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Alternative Minimum Tax for Individuals Edition
Reported In The Chicago Tribune

More middle-class households falling into minimum tax trap
By Lorene Yue
Your Money staff reporter
Posted March 6, 2004

From reformers to politicians, everybody's talking about the alternative minimum tax, but nobody seems to be doing anything about it. The AMT, enacted in 1969 to reduce the use by the super-rich of special deductions to avoid paying their share of income tax, has spiraled out of control. This year you have a 1 in 10 chance of getting walloped with a higher-than-expected tax bill thanks to the AMT, and by 2010 one out of every three households is expected to fall into the AMT trap. Without sweeping reform, a married couple with two kids and an income of $75,000 to $100,000 has a 97 percent chance of paying AMT in 2010, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution.

The private sector agrees.

"It is not going to get better," said John Battaglia, a director at Deloitte & Touche's New York office. "It is going to get worse." The Taxpayer Advocate's office, an independent organization within the Internal Revenue Service, called AMT the most serious problem facing taxpayers in 2003. "Congress must address the AMT before it bogs down tax administration and increases taxpayers' cynicism to such a level that overall compliance declines," wrote national taxpayer advocate Nina Olson in her 2003 annual report.

How did we get into this fix? Critics say it's the confluence of tax cuts throughout the decades and the lack of adjusting AMT exemptions for inflation. That combination has created a troublesome mix as incomes creep up and AMT exemptions remain the same, making more taxpayers susceptible to AMT.

"It's gone way beyond affecting the number of taxpayers it was intended to affect," said Francis Romano, taxpayer advocate in Hartford, Conn. "First of all, many people are not aware of it, and that in and of itself is a problem. People don't know to look for it."

Congress has put a Band-Aid on the growing wound by bumping up the AMT exemption in 2003 and 2004. But those exemptions are scheduled to revert to lower levels in 2005, which traps more middle-class taxpayers.

There is no litmus test to determine whether you'll be socked with AMT, which makes it tough to predict when it will come knocking on your door.

Tax experts advise most filers to work through a 12-line questionnaire in the IRS instruction booklet to see if they are subject to AMT. If you are, you will have another 65-line form to wade through if you do a paper return. Tax software should automatically alert users to any AMT liability, but it won't explain why you'll have to pay more in taxes.

Some taxpayers may be more susceptible than others. A few possible triggers:

-- High state income taxes. If you live in California, Connecticut, New Jersey or New York, you have a strong chance of getting caught, said John Nersesian, managing director for Nuveen Investments in Chicago. Paying lofty property taxes can also snare you.

-- Heavy miscellaneous deductions. You could be setting yourself up for a higher AMT bill if you rack up a significant amount of assorted deductions. Money spent on items such as medical procedures, your job, investment advisers -- typically subtracted from gross income -- gets added back when figuring out AMT, and that can jack up your tax liability.

-- Incentive stock options. Tax experts warn that when cashing in stock options, make sure you are not bumping yourself into AMT or pumping up your AMT bill. Under the regular system, you would not pay taxes if you buy stock at the option price but then do not sell it at the market price, but under AMT rules, you pay taxes when options are exercised.

Tax experts do not expect immediate solutions, thanks to the complexity of AMT and how tightly it has become woven into the income tax system.

Short of a complete overhaul, the Taxpayer Advocate's office suggests that Congress try such alternatives as setting a gross income bar for AMT so taxpayers know immediately if they are subject to the higher tax, adjusting the exemption amounts for inflation and allowing filers to claim personal exemptions, state and local taxes, standard deductions and miscellaneous items.

Why don't the politicians act? Anita Williams, a vice president at J.P. Morgan Private Bank in Chicago, said, "Maybe they are counting on the revenue that is being generated from it to offset the tax cuts."

Williams added, "For a lot of people, there is nothing they can do to avoid it. No planning is going to get you out."

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    • Introduction 1-1
    • A Brief History of Alternative Minimum Tax 1-1
    • Current Years’ AMT 1-2
    • Computing AMT 2-1
    • Form 6251 Alternative Minimum Tax-Individuals 2-1
    • Adjustments and Preference Items 2-1
    • Line 1, Standard Deduction and Itemized Deductions 2-1
    • Line 2, Medical and Dental Expenses 2-3
    • Line 3, Taxes 2-4
    • Line 4, Interest on Home Mortgage 2-5
    • Line 5, Miscellaneous Itemized Deductions 2-6
    • Line 6, Refund of Taxes 2-6
    • Line 7, Investment Interest 2-7
    • Line 8, Post-1986 Depreciation 2-8
    • Line 9, Adjusted Gain or Loss 2-13
    • Line 10, Incentive Stock Options 2-14
    • Line 11, Passive Activities 2-16
    • Line 12, Beneficiaries of Estates and Trusts 2-20
    • Line 13, Tax-exempt Interest from Private Activity Bonds Issued after 8/7/86 2-20 Other Items of Adjustment and Tax Preference Items 2-22
    • Line 14a, Charitable Contributions (For Tax Years 1993–1997) 2-22
    • Line 14b, Circulation Expenditures (For Tax Years 1993–1997)
    • Line 14a for Tax Year 1998) 2-22
    • Line 14c, Depletion (For Tax Years 1993–1997)
    • Line 14b for Tax Year 1998) 2-23
    • Line 14d, (Pre–1987) Depreciation (For Tax Years 1993–1997)
    • Line 14c for Tax Year 1998) 2-24
    • Line 14e, Installment Sales (For Tax Years 1993-1997)
    • Line 14d for Tax Year 1998) 2-26
    • Line 14f, Intangible Drilling Costs (For Tax Years 1993–1997)
    • Line 14e for 1998) 2-26
    • Line 14f, Large Partnerships (For Tax Year 1998) 2-29
    • Line 14g, Long-term Contracts 2-29
    • Line 14h, Loss Limitations 2-31
    • Line 14i, Mining Costs 2-32
    • Line 14j, Patron's Adjustment (For Tax Years 1994–1998) 2-33
    • Line 14k, Pollution Control Facilities (For Tax Years 1994–1998; Line 14j for Tax Year 1993) 2-33
    • Line 14l, Research and Experimental Expenditures (For Tax Years 1994–1998)
    • Line 14k for Tax Year 1993)2-34
    • Line 14m, Tax Shelter Farm Activities (For Tax Years 1994–1997)
    • Line 14l for Tax Year 1993; Line 14n for Tax Year 1998) 2-36
    • Line 14m, Section 1202 Exclusion (For Tax Year 1998) 2-37
    • Line 14n, Related Adjustments (For Tax Years 1993–1997; Line 14o for Tax Year 1998) 2-37
    • Line 15, Total Adjustments and Preferences 2-38
    • Alternative Minimum Taxable Income 2-38
    • Line 16, Taxable Income Before Personal Exemptions 2-38
    • Line 17, Net Operating Loss (NOL) Deduction 2-38
    • Line 18, Phased-out Itemized Deductions 2-38
    • Line 19, Sum of Lines 15 through 18 2-39
    • Line 20, Alternative Tax Net Operating Loss (AMTNOL) Deduction 2-39 NOLS for AMT Purposes 2-40
    • Line 21, Alternative Minimum Taxable Income 2-42 Exemption Amount and AMT 2-42
    • Line 22, Exemption Amount 2-42
    • Line 23, Line 21 Minus Line 22 2-43
    • Line 24, Calculation of the Actual AMT 2-44
    • Line 25, Alternative Minimum Tax Foreign Tax Credit (AMTFTC) 2-44
    • Line 26, Tentative Minimum Tax 2-46
    • Line 27 2-46
    • Line 28, Alternative Minimum Tax 2-48
    • Other Provisions that Affect AMT 3-1
    • Kiddie Tax 3-1
    • Partnership and S-Corporation Flow-Throughs 3-6
    • At-Risk Rules and Basis Limitations 3-6
    • Estimated Tax Payments 3-6
    • Short Tax Years 3-7
    • Restricted Consents and AMT 3-7
    • Minimum Tax Credit 4-1
    • Minimum Tax Credit/General Rules 4-1
    • Minimum Tax Credit Net Operating
    • Loss (MTCNOL) 4-4
    • Minimum Tax Credit and AMT
    • Foreign Tax Credit 4-4
    • Special Rules Relating to Regular
    • Tax Credits from Nonconventional
    • Fuel Sources, Orphan Drug Credit and Qualified Electric Vehicle Credit 4-4
    • Computing the Minimum Tax Credit 4-5
    • Chapter 5
    • Prior Law 5-1
    • Personal Exemptions 5-1
    • Personal Interest 5-1
    • Investment Interest 5-2
    • Passive Activities 5-2
    • Charitable Contributions 5-3
    • Intangible Drilling Costs (IDC) 5-5
    • Energy Preference Deduction 5-5
    • Long-term Contracts 5-8
    • Research and Experimental 5-9
  • VI
    • Depletion Expense 5-10
    • Alternative Tax Net Operating Loss 5-10
    • AMT Exemptions 5-10
    • Percentage Applied When Arriving at Tentative AMT 5-10
    • Minimum Tax Credit 5-11
    • Kiddie Tax 5-11

Item #4147119E

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