900 N. Kings Highway, Cherry Hill, New Jersey 08034
856.667.4100 ·
215.563.0276 ·
Fax: 856.667.3652
The Online Advisor - August 1998
You could get hit with a big tax surprise - the alternative minimum tax
Over the next several years, thousands of middle-income taxpayers will find themselves subject to the alternative minimum tax (AMT). Congress created the AMT in the 1970s to ensure that wealthier taxpayers, who often have the kinds of income and deductions that qualify for preferential tax treatment, would pay at least a minimum amount of tax.
Congress also wrote exemptions into the law so that middle-income taxpayers wouldn’t be subject to the AMT. Unfortunately, these exemptions were not indexed for inflation. As incomes have continued to rise, more and more people have found that they need to calculate their tax bill twice - once under regular tax rules and again under the AMT.
The AMT is like a flat tax. You get a lower tax rate in exchange for losing most deductions. To calculate the AMT, you start with regular taxable income, which includes all your familiar deductions and exemptions. Then you make certain adjustments and add back certain “preferences” to arrive at your AMT income. (Preferences include personal exemptions, state and local income taxes, certain interest on home-equity loans, and miscellaneous itemized deductions.)
After adding back the preferences, you’re entitled to an exemption of $45,000 on a joint return ($33,750 for singles). The exemption phases out beginning at $150,000 of AMT income on a joint return ($112,500 for singles). You then calculate your AMT by applying a tax rate of 26 percent to the first $175,000 of AMT taxable income and 28 percent to amounts beyond that. Finally, you compare your AMT and your regular tax, and you pay whichever is greater.
If your preference items are relatively high, you should be aware of the AMT. Do you pay substantial state income taxes, or deduct large medical expenses or miscellaneous itemized deductions? If so, watch out for the AMT. The same is true if you exercised incentive stock options or received substantial interest on certain types of tax-exempt bonds.
Don’t forget the AMT in your tax planning. You may be one of those middle-income taxpayers who is subject to this tax.