Alternative Minimum Tax for Individuals

By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com

The Alternative Minimum Tax for Individuals

The Individual Alternative Minimum Tax or AMT has been around since 1969. It was enacted by Congress after the Secretary of the Treasury testified that, in 1967, 155 people in the United States with incomes above $200,000 paid no income tax in that year. As a result, the AMT was passed to make sure that these wealthy individuals did not escape paying at least some tax.

The AMT is basically a separate tax system. You determine your tax liability under the regular income tax system and you do a second calculation under the AMT rules. Whichever is higher is the tax you pay.

Most individuals still do not pay the AMT and it is of no concern to them. However, when Congress passed this legislation almost 40 years ago, it did not index the AMT for inflation. While a $200,000 income put you in the elite status in 1969 that is no longer the case. $200,000 in 1969 is equivalent to over $1,000,000 today. This means that an estimated 4,000,000 Americans are now subject to the AMT. And that number is growing.

Congress would like to do away with the AMT, or at least reform this measure so that it fulfills its original intent of taxing the very wealthy. Unfortunately, there is a big problem with that. The AMT now generates a huge amount of revenues. As it is currently structured, the AMT will generate over $65 billion in 2007 and an estimated $250 billion just ten years later in 2017. If this source of revenue is eliminated, Congress must find additional revenues or reduce spending – neither of which they are inclined to do.

Who Pays the AMT?

The AMT was originally referred to as a “class” tax. If it is not reformed, it will become a “mass” tax. As can be seen from this table, the AMT is expected to hit an increasingly large number of taxpayers in the next few years.

Income	%Paying AMT in 2002	%Paying AMT in 2010
$50,000 - $75,000	1.4%	43%
$75,001 - $100,000	3%	79%
$100,000 - $500,000	24%	95%

In addition to shelling out more dollars to Uncle Sam, taxpayers are burdened with determining if they have an AMT liability and then calculating that liability. Fortunately, most income tax preparation programs will do this calculation, so that burden can be eased.

But there is still another problem to consider. Suppose you go the entire year with your regular withholding at a rate that usually give you a small refund or you break even. Then one year, you get hit with the AMT. Guess what? Not only do you owe the additional tax, you may get hit for interest and penalties for underpaying your tax. Bummer.

What Triggers the AMT?

Unfortunately, there is no simple answer to this question. It can be one big item on your tax return that triggers the AMT. But more likely, it is a number of small, otherwise insignificant items that, when combined, make you liable for the AMT. Frankly, about the only way to know for sure is to do the calculation. Although there are a number of things that can trigger the AMT, the “Dirty Dozen Minus One” covers the main issues.

1. Exemptions that you claim for you, your spouse, and your dependent children can create an AMT liability.

2. The Standard Deduction is taken by 70% of all taxpayers. Unfortunately, it is not allowed under the AMT.

3. If you live in a high-tax state, your State and Local Taxes may trigger an AMT liability.

4. Do you have a HELOC? Interest on Second Mortgages if the money is not used to buy, build, or improve your home is not deductible under the AMT.

5. Part of all of your Medical Expense Deduction will be disallowed under the AMT.

6. Do you have employee business expenses, income tax preparation fees, or investment expenses that you deduct as Miscellaneous Itemized Deductions? Not allowed under the AMT.

7. Non-refundable personal Tax Credits such as the education credits, child care credit, and energy credits are not allowed for the AMT. The adoption credit, child tax credit, and the retirement savings credit are allowed for the AMT.

8. If you exercise Incentive Stock Options that are not taxable under the regular income tax system, beware. That is income under the AMT.

9. Long-term Capital Gains reduce the exemption amount, leading to an AMT liability.

10. Enjoying that municipal bond you bought? Your Tax Exempt Interest may or may not be subject to the AMT. Your 1099-INT should indicate how much, if any, is taxable under the AMT.

11. Although recent legislation has reduced the benefits associated with Tax Shelters, there are still some around. The AMT reduces the benefits from these investments.

The Alternative Minimum Tax is a very complicated portion of our tax system. If you think you may be subject to it, or want to take action to try to avoid it, you should consult with your CPA or other tax planner. Additional information may also be found at www.webtaxcenter.com.

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Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.

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