TAX TIP No. 23
Beware the complicated and costly AMT
You don't have to enter your name, Social Security
number or other identifying data. The program, which
guides you through a series of question-and-answer pages,
only wants the numerical data from your forms.
When you're finished, it will tell you whether you
now have to fill out the AMT form, but it won't tell
you the actual tax damage. You'll still have to fill
out Form 6251 to find out that amount.
AMT starting point
How do you know, without using tax software or the AMT
Assistant, if you might be caught in the AMT net? There
are some indicators, but it's not always easy to tell.
The starting point for figuring any AMT
is your regular taxable income. This is the stage where
the AMT Assistant (or work sheet, if you still insist
on doing things by hand) kicks in.
Basically, some of the deductions you claimed to figure
your regular tax bill must be added back. These are
known as tax-preference items. You also might find a
special exemption amount is subtracted. The resulting
amount is subject to the alternative tax.
Many of the tax breaks not allowed under
the AMT system do affect predominantly wealthy individuals
or businesses with complicated tax circumstances. These
include incentive stock options, intangible drilling
costs, tax-exempt interest from certain private activity
bonds, and depletion and accelerated depreciation on
certain leased personal or real property.
Common tax breaks
The AMT also rejects or reduces many common tax breaks
used every year by individual taxpayers to lower their
For example, under the AMT,
you cannot deduct state and local taxes. This
is a major blow to many filers, because most
states collect income taxes and all jurisdictions
have some type of levy that generally can
be counted against a federal tax bill.
Medical costs are still allowed, but the
AMT requires they exceed at least 10 percent of your
adjusted gross income rather than the 7.5 percent threshold
of the regular tax system. Miscellaneous itemized deductions,
although limited under the regular tax system, are disallowed
under the AMT. Even large families can be hit. If your
personal exemption total is big, look out.
Own a home? Some cherished home-related
tax breaks take an AMT hit. While mortgage interest
on your main and second home is still AMT-deductible,
home equity loan interest is restricted. It can't be
deducted unless the money is used solely to pay for
home improvements. Your home's property
taxes also are disallowed as deductions under the
Other commonly-claimed credits
also technically affect AMT calculations,
such as those for dependent care and education
costs. However, for the last few years the
Congressional AMT patch has allowed AMT taxpayers
to continue to count these in their calculations.
Income levels affected
Once you add back these AMT
disallowances and run the
numbers, you might be subject
to a bigger IRS bill if your
taxable income in 2008 was
- $69,950 and you are married
filing a joint return.
- $46,200 and you are filing
as single or head of household.
- $34,975 and you are a married taxpayer filing a
For 2009 returns, however, unless Congress acts, the AMT income exemption amounts are substantially lower, meaning more filers could face the AMT next filing season.
For the last few years, Congress has bumped up the earnings amounts to keep more middle-income filers from paying more under the system. While that law change helps out millions of taxpayers who might otherwise pay the AMT, the uncertainty of when and how much relief will be provided is a constant area of frustration for taxpayers who have encountered or might face the alternative minimum tax.
With a new White House occupant and substantial changes in Congress, more long-term AMT relief might be on the horizon. But as with all things originating in Washington, D.C., don't make any tax plans or moves until a measure is actually law. At the very least, another temporary AMT fix is likely to happen again in 2009.
And what about those high-income taxpayers the AMT was created to catch? The legislative irony is that today's alternative tax usually doesn't affect them. They tend to owe more under the regular tax system because the two top ordinary tax brackets that these filers are likely to face, 33 percent and 35 percent, exceed the maximum 28 percent AMT rate.
If you end up facing the AMT, the extra
money you owe, along with the added paperwork hassle,
is never welcome. But dealing with it now is better
than the alternative: letting the IRS discover that
you should have paid it. When Uncle Sam comes asking
for back taxes, he wants interest and penalties, too.