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More Taxpayers Becoming Liable |
Exercising incentive stock options and making several other financial moves can inflate your tax bill and set off the alternative minimum tax or AMT.
Originally, the AMT was set up to keep very wealthy people from using various tax benefits to pay little or no tax. But the AMT doesn't just affect the wealthy anymore. It's hitting increasing numbers of moderate income
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"AMT Patch" Applied for 2008
and 2009
In order to prevent millions more individuals from falling victim to the alternative minimum tax (AMT), a law signed by President Bush on October 3, 2008 increases the AMT exemption amounts for 2008 only. The updated AMT exemption figures are:
- $69,950 for married joint filers. However, the exemption is phased out between alternative minimum taxable income (AMTI) of $150,000 and $400,200. Without the new law, the exemption would have fallen back to only $45,000.
- $46,200 for single taxpayers and heads of household. The exemption is phased out between AMTI of $112,500 and $282,500. Without the new law, the exemption would have dropped to only $33,750.
- $34,975 for those who use married filing separate status. The exemption is phased out between AMTI of $75,000 and $200,100. Without the new law, the exemption would have been only $22,500.
This law also allows taxpayers to use various personal tax credits (such as the dependent care credit and the two college education credits) to reduce both their regular tax and AMT bills for 2008 only. In addition, the law abates AMT liability resulting from the exercise of ISOs before 2008 for any unpaid tax liability on Oct. 3, 2008. This fix will prevent many middle-income individuals from being forced into paying AMT for the 2008 tax year but lawmakers have not solved the AMT problem. They just put a temporary "patch" on it.
2009
As part of the American Recovery and Reinvestment Act of 2009, the AMT patch is as follows:
For married joint-filing couples, $70,950
For unmarried individuals, $46,700
For married individuals filing separate, $35,475
Phase-out amounts remain the same as for 2008. | taxpayers. Back in 1987, only 140,000 personal returns were subject to the AMT. It is expected that 32.4 million taxpayers will be liable by 2010. (Without a temporary "AMT patch," described in the right-hand box, more than 21 million people would have been subject to AMT for 2008.)
Among the items that can contribute to an AMT liability are personal and dependency exemptions, state and local tax deductions, interest on second mortgages, tax credits, exercising stock options, long-term capital gains, tax-exempt interest, and tax shelters.
Here are the basic facts:
The AMT is a separate tax system with a set of rules aimed at determining the minimum amount in taxes you must pay given your income.
You calculate both your income tax under the regular rules and the AMT rules and pay whichever is higher.
Under the AMT rules, you add back many items that are deducted or excluded from regular income taxes. This increases the base for the AMT.
If you are liable for the AMT, you use the alternative AMT tax rates, which run from 26 percent to 28 percent. Regular tax rates go from 10 percent to as much as 35 percent.
Here are some tax return items that can affect the AMT:
It's common to make year-end prepayments of taxes that would be due the next year. However, if you wind up paying the AMT, you may derive no benefit from this practice. Your tax adviser can tell you what the crossover point is.
Certain incentive stock options (ISOs) qualify for tax deferral and preferential capital gains treatment, for the regular tax. But the exercise of these options triggers income for the AMT. You might want to stagger the exercise of options over several years to reduce AMT exposure.
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Miscellaneous Itemized
Deductions | The rules are similar to those for state and local taxes. Again, proceed cautiously before making prepayments of expenses like investment, legal and tax preparation fees. If you unavoidably must pay AMT, the rate is 26 percent on the first $175,000 of income and 28 percent for amounts above $175,000. Ask your tax pro if it makes sense to accelerate income or to defer deductions to a future year.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.
The drafter of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice. Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's particular circumstances.
The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. |
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