Don?t Be Blindsided by the AMT

When it was first devised, the alternative minimum tax (AMT) was supposed to hit only the most affluent taxpayers. That?s not the case anymore. In fact, this ?alternative tax? may become the regular tax regime for the majority of middle-income and upper-income taxpayers, as well as a sprinkling of low-income taxpayers.

If you haven?t been paying attention to the AMT thus far, it?s time to pay closer attention.

How it works: The AMT runs on a separate track beside your regular tax liability. After you have figured out your regular taxable income, your AMT liability must be computed. There are four basic steps.

1. Add certain tax preference items to your taxable income and make other technical adjustments required by law.

2. Subtract from this figure a special exemption amount based on your filing status.

3. Apply the AMT rate to the net amount. For the 2006 tax year, the applicable rate is 26% on the first $175,000 of AMT income; 28% for amounts above $175,000.

4. Compare your AMT liability with your regular tax liability. If the AMT is higher, you are required to pay the excess in addition to your regular tax liability.

The list of preferences and technical adjustments is a long one. Suffice it to say that the AMT computation requires you to add back certain itemized deductions and personal exemptions. That is one of the reasons why more taxpayers have become unintentional victims of the AMT.

There have been several highly publicized cases where couples with numerous dependents have been hit by the AMT, despite having annual incomes of $50,000 or less. Furthermore, taxpayers who reside in states with high income tax rates and make high mortgage interest and property tax payments are likely to encounter AMT problems.

Another reason for the increase in taxpayers affected by the AMT liability is inflation. Although Congress has tinkered with the exemption amounts the last few years, it has failed to provide an annual inflation adjustment. For the 2006 tax year, the exemption has been increased slightly to $62,550 for joint filers; $42,500 for single filers.

Worst of all: The exemption amounts are phased out for high-income taxpayers. Each exemption is reduced by 25 cents for each dollar of AMT income over $150,000 for joint filers; $112,500 for single filers and heads of household; and $75,000
for married couples filing separately. These figures have not been adjusted in recent years.

The AMT calculations are not for the faint-of-heart. We would be glad to provide the expertise required in this area.

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