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Alternative Minimum Tax planning

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Posted: Wednesday, August 18, 2010 11:00 am

The Alternative Minimum Tax (AMT) was created by Congress in 1969 to insure that everyone pays at least some tax. The AMT requires taxpayers to calculate their income tax twice, once under the regular method and again under the AMT method. The taxpayer is charged the higher tax level of the two.

AMT recalculates the federal income tax bill at a flat 26 percent rate and is increased to a flat 28 percent taxable income over $175,000, except for those filing in the "married filing separately" category. The rate is applied on your income after your standard or itemized deductions, but before your personal exemptions.

The AMT wage threshold isn't adjusted for inflation so more middle class individuals are expected to pay the AMT, according to the Treasury Department.

The estimated governmental compliance costs for the AMT exceeds $1.5 billion, almost one-third of the total revenues generated by the tax, making it a very inefficient tax.

There were revisions made in 2009 in order to lower the number of taxpayers that are affected by the AMT. The revision exempted an estimated 28 million taxpayers that would have been included in the AMT, paying $2000 more on average.

Various things beyond income can trigger the AMT. Understanding the differences in the AMT compared to the regular taxation method can help you to avoid the tax. The main differences are adjusted gross income, medical expenses, home equity interest, miscellaneous itemized deductions, phase-out of itemized deductions, net operating loss, loss limitations and alternative net tax operating loss deduction.

While you want to try to avoid paying the AMT, there is a tax credit for AMT paid in a prior year. Best ways to plan ahead to avoid the AMT is to use tax-planning software and study the form each time you prepare your tax return.

Ken Lindow, CPA, MBA, lives and works in Ahwatukee Foothills. Contact him with tax questions or column topic ideas at (480) 940-8351 or


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