Situation:
Your clients have come to you interested in ways to avoid the alternative minimum tax. They currently reside in Kentucky and make a combined income of $85,000 from salary and wages.
They also receive interest income of $1,200 and qualified dividend income of $2,500. They pay state taxes of $6,970, real estate taxes of $6,385 and other taxes of $1,500. Their mortgage interest expense is $15,000.
The taxpayers have projected that they will be subject to an increase in their taxes of $331, due to the AMT.
They have requested your assistance in lowering or eliminating this additional tax.
Solution:
The Emergency Economic Stabilization Act of 2008, passed on Oct. 3, included an AMT patch that increased the exemption amount for individuals.
The amount for married individuals filing a joint return and a surviving spouse was increased to $69,950 from $45,000.
The exemption amount for unmarried individuals was increased to $46,200 from $33,750.
Since the AMT patch was passed, your clients will no longer be subject to the AMT.
However, if the patch is not extended to 2009, they will need to plan for ways to avoid the AMT.
Because the AMT prevents the use of the standard deduction but does not limit the use of some itemized deductions, the taxpayers may choose to itemize deductions, even when the standard deduction exceeds the value of their itemized deductions.
They also may consider paying their property taxes in 2010 since this is not an allowable deduction for AMT purposes.
The individual AMT operates parallel to the regular income tax, with a different income definition, rate structure, and allowable deductions, exemptions, and credits. In short, after calculating regular tax liability, taxpayers must calculate their “tentative AMT” under the alternative rules and rates and pay whichever amount is larger.
To calculate tentative AMT, taxpayers determine the AMT tax base (AMTI), apply the AMT tax rate and exemption phase-out schedules, and then subtract applicable credits.
Technically, AMT liability is the excess, if any, of tentative AMT above the amount of taxes due under the regular income tax alone.
Taxpayers owe AMT when their tax calculated under the alternative rules, or the tentative AMT, exceeds their tax calculated under the regular system. The amount by which their tentative AMT exceeds their regular tax is then payable as AMT liability.
Because of this comparison, the number of taxpayers affected by the AMT depends on the spread between the regular tax rates and the AMT rates.
Changes that increase the spread will reduce the number of AMT taxpayers and changes that decrease it will tend to increase the number of AMT taxpayers. The individual income tax cuts enacted since 2001 exacerbate the problems of the AMT.
The individual AMT was originally enacted in 1969 to guarantee that 155 high-income individuals paid at least a minimal amount of tax. By 1970, 20,000 taxpayers were affected by AMT.
Absent a change in law, more than 30 million taxpayers will become subject to the AMT by 2010. By 2017, the AMT under current law will capture about 39 million taxpayers.
Tax INsight is prepared by experts who are active members of the American Institute of Certified Public Accountants. Tax INsight appears on the web and in IN Daily every Tuesday. Comments are welcome at
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