The 'alt min' tax: how it could affect you
Boston — It isn't everyone's problem, ''but if you're earning more than $50,000, you need to worry about it.'' So says Alan J. Straus, a tax manager in the New York office of Touche Ross & Co.
He's talking about the alternative minimum tax, known familiarly as the ''alt min.''
The alt min is Uncle Sam's way of ensuring that all your strategies to reduce federal income tax liability are not too successful. It is a lower tax - 20 percent - than the usual progressive income tax, but it is calculated on a much broader base, and so those paying the alt min are paying quite a bit of money.
Indeed, liability for the alt min is triggered whenever you would pay less under regular calculation of your tax than under the alt min; practically, this means whenever your tax-preference deductions are large in relation to your ordinary income. And although anybody in the $50,000-plus annual income group should be alert to the possibility of alt min liability, it can hit even someone with relatively modest income.
Among the items included in the alt min tax base, according to Arthur Andersen & Co., are these:
* The long-term capital gains deduction (the 60 percent portion of such gains that is excluded from the regular tax base).
* Excess of accelerated over straight-line depreciation on real property.
* Excess of accelerated over straight-line depreciation on leased personal property.
Capital gains resulting from the sale of a business, or of a piece of real estate held as an investment, perhaps inherited, can trigger alt min liability for those earning as little as $30,000.
For those involved in oil and gas tax shelters, with intangible drilling costs written off as an immediate deduction, rather than amortized over time, alt min may be a problem. A comparable situation is the question of accelerated vs. straight-line depreciation in a real estate tax shelter. ''Before you get into a shelter, ask about things like drilling costs,'' says Mr. Straus.
Some people in more than one shelter may find themselves oversheltered, and that triggers the alt min.
If you do tax planning early enough in the game, you might be able to avoid alt min. Mr. Straus suggests amortizing drilling costs, for example, in the case of an oil and gas shelter, instead of taking an immediate write-off.
And if you find you are inexorably heading toward the alt min, what then?
''Shelters are the wrong thing to do; what you need to do is try to generate ordinary income,'' says Marilyn J. Pitchford, a tax partner in the Boston office of Arthur Young & Co. ''This ordinary income will be taxed at 20 percent instead of, say 50 percent, until the ordinary income catches back up with preference income.''
Ordinary income might be that from straight investments, such as money market funds. Or there might be some way to arrange the timing of compensation to increase ordinary income within a given tax year, Ms. Pitchford suggests.
The critical point to remember is that under alternative minimum tax, with its lower rate on a broader base, you don't get the usual tax benefits from certain deductions. And your gains aren't so severely taxed. Some observers recommend investing in higher-yield taxable bonds instead of the tax-free bonds high-bracket taxpayers may be used to.