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Alternative Minimum Tax—Not Just for High Earners Anymore
In 1990, 132,000 individual
taxpayers paid alternative minimum tax (AMT), a tax created to ensure that
high-income taxpayers paid their fair share of taxes. Because Congress has
not indexed the AMT for inflation, increasing numbers of middle-income
taxpayers will end up footing the bill in the future. Unless things
change, the nonpartisan Congressional Budget Office estimates that by the
year 2016, AMT will affect 33 million taxpayers to the tune of $81
billion.
Think you’re exempt from AMT?
Think again. Consider “George Greatheart” whose elderly parents are in
declining health and incurring some astronomical medical bills. George’s
father requires the use of a wheelchair and needed an accommodating home.
George, in caring for his parents, took over their support and purchased a
small wheelchair-friendly house in which his parents could more
comfortably reside. He planned to deduct the real estate taxes paid on his
own residence and two years of back taxes on the house purchased for his
parents, anticipating a significant refund. Instead, George found out that
the over $17,000 in medical expenses and $11,000 in real estate expenses
are AMT ‘preference items’ and they put him over the 7.5 percent
adjusted gross income threshold. Instead of a much-needed refund, George
got stuck paying the AMT. After the sick feeling he got when he saw his
tax return, he enlisted the help of a tax professional so he knows how to
better leverage his expenditures and avoid similar situations in the
future.
“AMT is like a ‘stealth
tax’,” contributes enrolled agent Kevin Huston and NATP member from
Arden, North Carolina. “It comes out of nowhere when you least expect
it, and catches you by surprise. All the rules for regular tax planning
are turned upside down when you are planning to avoid or minimize AMT. It
looks very much like a flat tax, where you don’t get to use your
deductions—with AMT, planning is critical, as tax professionals cannot
usually fix it after the end of the year,” Huston adds. However, Dawn J.
Renner, CPA, MBA of Minnetonka, Minnesota, mentions that that in some
cases there is a glimmer of hope, “In years after paying AMT, tax
preparers can see if filing Form 8801, Credit for Prior-Year Minimum Tax,
will allow you to recoup some of the AMT paid.” Renner also reminds that
many states also have an AMT and the state AMT may be computed differently
than federal taxes.
Depending on your circumstances,
you may be a target for AMT. Here are the top ten AMT preference items
that could potentially hurt you in the future:
• Personal exemptions.
• Standard deduction.
• State and local income, sales,
and property taxes.
• Mortgage interest on refinanced
or second mortgages and home equity loans not used to buy, build, or
improve a home.
• Medical expenses.
• Miscellaneous itemized
deductions subject to the two percent floor.
• Exercise of incentive stock
options.
• Long-term capital gains.
• Tax-exempt interest from
private activity bonds.
• Business tax deductions.
If you are part of the potential
group of middle-income taxpayers that may be ensnared in the coming years
by AMT, talk with your tax preparer when you have your taxes prepared this
year, to avoid being caught in coming years. Small changes can reap big
rewards.
For local assistance with Alternative Minimum Tax
and related issues visit www.restylement.com or contact Frederick Dean,
Jr. at dean@restylement.com.
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