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Are You in the AMT Danger Zone?

Date: July, 2010

The alternative minimum tax (AMT) was originally designed to ensnare only the wealthiest individuals. But this "stealth tax" has been steadily hitting a far wider group of taxpayers than initially intended. If you are in danger of incurring AMT liability, you should familiarize yourself with the rules.

 Basic premise: The AMT runs on a separate track beside your regular tax liability. After you have figured out your regular taxable income, your AMT liability must be computed. Here are four basic steps:

 1. Add certain tax preference items to your taxable income and make other technical adjustments required by law.

 2. Subtract from this figure a special exemption amount based on your filing status.

 3. Apply the AMT rate to the net amount. For 2010, the applicable rate remains 26% on the first $175,000 of AMT income; 28% for amounts above $175,000.

 4. Compare your AMT liability with your regular tax liability. If the AMT is higher, you are required to pay the excess in addition to your regular tax liability.

 The list of preferences and technical adjustments is a long one. Suffice it to say that the AMT computation requires you to add-back certain itemized deductions and personal exemptions. That is one of the reasons why more taxpayers have become unintentional victims of the AMT. 

 There have been several highly publicized cases where couples with many dependents have been hit by the AMT, despite having relatively low incomes. Furthermore, taxpayers who reside in states with high-income tax rates and who make high mortgage interest and property tax payments are likely to encounter AMT problems.

 Another problem: Although Congress has tinkered with the exemption amounts in recent years, the tax relief has been minimal. Absent any legislation, the exemption amounts for the 2010 year are scheduled to drop to $45,000 for joint filers (from $70,950 in 2009) and $33,750 for single filers (from $46,700 in 2009). However, as this is being written, another minor "patch" in the AMT exemption amount is anticipated this year.

 Significantly, the AMT exemption amounts are phased out for high-income taxpayers. Each exemption is reduced by 25 cents for each dollar of AMT income over $150,000 for joint filers; $112,500 for single filers and heads of household; and $75,000 for married couples filing separately. Key point: These figures have not been adjusted for inflation in recent years.

 As the end of the year approaches, you might actually accelerate more income into this year if you expect to pay the AMT in 2010. Reason: The extra income will be taxed at either the 26% or 28% AMT rate. In comparison, your regular top income tax rate may be higher, especially if rates increase in 2011.

 In summary: Review your situation with a professional tax adviser. Depending on your personal circumstances, it may be possible to either avoid or reduce the impact of the AMT in 2010.
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