Thousands of middle-income taxpayers may receive a nasty
surprise this year
– an IRS bill for the alternative minimum tax (AMT).
Thousands of middle-income taxpayers may receive a nasty surprise this year – an IRS bill for the alternative minimum tax (AMT).
The AMT was intended to apply only to high-income taxpayers, who otherwise could use tax “preferences” to reduce their tax liability, sometimes even to zero. Since Congress wanted to collect at least a minimum level of tax from this group, it enacted a parallel income tax system that did not allow certain deductions, credits, and preferences permitted under the regular tax structure. You’re required to calculate both regular and alternative minimum tax, and then pay the higher of the two.
To protect middle-income taxpayers, a flat AMT exemption was provided to compensate for the disallowed deductions and credits. Unfortunately, Congress failed to index the AMT exemption for inflation. Other deductions and credits are tied to inflation and increase each year while the AMT exemption stays constant. As a result, the AMT exemption has become relatively smaller and increasingly less effective at sheltering mid-level earners.
You’re especially at risk for the AMT if you have large itemized deductions, claim numerous credits and personal exemptions, have high depreciation expense or exercised incentive stock options during the year.
In 1990 the AMT hit 132,000 taxpayers. Almost 1.5 million owed this tax in 2001 and projections indicate that more than 20 million taxpayers could face the AMT by 2011. With the growing number of taxpayers facing the AMT, lawmakers have been exploring how to either reform or repeal this tax. Current tax law provides some relief by excluding certain tax credits from the AMT and temporarily increasing the AMT exemption amount.
Determining whether you will be subject to the AMT is crucial in your tax planning. The fact is that tax strategies designed to lower your regular tax bill can actually trigger the AMT.
Give us a call if you would like to review the impact of the AMT on your tax situation.
Kerry Lorincz is a CPA and partner with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister and in Morgan Hill.
