Abstract: EXECUTIVE SUMMARY * THE ALTERNATIVE MINIMUM TAX (AMT) HAS BECOME an increasing concern for middle-income taxpayers. The AMT is not just a problem for wealthy taxpayers who engage in activities that result in tax preferences. Itemized deductions and personal exemptions are subjecting a growing number of taxpayers to the AMT. * FOR A GIVEN LEVEL OF TAXABLE INCOME, CPAs can-- and should--calculate a break-even point: the amount of combined tax preferences and adjustments a taxpayer can have before he or she is subject to the AMT. For example, in 1999 a married couple filing jointly with $100,000 of taxable income can have combined preferences and adjustments of $25,667 before having to pay AMT. * THE AMT CAN TRAP TAXPAYERS with modest incomes and relatively simple tax situations. One reason for this is that rates and exemptions used in computing the regular income tax are indexed for inflation. AMT rates and exemptions are not. * TAX CREDITS CAN BE USED ONLY TO THE EXTENT the regular tax exceeds the tentative AMT. Taxpayers can, however, use foreign tax credits to offset 90% of their tentative liability. In 1998 short-term relief allowed taxpayers to use personal credits to offset AMT, but Congress has not extended this waiver. * CPAs MUST BE CAREFUL TO TAKE AMT INTO ACCOUNT in doing tax planning for middle-income taxpayers. For example, it may not benefit certain taxpayers to accelerate itemized deductions into the current year if they are close to their break-even point. Some Americans may be paying more than their fair share. Congress enacted the alternative minimum tax (AMT) in 1969 to make wealthy taxpayers pay their fair share instead of using tax shelters and other means to reduce--or even eliminate--their federal tax liability. Despite this fair-minded purpose, an unintended result has been that more and more middle-income taxpayers are falling into an AMT trap. The Omnibus Consolidated and Emergency Supplemental Appropriations Act of 1999 gave short-term relief to some of these taxpayers, with a waiver that ensured the AMT did not render their personal tax credits useless for 1998. Despite these modifications, many average taxpayers still found themselves paying AMT last year. Unless Congress addresses the AMT problem more comprehensively-as the AICPA suggested in its AMT proposal (see sidebar, AICPA Proposals on AMT, page 88)--the tax will become a thorn in the side of middle-income Americans as well as wealthy ones. Here is some guidance CPAs can use to profile and help clients who may unexpectedly find themselves snared by the AMT. BATTLING MISCONCEPTIONS As most CPAs are aware, the AMT is assessed on a tax base different from that used for the regular income tax (KIT). Exhibit 1, page 89, shows a comparison of the two. Taxpayers must compute their BIT liability and then compute the tentative AMT liability. The taxpayer compares the tentative AMT liability with the PIT liability to find the total tax liability, which is the greater of the two before credits. Exhibit 1: AMT and RIT Compared Total income from all sources Less: Exclusions Gross income Less: Deductions for adjusted gross income Adjusted gross income AMT computation Regular tax computation Adjusted gross income Adjusted gross income Plus: AMT adjustments and preference Less: RIT personal and Less: AMT itemized deductions dependency exemptions Less: The greater of total AMT income itemized deductions or the standard deduction Less: AMT exemption Taxable income AMT base Times: Regular tax rate Times: AMT tax rate Regular tax liability before credits Tentative AMT liability Plus: Actual AMT Less: Nonrefundable credits(*) Less: Regular tax before credits Less: Refundable credits Actual AMT Plus: Other taxes Total tax (*) The foreign tax credit may offset 90% of the tentative AMT. …
Publication Year: 1999
Publication Date: 1999-10-01
Language: en
Type: article
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Cited By Count: 1
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