NEWS AND RESOURCES

Tax and Financial News for April 2000

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The Alternative Minimum Tax
Most people have never heard of the AMT tax. More and more people will unfortunately know all about the ATM tax this year. The Alternative Minimum Tax is a tax system with its own tax brackets that's parallel to the regular tax system. It was designed by Congress when it became clear that many wealthy people were paying little or no tax by creatively using deductions and credits. The AMT was formed to make sure the rich pay their share of taxes.

In the past few years, more middle income taxpayers have been hit by the AMT tax. This year approximately one million taxpayers will face the AMT tax. The AMT is sometimes triggered when a taxpayer takes large deductions. Taxpayers who have high state and local taxes are prone to the AMT because these taxes are deductible. The most prime candidate for the AMT is someone who takes deductions equal to or 25% or more of their adjusted gross income.

Exercising incentive stock options is the newest way to introduce yourself to the AMT. The difference between the exercise price (when you purchase the stock) and its market value is counted as income as far as the AMT. Under the regular system, you don't owe tax when you exercise the options, only when you sell the shares. There is a break for you if your stock options trigger the AMT. You get an AMT credit that can be carried forward and used in a year that you don't fall into the AMT.

The AMT has two tax rates of 26% and 28%, which does not sound so bad. There are a lot of people that pay higher rates than 28% but here is what you need to understand. Under the AMT, you lose the ability to take a lot of deductions you may be expecting. If this is the case, you pay a lower rate on a higher taxable income. A lot of deductions that you might use to offset your ordinary income are being disallowed. Under the AMT some state and local taxes, property taxes and many miscellaneous itemized deductions are worthless. Deductions such as charitable contributions and mortgage interest however, are allowed. People that fall into the 31% or higher bracket, these deductions can lose their value if they are deducted in an AMT situation. In a 36% tax bracket, you would get a 36% benefit from a deduction. In the AMT, you get a 26% or 28% benefit.

With current rules concerning the AMT, about 9 million taxpayers will fall prey to the AMT by year 2008. Of the 9 million, about 1.8 million will have an income of $100,000 or less and 157,000 will have an income of $30,000 to $40,000. The AMT exemption amounts and tax-bracket break points have not been adjusted for inflation. The AMT needs to be updated but not everyone wants to do this, as it will mean less money for Uncle Sam.

What this means to you

If you think you are even close to the AMT, you might want to defer deductions until the next year. The best thing to do is get a professional who can help make the right decisions for your personal situation. For example, under a regular tax system, a taxpayer would accelerate deductions and defer income. If you are close to the AMT, the best thing to do might be to defer deductions and accelerate income. Not understanding how the AMT works can make for unexpected surprises at tax time. A person can pay all year to prepay their state taxes and later come to find out, the AMT made them lose the state tax deduction also, since state taxes are not deductible under the AMT.

For a person in the 39% tax bracket, staying in the AMT and accelerating income may be a good idea. If this is possible, it would mean more income is taxed at the AMT's rates rather than the higher regular rate. Don't try to figure this out on your own. There are last minute changes you might not know about. For example, a last minute provision that Congress passed to exempt some credits such as the child tax credit, need to be taken into consideration.

People with income over $75,000 and large deductions are especially vulnerable. Persons with several children, interest deductions from second mortgages, capital gains, high state and local taxes, and incentive stock options are the ones the IRS will be looking at for the AMT tax. It is too late to help yourself for 1999 taxes but the decisions you are making right now will determine how well you will get to know the Alternative Minimum Tax next year.

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