many of those banks have changed their minds.  I hear it’s a good idea to check Credit Unions; seems they may have agreed to accept the warrants.

For “everything you wanted to know about CA IOUs and we afraid to ask”, check out this latest TurboTax article “California: Now Issuing IOUs for Income Tax Refunds.”