Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Facing off with the Insane AMT

Posted by taxguru on December 1, 2007


What the “Alternative Minimum Tax” Really Means for American Families – As if the regular tax code isn’t difficult enough to maneuver in, we now have to do more to work with the idiotic and Insane AMT rules. More costly neglect by our imperial rulers in DC.

Here is what the TaxCoach service has for an introduction on avoiding the AMT:

Alternative minimum tax (“AMT”) is a parallel tax designed to prevent “the rich” from using regular deductions to avoid tax entirely. In 2005, it hit 3 million taxpayers nationwide, primarily in states with high income and property taxes. (This includes IRS Commissioner Mark Everson, who announced in 2004 that he had been hit for the first time.1) But the tax is not indexed for inflation, and by 2010, it’s expected to hit 30 million, including 94% of married filers with children making $75,000 to $100,000.

The AMT system starts with regular taxable income then adds “preference items.” These include:

    • Medical expenses between 7.5% and 10% of AGI
    • State and local taxes deducted on Schedule A
    • Home equity interest not used to buy, build, or improve your home
    • Miscellaneous itemized deductions
    • Investment interest figured according to special rules
    • A portion of post-1986 accelerated depreciation
    • Gains from incentive stock options (“ISOs”)
    • Interest from most “private activity” municipal bonds

Once you’ve determined AMT income, subtract an exemption of $62,550 (joint filers), $42,500 (single filers), or $31,275 (separate filers) (2007). These exemptions phase out by 25 cents for every dollar of AMTI above $150,000 (joint filers), $112,500 (singles), or $75,000 (separate filers). The tax itself is 26% of AMTI up to $175,000 plus 28% of AMTI above $175,000.

Here are eight ways to help avoid the AMT:

  • Don’t prepay state income and property taxes in years you’re subject to the AMT.
  • Avoid private activity municipal bonds.
  • Defer exercising ISOs where it makes investment sense.
  • Capitalize, rather than deduct, investment expenses
  • Schedule business equipment purchases when you can use your full depreciation deductions.
  • If your employer reimburses business expenses, make sure you have an “accountable” plan to keep them off your return.
  • Defer recognizing capital gains. These gains are taxed at the same 15% rate as for ordinary income; however, they increase taxable income subject to the AMT.
  • Consider emancipating college-age children. The AMT disallows personal exemptions, so there’s no extra tax to pay by giving them up. Letting children claim those exemptions can save tax and qualify them for more generous financial aid.

Tax Savers

If your regular tax is higher than the AMT rate, accelerate income into a year when you pay the AMT. You’ll save up to 9% if you can shift income that would otherwise be taxed at the top bracket into an AMT year.

 

TaxCoach Software: Finally! Plain-English Tax Planing That Builds Your Business!

 

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