Alternative Minimum Tax Sneaks Up On Mid-Incomers

What was meant to keep high-income taxpayers from slipping through loopholes is beginning to hit more and more mid-income level folks.

Alternative minimum tax (AMT) is a different way to calculate taxes so it treats deductions, credits and exemptions differently, according to an article published in Beall Barclay Wealth Management’s annual tax tip magazine.

Beall Barclay & Co. PLC is based in Fort Smith and employs 29 CPAs.

The article said AMT is not indexed for inflation, so over time inflation and economic growth have resulted in more and more taxpayers figuring their taxes under the system. There were 132,000 taxpayers affected by the rules in 1990, the article claims, and about 1.3 million taxpayers in 2000.

The AMT does not allow many deductions or credits permitted under the regular system. Property taxes, state and local taxes, some mortgage interest, some medical expenses and many itemized deductions cannot be deducted under the AMT, according to Beall Barclay.

AMT has only two tax rates: Incomes under $175,000 are taxed 26 percent and those with incomes over $175,000 are taxed 28 percent.

According to Little Rock-based Moore Stephens Frost Financial Group’s tax tip guide, a person will be subject to AMT if their AMT liability exceeds their regular tax liability.

AMT liability is determined by adding tax adjustments back into taxable income and deducting the exemptions based on a person’s filing status.

The exemptions are:

• $40,250 for single, head of household

• $58,000 for married, filing jointly

• $29,000 for married, filing separately

Basically, experts from Beall Barclay to The Motley Fool Web site recommend having a tax specialist figure the taxes both ways to determine which system is most advantageous.

Some things that contribute to AMT liability, compiled from various sources, include:

• Personal exemptions — The more exemptions there are, the greater the chances of being a candidate for AMT.

• Miscellaneous deductions — According to The Motley Fool, itemized deductions greater than 2 percent of adjusted gross income are deductible for normal tax, but not for AMT.

• State and local taxes — The Motley Fool said this is responsible for bringing thousands of people into AMT range. Avoid paying in years where AMT is a threat.

• Medical expenses — AMT allows a medical expense deduction, but it must be more than 10 percent of adjusted gross income.

• Incentive stock option and capital gains — Too much of either could bring an individual within sight of AMT, so experts caution to be mindful.

The IRS’s AMT Form 6251 and instructions can be found online at www.irs.gov.