Business & Tax InsightsBy Mark Buescher, C.P.A.Guest Columnist
Many taxpayers have never heard of the alternative minimum tax, but many individuals get hit with this extra tax and do not even understand it. As the government seeks additional sources of revenue, AMT as it is commonly known, is expanding and more “average” taxpayers are now subject to the tax.
The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. However, the AMT has increased its reach and now applies to some people who do not have very high income or don’t claim many special tax benefits.
Proposals to repeal or reform the AMT have languished in Congress for many years, but effective action does not appear to be forthcoming in the near future. As it stands, almost anyone is a potential target for this tax.
In simplistic terms, the AMT is nothing more than a parallel tax. First you compute your regular income tax. Then you compute your minimum tax, and your “alternative” is to pay the greater of the two.
Whereas the regular income tax is computed on taxable income (adjusted gross income less itemized/standard deductions and personal exemptions), the AMT begins with adjusted gross income less deductions, adds back various deductions not allowable for AMT purposes, applies an AMT exemption ($48,450 for single taxpayers, $74,450 for married taxpayers) and is computed on the remaining balance. The exemption phases out at higher income levels.
One reason that the AMT could be greater than your regular tax is that while the regular tax has graduate rates (from 10% to 35%), the AMT has only two rates, 26% and 28%. Many deductions allowable for regular tax purposes aren’t allowable for AMT purposes. The most common of those deductions include (but are not limited to) the following:
Taxes. No AMT deduction is allowed for state/local income taxes, real estate taxes, or personal property taxes.
Miscellaneous itemized deductions. No AMT deduction is allowed for unreimbursed employee business expenses, investment expenses, or any other similar miscellaneous deduction.
Large investment income. For the regular tax, there is a special tax rate (sometimes as low as zero) for qualified long-term capital gains and dividends, but for AMT purposes, there is no special lower tax rate to apply to this income.
Congress was successful in making it difficult to avoid the AMT. AMT planning requires the understanding of how the AMT is computed and how the various AMT non-allowable deductions factor into your tax return. Obviously, the AMT can be difficult and complicated, but with a greater knowledge of its makeup, you may be able plan for its impact.
Mark Buescher, CPA, is owner and principal of Buescher and Ruff, LLC, a local full service accounting firm in Madison, specializing in tax preparation, business consulting and tax planning. Tax laws contain varying effective dates and numerous limitations and exemptions that cannot be summarized easily. For details and guidance for your specific situation, contact your tax advisor.