Alternative Minimum Tax Planning

Because some taxpayers - particularly wealthy taxpayers - have been so successful in their efforts to legally minimize their tax bills, Congress came up with another way to tax them: the alternative minimum tax (AMT). The AMT provides a formula for computing tax that ignores certain preferential tax treatments and deductions that taxpayers would otherwise be entitled to claim.

So, many taxpayers are required to compute their income tax liability twice: once under the regular method and once again under the AMT method. An individual will be subject to the AMT if his or her AMT liability is more than the regular tax liability for the year.

What types of things can trigger the AMT? The most common items that can cause you to become subject to the AMT are listed below. These items must be added back to your taxable income in order to compute your AMT:

If you have large amounts of any items in this list, and your adjusted gross income exceeds the exemption amounts discussed below, you (or your accountant) should compute your AMT liability on IRS Form 6251, Alternative Minimum Tax - Individuals, to determine whether you must actually pay any AMT.

Business Tools

Among the Business Tools are Form 1040 and Form 6251. They are in Adobe Acrobat .pdf format, and you will need Acrobat Reader 4.0 to view the files and print them. A free version of Acrobat 4.0 is available in the Business Tools area as well.

AMT rates and exemptions. The AMT method does provide each taxpayer with a flat dollar amount that is completely exempt from tax. The dollar amount of your exemption depends on your filing status. For 2001 through 2004, the exemption amounts are $49,000 for marrieds filing jointly, $35,750 for singles and heads of households, and $24,500 for marrieds filing separately.

If your taxable income for AMT purposes (called AMTI) exceeds the exemption amount, you will be subject to a 26 percent AMT rate on the first $175,000 of AMTI that exceeds the exemption amount, and a 28 percent rate on any AMTI above this $175,000 amount.

The AMT exemption amounts are phased out for taxpayers having AMTI exceeding the specified income levels. Under these rules, the exemption available to married couples filing jointly is eliminated entirely if AMTI exceeds $346,000. The amount where the exemption is reduced to zero is $255,500 for single individuals and heads of households, and $173,000 for married taxpayers filing separately.


Work Smart

There's no doubt about it - the AMT can play havoc with your tax planning. If your AMT liability and your regular tax liability tend to be approximately equal from year to year, your best bet is to maintain this stability. If your deductions are not so evenly spaced and you tend to have great fluctuations in income from year to year, you may be able to shift some AMT-triggering items from an AMT year to a non-AMT year, so as to reduce your liability in a non-AMT year almost to the point at which you would become subject to the AMT. Your tax professional can tell you whether this might be possible in your individual situation.

Credit for prior year's minimum tax. If you paid AMT last year, or you had a minimum tax credit carryforward from last year, you may be able to claim a tax credit for it.