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Tax news you can use

 

Tax laws keep changing, but don't be the last to know about them. Here's the latest filing scoop.

TAX TIP #23
Beware the complicated and costly AMT

Three letters, AMT, are striking tax fear in the hearts of more and more middle-class filers.

In this tax tip:
 
 
 
 
 

These folks are simply trying to use the tax code, legally, to lower their annual Internal Revenue Service bills. They claim exemptions for eligible dependents, deduct the interest on their mortgage and associated equity loan, and write off the state income taxes they pay. Some of these tax breaks, however, will do them no good under the alternative minimum tax system.

Commonly referred to as the AMT, this tax has its own set of rates (26 percent and 28 percent) and requires a separate computation that could substantially boost your tax bill. Basically, it's the difference between your regular tax bill, figured using ordinary income tax rates, and your AMT bill, figured by filling out more IRS paperwork. When there's a difference, you must pay that amount, the AMT, in addition to your regular tax.

The AMT was designed in 1969 to ensure that wealthy taxpayers didn't use loopholes to escape paying their fair share of taxes. The original target was 155 filers with the then-exorbitant income of $200,000 who avoided paying any federal taxes.

More AMT victims, higher taxes
Nowadays, according to the Treasury Department, when an AMT payment is required, the federal coffers get, on average, an additional $2,770 per household.

Government number crunchers point to other alarming figures. Four million people paid AMT in 2005 and, without changes to the system, the AMT will ensnare almost 22 million taxpayers this year and 52 million by 2015.

Why the increase? Because the tax is not indexed for inflation. Without that annual adjustment, your yearly raises of a few percentage points have been moving you closer or even into the income realm that the tax law deemed 35-plus years ago as prime AMT bait.

A short-term ATM fix is pending in Congress. The IRS's own Taxpayer Advocate says the system should be scrapped; the President's Advisory Panel on Tax Reform agrees.

While lawmakers and economists wrangle over whether and how to tweak the AMT, taxpayers are left to deal with it. Here's what to look for, as well as look out for, when it comes to this potential added tax burden.

Calculation insult to tax injury
Adding insult to injury, the AMT's parallel system demands that taxpayers do more work to pay more in taxes. The effort is required both in filing paperwork (the two-page, 55-line own Form 6251, Alternative Minimum Tax -- Individuals) and maintenance of separate records for regular and alternative tax purposes.

Even filers who escape actual payment of the higher tax still must do additional work just to learn that they are off the AMT hook.

To help sort through the AMT mess, some taxpayers turn to computer software packages, most of which include AMT computation, or hire professional help. Both choices should help you stay on the IRS's good side, especially if you owe AMT, or at least put your mind to rest if you don't.

But the options also will add to the overall cost of doing, if not paying, your taxes.

Free help in figuring your AMT
This year, however, the IRS is providing some free AMT calculation assistance.

-- Updated: Feb. 1, 2007
 
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