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Politics : Bill Clinton Scandal - SANITY CHECK -- Ignore unavailable to you. Want to Upgrade?

To: DMaA who wrote (10479)	10/21/1998 10:38:00 AM
From: Les H	Respond to of 67261

1997 TAX ACT AND INFLATION PUSHES MORE TAXPAYERS INTO THE ALTERNATIVE MINIMUM TAX (09/98) Long called a "tax trap" or "shadow tax," the alternative minimum tax (AMT) is now being labeled a "time bomb." Though originally designed to ensure that wealthier taxpayers paid at least some income tax, the AMT may start catching more middle-income taxpayers in the wake of the 1997 tax act. Congress's Joint Tax Committee has estimated that if changes aren't made to the tax laws, 8.4 million taxpayers could have to pay the higher AMT by the year 2007. That compares with only 605,000 in 1997. To understand why the AMT is considered a "time bomb," you first need to understand how the alternative minimum tax is calculated. Taxpayers first must calculate their regular income tax. Then they "add back" certain adjustments and "preferences." For example, a taxpayer cannot take the standard deduction under AMT. Taxpayers who itemize must add back such "preference" items as the personal and dependent exemptions, state and local taxes (including real estate), investment interest expense, child care credits, that portion of home refinancing that's higher than the refinanced debt, and the spread between the market prices and the exercise price of incentive stock options. Tax-exempt interest from certain private activity bonds also is added back in. After the preference items are added back in, you basically get to take a single allowable exemption. In the case of married taxpayers filing jointly, it's $45,000 ($33,750 for singles). However, this exemption starts phasing out once your alternative minimum taxable income (AMTI) reaches $150,000 on a joint return or $122,500 on a single return. After the exemption is taken (if you qualify), the first $175,000 of AMTI is multiplied by 26 percent, and anything above that is multiplied by 28 percent. If the resulting tax is higher than what you calculated on your regular income tax, you pay the higher AMT amount. Several provisions under last year's Taxpayer Relief Act will push more taxpayers into the AMT camp starting with their 1998 returns. For example, the child credit ($400 in 1998, $500 in 1999 and later), the new $5,000 adoption credit and the higher education tuition credits taxpayers can take under the regular income tax aren't allowed under the AMT. Consequently, some taxpayers may find the AMT eating up as much as half of the tax money they saved by taking the credits. The AMT also is hitting more taxpayers because its exemption and other provisions have not been adjusted for inflation for several years, whereas regular income tax provisions have been. The lower capital gains rates won't affect the AMT calculation directly, but investors who realize large capital gains in high-tax states in a given year may find themselves falling under the AMT because state taxes are a preference item. The AMT problem won't affect too many 1997 returns, but starting with 1998 returns, more taxpayers could start paying the AMT. Now is the time for you to start to work with your tax advisor to see if you're vulnerable and to take possible corrective actions. Planning is especially important because tax strategies used to reduce regular income taxes, such as deferring income and accelerating expenses in a given year, can have the opposite effect on AMT taxes. Also, plans to exercise stock options might warrant a close look. Are you vulnerable to the alternative minimum tax? If you take heavy deductions among the preference items, possibly. The problem is, there is no magic income threshold for taxpayers. Most advisors say anyone earning over $75,000 a year should run the AMT calculation, but the only guarantee that you won't be hit with the tax is if your income is below your AMT exemption amount (such as $45,000 for married filing jointly). One piece of good AMT news: The Taxpayer Relief Act dropped the AMT for small businesses earning $5 million or less in annual gross receipts. This article was produced by the Consumer Affairs Dept. of The Institute of Certified Financial Planners and provided to you courtesy of The Los Angeles Society of the Institute of Certified Financial Planners.