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TIP: The Alternative Minimum Tax - Forewarned is Forearmed

Tip of the Month

February 2005

TIP: The Alternative Minimum Tax - Forewarned is Forearmed

The alternative minimum tax (AMT) was originally intended to make sure that the wealthy did not wriggle out of paying income taxes. It targeted a fairly small group of taxpayers. In 1970, less than 20,000 people owed AMT, but now about 2.6 million people - many of them middle-income taxpayers - are firmly in the AMT category. Why? For the most part, inflation is the reason the tax is encroaching on the middle classes. AMT brackets - unlike "normal" income tax brackets and exemptions - are not adjusted for inflation and, as a result, each year more middle-income taxpayers, whose salaries continue to rise year-by-year, fall into the AMT bracket.

Figuring out if you owe AMT is not a simple matter. The best way to determine if you do is to collect your financial information and have your professional tax advisor review your situation. Taxpayers whose income exceeds $75,000 and who have significant deductions should be proactive and investigate well before tax filing deadlines to avoid falling foul of the IRS. Remember: ignorance is no defense. Taxpayers who are required to pay AMT and overlook it, not only owe the back taxes, but also any interest or penalties that the IRS chooses to levy.

As mentioned previously, the AMT was designed to snare rich taxpayers who were in the habit of taking large deductions to avoid paying most (or all) of their income taxes. Unfortunately, today the deductions that land people in the AMT category usually are fairly ordinary - not in the "rich and famous" league at all. If any or all of the following apply to you, make an appointment with your tax professional to review your situation:
  • Gross income exceeds $75,000 and have write-offs for personal exemptions, taxes and home-equity loan interest;

  • Own a business or have partnership interests; or

  • Own rental properties.
The AMT operates with its very own set of complex rules and requirements, which, in general, are considerably less accommodating than "normal" personal income tax rules.

The AMT requires you to add back some of the "normal" deductions and exclusions to your taxable income to determine your alternative minimum taxable income.

If you are a business owner, receive rental income, or have an interest in a partnership or an S corporation, in most circumstances, you are eligible for some tax breaks under the AMT. However, you won’t get to deduct exemptions (personal and dependents) or your standard deduction if you don’t itemize. Nor will you be eligible for state, local and property-tax write-offs. Other items - including certain investment and medical expenses and employee business expenses - don’t count as deductions under AMT rules, either.

There are many "ifs" and "buts" that are specific to the AMT that you probably haven’t encountered before, and a whole slew of different forms. Because the AMT operates under such different parameters, it’s a smart move to seek professional help early in the calendar year to review your specific situation.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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