Alternative Minimum Tax

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PERSONAL FINANCES FOR 2007: Alternative Minimum TaxThursday September 6, 2:00 pm ET By Clare White, CMT
It’s generally better to think about your tax situation during the year when you have some time to make adjustments, rather than scrambling at year end. One of the biggest issues that a large number of taxpayers continue to face is the status of the Alternative Minimum Tax [AMT]. In recent years the number of taxpayers impacted by the original form of this alternate calculation has increased significantly. Reductions to these numbers have come in the form of temporary relief measures enacted by Congress.
The AMT calculation was originally intended to set minimum tax levels for high income individuals. The end result is a flat-tax rate to prevent these taxpayers from using a large number of deductions to avoid taxes. The law was set-up with triggers to adjust income levels over the years with the intention of maintaining this high income pool of individuals. However, the calculations may have been too aggressive because in recent years many taxpayers deemed to be on the upper end of middle income earners have been caught up in the tax.
There is no set income level that triggers payment of AMT, but rather a series of calculations to determine if the tax applies. In general, those taxpayers impacted include individuals/families with significant deductions from a high number of exemptions, itemized deductions, and/or high state and local taxes. Increased income from capital gains and other sources may also contribute to AMT payment. This is a good point for a disclaimer, nothing in this article should be construed as tax advice – you need to contact an accountant for that.
As mentioned, more taxpayers have been subject to the AMT in its original form, but fewer taxpayers have paid it due to temporary changes made by Congress. Planning for 2007 is difficult because it’s uncertain whether or not these temporary changes will be enacted again for the tax year. If you were close to paying it last year and your tax and financial situation hasn’t changed that much this year, your accountant will have to run the calculation again this year and in future years until your situation changes significantly or the law is changed. That is, if a permanent change in tax law ever takes place.
As always, the best defense is a good offense, so you may want to be preemptive by having a conversation with your accountant in the short-term to get his or her pulse on the issue. They can provide you with planning ideas that can include putting more money in pre-tax accounts, mapping out years for asset sales, shifting expenses to years that will less likely be impacted by AMT and considering investments that are more AMT friendly. Pre-tax accounts include applicable retirement and medical accounts. Shifting expenses may include small things like pushing forward your Jan 2008 mortgage payment.
One thing to keep in mind is that you will be completing your 2007 taxes during an election year. It’s up to you to weigh whether either party wants to be the heavy by not extending AMT relief and forcing more payments.
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Clare White, CMT Contributing Writer and Options Strategist Optionetics.com ~ Your Options Education Site Questions for Clare? Visit the Optionetics.com Discussion Board

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