Q What is the Alternative Minimum Tax?
A The Alternative Minimum Tax (AMT) is a secondary way of calculating income tax liability.
“It was a way to make sure the wealthy didn?t get away without paying any income tax by structuring their affairs in a tax-friendly manner,” said Gene Utterback, enrolled agent (certified by the IRS for tax knowledge), and member of the Maryland Society of Accountants.
But when Congress instituted the AMT in 1969 ? affecting 155 taxpayers originally ? they never wrote in automatic inflation-based adjustments, so it impacts more taxpayers every year.
Utterback said in 2001 fewer than 2 percent of all taxpayers were subject to the AMT.
“Current projections indicate that by 2010 the AMT will affect one-third of all taxpayers and will apply to approximately 95 percent of taxpayers who make between $100,000 and $500,000,” he said.
As these taxpayers identify more deductions AMT goes up, so after a certain point deductions don?t usually help, he said.
The way to avoid AMT, unless Congress fixes it, is to make less money.
“Essentially, you have to add back most of your deductible items, like state taxes and mortgage interest, give up the preferential tax rates on long-term capital gains, add back all nontaxable income and use a sliding-scale AMT exemption” in place of the other deductibles and exemptions, Utterback said.
That amount, taxed at 26 percent, is compared to a regular tax, and the filer pays whichever amount is more.
“The AMT is one of the most complex and misunderstood sections of the tax code, and it is hitting more and more of us,” he said.
