Tax Tips: What is the Alternative Minimum Tax?

In the news recently were projections for tax law changes from Congress by the end of 2010. One of the "hopefuls" is raising the definition of income subject to the nightmare Alternative Minimum Tax so that enough folks do not end up having to compute it, pay it and then get mad. (If it isn't tweaked each year, eventually, inflation would make almost everybody subject to it by default.)

Alternative Minimum Tax, or AMT for short, is basically a second tax return that must be prepared if you meet the minimum criteria. On the surface the concept appeals to many folks (those not subject to it). They say, "The rich should pay more tax!" Aside from how to define "rich," the whole concept of a progressive tax system (higher tax rates as taxable income goes up) is already in place without any need for the AMT.

The problem with the AMT is that everybody is generally subject to it. One must first calculate their tentative Alternative Minimum Taxable Income (called AMTI), then subtract the AMTI exemption amount. This exemption amount is what Congress is thinking of raising.

The amount of AMTI that is over the exemption amount is multiplied by the appropriate AMT tax rate. (For 2009, the rates were 26 percent and 28 percent.

Here is an example of the AMT computation for a hypothetical Nevada couple in 2009. These folks are filing a joint return, with five children under 17 years old, have adjusted gross income of $129,300. The higher paid spouse travels out of state as a sales rep, and thus pays high non-resident state income taxes to Oregon and California. They have $32,000 of itemized deductions and $25,550 of personal exemptions, leaving taxable income of $71,750. That computes a normal federal income tax of $10,319.

Now for their 2009 AMT computation: We start by adding back personal exemptions of $25,550. Add back the part of itemized deductions for taxes of $14,691. Fill out a worksheet to determine if the mortgage interest of $12,000 has to be added back. (This time our taxpayers are lucky, they keep the interest deduction.) Add back their miscellaneous itemized deductions of $650. Finally, they go through over 23 lines of other adjustments, usually requiring special worksheets and or schedules to arrive at AMTI of $112,641. They get an exemption (the one Congress is thinking of changing) of $70,950, leaving a balance of $41,691 subject to the flat 26 percent AMT, resulting in an AMT of $10,840.

Since their AMT is more than their regular income tax of $10,319, this hard-working couple can consider themselves "lucky." In addition to their regular income tax of $10,319, they get to pay an AMT of $521 ($10,840 minus $10,319) for the privilege of having five children, and needing to travel out of state to make a living. They also get to enjoy the exhilarating process of preparing the AMT form 6251 and its related schedules and worksheets.

Now, wasn't that fun? Don't we feel better knowing that the "rich" are paying their fair share?

• Kelly Bullis is a Certified Public Accountant with over 30 years of experience. Contact him at 882-4459.