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Alternative Minimum Tax

The Alternative Minimum Tax (AMT) has come to town. Those of us familiar with the AMT tax are probably just cooling down due to being subject to this tax. Those of you not familiar with AMT, sit tight, The Treasury Department projects that by 2010 approximately 40% of married couples with children will be subject to AMT.

What is AMT? Congress enacted the AMT in 1969. Some people with a high income had large deductions and actually paid less tax than those with lower incomes. The AMT was supposed to make the tax system fairer. The AMT is close and actually in some ways parallel to that of our regular income tax. It expands the amount of your income that is taxed by adding back to income deductions that were allowed in our regular tax system.

What items are added back to income? Some of the more common adjustments and preferences are: tax-exempt interest, mortgage interest and home equity interest where the funds were not used to buy, build or substantially improve your home, state and local income taxes, real estate or property taxes, medical expenses, miscellaneous itemized deductions—which includes unreimbursed employee business expenses and investment fees, exemptions, incentive stock options to name a few.

Can I avoid paying AMT? There are some strategies that can be implemented to assist in avoiding AMT. For example, if you deduct medical expenses, and your employer has a pre-tax medical plan, look to participate in your employer’s plan. This will help reduce both AMT and regular income tax. Also, if you deduct unreimbursed employee business expenses, ask your employer if they have or would adapt an accountable business plan. This is where you would submit receipts to your employer and your employer would reimburse you directly. The reimbursement is not subject to taxation and you also do not deduct the expense.

Is there good news about AMT? Well, the more folks that are becoming subject to the AMT will hopefully create more awareness in Congress’ eyes. This may lead to action regarding this hidden tax increase that will continue to affect more and more every year.

If you have any questions, or would like to discuss if the AMT will affect you for 2005 and what strategies may be implemented to reduce this tax and exposure, please do not hesitate to contact us.

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