Finance: Adjusting to the AMT

The faltering economy has most taxpayers hoping for as many breaks as possible this year. The government has tried to curtail the subprime mortgage crisis with various incentives, including tax breaks for homeowners facing foreclosures, and the much-touted economic stimulus package. Meanwhile, there’s a controversial tax stinging more taxpayers each year. Called the Alternative Minimum Tax (AMT), it was originally enacted in 1970 to ensure that the wealthy couldn’t exempt, deduct and credit their way out of paying any taxes at all.

      Fast-forward to today. Incomes have increased exponentially during the last several decades, subjecting millions of upper/middle- and middle-income earners to the AMT as well. This has happened because the AMT was never indexed to adjust to inflation. As the article, “A Taxing Situation,” by Chelan David, published in the April 2007 issue of DAYSPA explains, the AMT operates under its own set of tax rules. “Under AMT rules, some deductions allowed when computing standard tax are restricted, certain items of income and deduction items are computed differently and a different rate schedule applies,” David explains.

      Congress has tried to mediate the effect of AMT on those taxpayers who are unlucky enough to qualify, by annually passing what are referred to as “patches.” However, Congress didn’t enact the patch that affects 2007 tax filers until late December. This forced the IRS to withhold the publication of five commonly used tax forms pertaining to AMT tax, including those for childcare and education expenses, and mortgage interest credits. As a result of the unavailability of these forms, several million early-bird tax filers were delayed from sending their 2007 returns in January. Unfortunately, even this most recent adjustment won’t help an estimated 4 million tax filers who will be subject to the AMT.

      If Congress does nothing permanent to revoke this tax, the Washington Post estimates it will expand to include more than 30 million taxpayers by 2010.

      Whose 2007 tax return will be subject to the AMT? Generally speaking, the AMT seems to affect households that earn at least $100,000, have dependents and live in highly taxed states. But don’t gauge your chances of being affected by this profile alone. “High income alone isn’t the only qualifier,” writes David. “The AMT targets taxpayers who make deductions, exemptions and exclusions from regular income tax, and it can be triggered by a combination of small things, or just one large item.”

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      The best way to find out whether you owe AMT is to consult a tax professional. You or your tax preparer will fill out Form 6251. It essentially adds back certain deductions and credits taken from the standard form you use to fill out taxes. According to David, these items might include employee business expenses, investment expenses, your state and local income, and property tax write-offs. To assist with computations, this year the IRS is also offering an electronic worksheet called “AMT Assistant for Individuals,” available at www.irs.gov.

      Avoiding the AMT altogether is difficult if you qualify for the tax. However, careful financial planning can help reduce your bill. David suggests that the best strategy is to carefully analyze potential deductions. It can be particularly helpful if you expect income fluctuations for the next several years. “If you find you fall under the AMT for the tax year, defer some of those deductions to the following year when perhaps you won’t be affected by the AMT,” David writes. “This way, you won’t be affected by them now but can take full advantage of them later.”

To learn more about AMT, visit www.irs.gov.

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