Avoid Alternative Minimum Tax

Avoid Alternative Minimum Tax

By Thomas Boyd, Queens Chapter President

During this time of year, CPAs tend to focus their attention on taxes. Even those of us not directly involved in tax compliance get caught up in the impact of taxes for entities we account for and, of course, the impact taxes have on our own personal finances. Those of us with tax practices will spend the next couple of months bogged down in the complexities of tax law. If you attended tax update conferences at the chapter or state level, I hope you found them helpful.

Last October, the Queens Chapter held its Annual Tax Conference, which included a variety of topics on federal and state taxes. (The Queens Chapter Tax Committee will set up this year’s conference.)

The topic I presented at the conference, Alternative Minimum Tax (AMT), created a lot of interest from the audience. AMT, of course, is a source of misery to tax practitioners. Most of us rely heavily on tax software to compute it. No matter how it is computed, avoiding AMT should be part of your tax planning strategy.

Lately, more taxpayers have become subject to AMT. In the past, few individuals were affected by AMT, as their regular income tax was greater. This is changing. The Tax Act of 2001 lowered rates but did not affect the AMT rates. The AMT rate is 26% of the first $175,000 of alternative minimum taxable income (AMTI) and 28% on the excess. Even though the AMT rates may be higher than some individual rates, many taxpayers are becoming subject to it by the very structure of the system. Under the minimum tax system, many deductions are denied, including those for dependents, the taxpayers themselves, taxes, job expenses and miscellaneous deductions. Also, AMT is not indexed to inflation.

You should note that in 1999 there were fewer than one million taxpayers subject to AMT—mostly upper-bracket taxpayers with various tax preferences and adjustments. For the tax year 2004 it is estimated that 5 million taxpayers will be subject to AMT, and this is expected to increase to 36 million taxpayers by 2010.

Congress is aware of the problem, but fixing it will be costly. Probably the only way Congress and the White House might corral the runaway AMT is to make it part of a tax reform package. President Bush did make tax reform a priority for his second term. Tax reform, however, is a difficult undertaking, and at best is ideologically problematic, economically complex and politically risky. CPAs will have to deal with AMT for now and the foreseeable future as more taxpayers become subject to it.

For those of you dealing with taxes and their complexities, I’m sure you will find the Tax Conference valuable. The chapter’s board is planning technical meetings that offer CPE credits starting after the tax season. Do plan to attend them, especially this year’s Tax Conference, which will probably be in October again.

Thomas Boyd can be reached at 718-428-0956 or tmboyd38@hotmail.com.