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Alternative Minimum Tax: Tricky Year End Tax Planning

© Lita Epstein

AMT, also know as Alternative Minimum Tax

We've all gotten into the habit of taking as many deductions as possible before December 31 and putting off whatever income we can until after January 1. Well that scenario may not be your best tax planning strategy this year because of the new tax legislation.

There are two factors driving this decision. One is the lower tax rates for 2003 and the second is the looming Alternative Minimum Tax (AMT), which is a ticking time bomb just waiting to go off. Next year the lower income tax rates will put many more taxpayers at risk of owing the AMT. These taxpayers will not be able to take full advantage of the tax cut because of lost deductions caused by the AMT.

Here are some excerpts from my new book, The Complete Idiot's Guide to Tax Breaks and Deductions, about the AMT:

"You may never have heard of the Alternative Minimum Tax (AMT) and even if you know about it, you probably were never subject to it. In 2001, 1.4 million taxpayers were impacted by the AMT. The Congressional Joint Committee on Taxation projects that this number will jump to 35.5 million in 2010 without some fix by Congress before then.

"The potential problem posed by the AMT time bomb is twofold. The first is that the AMT is not adjusted for inflation. The other is that the reductions to tax rates in the 2001 tax bill could throw about 18 million taxpayers under the AMT, which will reduce or completely eliminate the benefit of those new lower rates."

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"AMT tax rates are 26 and 28 percent, which are lower than the regular tax rates, but many of the deductions and credits can't be applied to the taxpayer's earned income to reduce taxable income. Most miscellaneous deductions as well as personal exemptions are not allowed under the AMT, which is what will throw many middle-class families into the AMT pool. For example, interest on home equity loans is deductible on a conventional return up to $100,000, but if a taxpayer must use the AMT formula, interest paid on home equity loans used for purposes other than home improvement will not be allowed.

"Today most taxpayers are protected from the AMT because of its exemption mechanism. Couples filing jointly can exempt $45,000 from the AMT calculation, and singles or head of household filers can exempt $33,750. The new tax law did add a small, temporary increase of $4,000 for joint returns and $2,000 for unmarried individuals, but this lasts until only 2004. The new law also protects some personal tax credits including the Child Tax Credit, Dependent-Care Credit, and Hope Credit and Lifetime Learning Credits from AMT reduction, at least through 2003.

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