Financial Q&A: Alternative Minimum Tax changes provide relief for some taxpayers

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Q:
I would like more information about the Alternative Minimum Tax, particularly how to avoid it.

A.m., washington, d.c.

A: The AMT is a tricky piece of tax policy that was begun in order to make sure that fat cats didn't get off entirely tax-free just because of loopholes. But it has ended up collaring quite a few lesser mortals, although even now it applies to fewer than 20 percent of taxpayers.

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Beth Wiggins, a CPA and partner with BKD LLP's Houston office, says that taxpayers are required to calculate taxes the regular way and then the alternative – or AMT – way. Under the alternative way, adjusted gross income reduced by itemized deductions changes for numerous alternative minimum taxable adjustments and preferences. These adjustments and preferences include portions of Schedule A medical and dental expenses, Schedule A taxes, and Schedule A miscellaneous deductions.

The alternative minimum taxable income is reduced by an exemption (phased out for certain taxpayers) and taxed at a flat rate of 26 or 28 percent or using those rates and maximum capital-gains rates.

For 2007 only, however, a new law provides some relief. It increases the maximum AMT exemption amount over its 2006 level and provides AMT relief for those individuals claiming certain "nonrefundable" personal tax credits (such as the credit for dependent care, residential energy credit, and the Scholarship and Lifetime Learning credits).

The law sets 2007 AMT exemption amounts at $44,350 for single taxpayers, $66,250 for married couples filing jointly, and $33,125 for married filing separately. These amounts are $2,000 higher than 2006 for single filers and married taxpayers filing separately; $4,000 higher for joint filers. More important, they're about $11,000 higher for single and married filing separately and about $22,000 higher for joint filers, than the 2007 exemptions they would have had to use if no law had been enacted.

Unfortunately, the IRS does not expect to have their computers reprogrammed for the late tax law changes until Feb. 11.

If this sounds complex, it's because it is, and many factors affect this calculation. Taxpayers with significant state and local or real estate taxes frequently find themselves paying AMT, says Ms. Wiggins, as do taxpayers with significant miscellaneous itemized deductions. Others might be taxpayers with numerous exemptions that get wiped out when the AMT is calculated.

To see how the IRS is progressing with its reprogramming, contact your tax professional or check with the IRS website at www.irs.gov.

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