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| April 1 , 2005 | The
Newspaper of the NYSSCPA |
Vol.
8, No.6 |
A Closer Look at the AMT
By Bart Fooden
and Lawrence Shoenthal
As
professionals who value numbers, here are some statistics on the alternative
minimum tax (AMT):
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Total AMT for New York state for the 2002 tax year is 308,513 returns and $1,033,022,073 in revenue;
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The AMT largely eliminated the 2003 tax cut;
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According to estimates from the U.S. Treasury Department, 2.6 million taxpayers are projected to be caught in the AMT net this filing season, providing $17.9 billion in revenue; and
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In 2010, the AMT is projected to affect 17 million taxpayers.
What Is the AMT?
It is a parallel tax system created in 1978.
Why Was It Invented?
Congress felt that some high-earning individuals and some large corporations were “gaming” the tax code to avoid paying income taxes. Either Congress ignored the fact that it had put in place the allowable deductions, or the legislators felt that the AMT was a simple way to fix the “tax loopholes” that permitted taxpayers to unfairly reduce their taxable income by claiming expenses against their income.
What Is Wrong with Congress’ Decision?
Nothing, if you are in favor of a high flat tax on gross income. While the AMT was positioned to tax high-income taxpayers in 1978, the definition of such taxpayers was not indexed for inflation, thus trapping people today who are not particularly high earners: the middle class. As regular tax rates have declined, inflation-indexed deductions like the standard deduction and personal exemptions have increased and the federal government has transferred more tax burdens to states and localities. The AMT has affected a majority of individuals and families who earn more than $100,000 and many who are under that income level as well.
Here are some examples of how this tax affects individuals and families:
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Congress determined an individual with an adjusted gross income of $39,750 in 1978 was wealthy enough to impose the AMT. Congress temporarily raised that amount for 2004 and 2005 to $40,250. How can a single parent with five kids to feed, clothe, shelter and medically provide for pay the AMT? Or if a couple is married, but they, or one spouse, were nonresident aliens for any part of the year, they are considered wealthy if they have adjusted gross income greater than $29,000.
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Congress reduced capital gain rates to 15 percent. If a family on retirement sold a second house, or their primary residence, which did not qualify for the exception, the capital gain could be taxed at a much higher rate if the AMT kicks in.
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A start-up company that issued to their employees a qualified stock option because it had no cash to pay many salaries has, even if the unexercised stock option produced no regular taxable income, put the employee into federal debt because of the AMT.
Principal Items That Cause AMT Liability
Income Items
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Municipal interest on private activity bonds
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Exercise of incentive stock options
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Rental losses
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Long-term capital gains
Deductions
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State and local income taxes
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Real estate taxes
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Miscellaneous itemized deductions, such as unreimbursed business and investment expenses
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Standard deductions and exemptions
Even though long-term capital gains are taxed at the same preferential rate for the AMT and regular tax, a significant capital gain may result in a greater AMT liability. The capital gain could serve to eliminate the AMT exemption and also could result in an increase in state and local taxes, which are not deductible for the AMT calculation.
While legislative efforts are underway to lessen the burden of the AMT on middle-class taxpayers, enactment of such legislation could be delayed, the bill could be watered down, or such efforts could be derailed completely.
The question, therefore, is, What can an individual taxpayer do to minimize exposure to the AMT? In some situations, particularly for people who live in high-tax (income and property) states, there may be no way to avoid it, but proper planning may help to minimize the AMT burden. The following are suggested planning techniques:
- If the regular income tax marginal rate is above 28 percent, accelerate ordinary income into a tax year where the AMT already applies.
- Avoid investments in tax-free municipal private activity bonds. They are not tax free for AMT purposes. Before investing, ask a broker what the AMT tax treatment of a bond is. Get the answer in writing.
- If possible, defer deductions for expenses not deductible for AMT purposes from a tax year in which the AMT already applies to a tax year in which it might not.
- If possible, bunch deductions that are not deductible for AMT purposes into one year.
- Avoid realizing significant long-term capital gains all at once. If possible, time sales of long-term capital gain property to occur over a period of years, or utilize installment sale reporting if applicable.
These suggestions are, of course, general in nature and may not apply to every situation. Each situation is different. Taxpayers should consult their CPA tax advisor to determine if the AMT applies to them and how they can avoid or minimize it.
Bart Fooden, CPA, of Bart L. Fooden & Associates CPA P.C. in Woodbury, N.Y., and Lawrence Shoenthal, CPA, of Weiser LLP in Manhattan, are both members of the NYSSCPA’s Public Relations Committee.
