Alternative Minimum Tax

Alternative Minimum Tax
by Takara Alexis

Over the ensuing years, the popular and practical definitions of wealthy adjusted for inflation, but the IRS code didn't. And although Congress has approved inflation-adjusted patches for many years, the current exemptions stand at just $58,000 for married couples filing jointly and $40,250 for single filers. The 2007 patch raised the levels effective to $66,250 for married couples and $44,350 for singles, and permits nonrefundable personal credits to be used to offset income when calculating AMT.

Now, instead of a tax net for the wealthy, the AMT has become the "stealth tax," torpedoing upper-middle class taxpayers who don't see it coming until they hit line 44 of their 1040. According to the Urban-Brookings Tax Policy Center, just 20,000 taxpayers fell under the AMT in 1970. By 2006, that had risen to 4 million. The

The problem with the AMT falls not in its tax rate - 28 percent compared to the 35 percent top bracket of the regular tax system - but in the deductions it disallows. You could still take mortgage interest and charitable donations, but the AMT excludes state and local income taxes and property taxes, unreimbursed business expenses, child tax credits, tax preparation fees, legal fees and home-equity loan interest.

Exercising incentive stock options could be the largest, most unexpected whammy. Under the AMT, the difference between the exercise price and the market price counts as income. Prior to exercising incentive stock options, talk to a financial professional. The number of options you exercise and the timing can significantly impact the amount of taxes you will owe on the gain.

Private activity bonds, municipal bonds for public projects like airports and stadiums, lose their tax-free status in AMT land. The offering circular for these bonds usually carries a disclaimer saying they may be subject to the AMT. Consult your financial professional before investing in or selling private activity bonds.

The typical tax strategy of delaying income and maximizing deductions may push you into the AMT zone. A financial or tax professional can assist you with balance ordinary income against deductions, including state taxes and when you pay them, to at least reduce if not eliminate the AMT hit. Such planning should look beyond the present tax year to ensure that minimizing AMT exposure in the current year doesn't maximize it the next.

Although the income patches Congress has made to the AMT levels have kept some taxpayers out of the AMT's clutches, a permanent repeal seems unlikely. The Treasury has estimated the resultant loss to the tax coffers would be $500 billion over 10 years. For now, the best strategy will be constant vigilance and competent tax and financial counsel to ensure the AMT doesn't take the wind out of your financial sails.

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