• If you are having problems logging in please use the Contact Us in the lower right hand corner of the forum page for assistance.

Accountant?

ranch hand

Well-known member
Tax Guide

The Alternative Minimum Tax


Email This Story Print This Story
Save This Story Send Us Your Comments
Add this column to your News Alerts (New!)

REMEMBER BACK when you were young and poor and nothing made you madder than tales of rich people who paid nothing in income taxes? Well, you weren't alone, and that anger led to the creation of something called the alternative minimum tax, which was designed to keep the rich from living tax-free.
Fast-forward a few years. You're a bit older, somewhat better off and paying far more in taxes than you ever thought possible. So what's the last thing you expect to see when you fill out your tax return? That you owe the alternative minimum tax. You can take some solace in the fact that thousands of taxpayers just like you have been snagged by this nasty bit of tax law in recent years. While only 19,000 people owed the AMT in 1970, over 4 million are paying it now.

What happened? Inflation, mostly. While the "regular" tax brackets, exemptions and standard deductions are adjusted annually for inflation, the AMT brackets and exemptions are not, so many people whose income has grown with the economy enter the dreaded AMT zone each year. Especially vulnerable are people with income over $75,000 and some large deductions, but not the exotic ones that were originally targeted by the AMT's creators. Most vulnerable are taxpayers with several children, interest deductions from second mortgages, capital gains, high state and local taxes, and incentive stock options.

How the Tax Works
The best way to understand the AMT is to view it as a separate tax system. It has its own set of rates and its own rules for deductions, which usually are less generous than the regular rules. Because of these confusing rules, the only ways you can tell if you owe the tax are by filling out the forms (essentially doing your taxes a second time) or by being audited by the Internal Revenue Service. If it turns out you should have paid the AMT but didn't, you will owe the back taxes plus any interest or penalty that the IRS decides to dole out.

You should definitely run the numbers if your gross income is above $75,000 and you have write-offs for personal exemptions, taxes and home-equity loan interest. Ditto if you exercised incentive stock options during the year, or if you own a business, rental properties, partnership interests or S corporation stock. If you earn more than $100,000, run the numbers for that reason alone.

That means filling out Form 6251. In effect, you are simply adding back some tax deductions and income exclusions to your regular taxable income to arrive at your alternative minimum taxable income. Here is where the middle class gets soaked. First you have to add back your personal- and dependent-exemption deductions ($3,200 each in 2005, $3,300 each in 2006), then your standard deduction if you don't itemize ($10,000 for joint filers in 2005 and $10,300 for joint filers in 2006; $5,000 for singles in 2005 and $5,150 for singles in 2006). You also lose your state, local and foreign income and property-tax write-offs, as well as your home-equity loan interest, if the loan proceeds are not used for home improvements.

The AMT also ignores some itemized deductions, such as investment expenses and employee business expenses, and some medical and dental expenses. It also counts as income the interest from private-activity bonds, a type of tax-exempt bond issued by governments, usually to finance sports stadiums and the like. Finally, AMT rules force you to pay taxes on the "spread" between the market price and the exercise price of incentive stock options granted by your employer. For example, if you exercised an option to buy 100 shares of stock for $3 a share and the stock was trading at $10, the spread would be $7 a share, or $700. Under the regular rules, you wouldn't pay current taxes on that amount, but under the AMT, it's considered income.

Don't give up hope. You do get a few small breaks under AMT rules that you wouldn't see under the regular tax rules. For example, while you can't deduct state, local and foreign taxes under AMT rules, you can deduct the refunds, which would be considered income under the regular tax rules. And because you're taxed on the spread on your incentive stock options, your tax basis for the shares you bought is higher under the AMT, meaning your tax bill will be lower when you sell the shares.

The AMT form has quite a few other pluses and minuses, but you can probably ignore them unless you own a business, rental properties or interests in partnerships or S corporations. If you do, you may need a tax pro to prepare at least the Form 6251 part of your return.

Finally, you get to deduct the AMT exemption — $58,000 for joint filers; $40,250 for unmarried persons; $29,000 for those married filing separately. However, this exemption is reduced by 25 cents for each dollar of AMT taxable income above $150,000 for couples ($112,500 for singles and $75,000 for married filing separate status), and it's not adjusted for inflation, which is one reason why more people owe the AMT every year. (The exemption amounts for 2006 are not yet finalized, but we expect them to remain the same.)

After the exemption (if any) has been deducted, the result is subject to AMT rates — 26% on the first $175,000 ($87,500 for married couples filing separately) and 28% on the excess. Again, the AMT brackets are not adjusted for inflation, which causes much greater exposure to the tax as the years go by. If the AMT exceeds your regular tax, you have to pay the greater amount. Technically, the AMT is just the liability over and above the regular tax, and this figure is entered on line 45 on page 2 of Form 1040.

Sorry, you're not finished yet. People get pushed into the AMT zone for different reasons, and some are actually better than others. That's because you could be eligible for the so-called minimum tax credit, which allows you to claim a credit on your tax return in future years for some of the extra taxes you paid under AMT rules. So you have to fill out another document, Form 8801, to determine if you are eligible. For whatever reason, the tax rules say that exercising incentive stock options is one of the few things that qualifies you for the credit, so if that's the reason you ended up paying the AMT, pay special attention to this form.
 

Jinglebob

Well-known member
Nope, just tryin' to get thru' several months a day. I work awhile and tase a break and do something else and then come back to it. Should get finished up tomorrow.
 

Hanta Yo

Well-known member
Jinglebob said:
Nope, just tryin' to get thru' several months a day. I work awhile and tase a break and do something else and then come back to it. Should get finished up tomorrow.


JB,

I love doing books, next year I'll post your stuff and make it accountant ready and I work cheap!! You'll also get a paper copy plus whatever copy you want to keep to use on your computer; ie cd, 3" floppy (and you know what? no one knows about how floppy a floppy can be without experiencing the 5 1/4 in floppy. If you think I'm a little off, I still have my AT&T computer, 5 1/4" floppy disk, 20 mb hard drive, 3.2 hertz speed, an awesome 1985 model!!! Best of the line at the time...My, how far we have come since those days :? Had to know computer language at the time but windows stepped up to the plate and made us computer illiterate!!!!

Gee, talk about changing the subject only three times in one paragraph, must be a female thing :roll: :wink:
 

Jinglebob

Well-known member
Thanks for the offer, but no thanks.
I feel it builds character in me to have to do it. :roll:

Besides, I kind of enjoy the shock value of seeing where all the money came from and went and still wonder why there is so little in my checking acct. :lol:

I got another month done, so only have 3 to go! Yaaaa! :lol:
 

Jinglebob

Well-known member
Hanta Yo said:
Good For You. You really do need to know where all your money goes to...unfortunately you only know at the end!! :p

No, I know where it's going as I am spending it and it always makes sense at the time, but later, when I add it all up, my wife just spends waaayyy too much of my money! :shock:

Whoa, settle down ladies! I was just kidding.

She's got her checking account and I have mine and we both can use the others, but very seldom do. That way, we are both responsible to our own, when, and/or if, an overdraft comes in.

My wife spends very little of my money. She just makes me spend it! :lol: :lol: :lol: :lol:


Settle down girls, settle down. man, some people can't even take a joke! :shock: :oops:

:wink:
 

cowsense

Well-known member
Jinglebob- Everyone told me I was the only procrastinater left and I'm glad to see there are some others out there. Which is your favourite accounting method, hat box, boot box or humongous pile. Personaly I use combinations of all three :lol:
 

Jinglebob

Well-known member
cowsense said:
Jinglebob- Everyone told me I was the only procrastinater left and I'm glad to see there are some others out there. Which is your favourite accounting method, hat box, boot box or humongous pile. Personaly I use combinations of all three :lol:

Big box, but I throw them in, in the order they come, so it's easy to sort thru' them. Hey, it works for me. I know where everything is. Now,if I can just find the one I want. :???:

Maybe we need to start a new group. POA. Procrastinaters of America. We'll charge dues, but just get them to us whenever it works out for you! :x
 

Latest posts

Top