Q: The alternative minimum tax seems to apply to more and more people every year. Is there some way, short of working the entire tax return both ways, of learning whether the AMT is likely to apply in one's own specific case?
W.N.B., Naples, Fla.
A: The AMT is indeed affecting more and more taxpayers, says Rob Johanson, an accountant and certified financial planner in Westlake Village, Calif. That's because it is not properly indexed for inflation. So as incomes rise, more and more people find themselves whacked by this "parallel universe" tax system that runs side by side with our regular system. The AMT eliminates certain deductions, personal exemptions, and other tax breaks permitted under the regular tax system. If you owe more under the alternative minimum tax than your regular tax result, then you must pay that higher amount.
The best way to determine AMT vulnerability, Mr. Johanson says, is to look at your completed 2005 return to see if the AMT applied or how close you came to owing it. Print out a copy of Form 6251, which will tell you how close you came to owing the tax or any AMT adjustments that got you there, if you did. You also can visit the H&R Block website, which contains a calculator (www.hrblock.com/taxes/tax_calculators/index.html) that determines your potential for running into an AMT liability for 2006.
A tax professional also can assess your tax situation and make recommendations for avoiding or minimizing the effects of the AMT. They can advise whether traditional strategies such as accelerating deductions or deferring income into next year might be reversed in order to lessen the impact of the AMT if there is no way to avoid it entirely.
Taxpayers who probably face the AMT this year include singles earning more than $112,500, joint filers earning more than $150,000, those who claim several dependents, and those who claim large amounts of unreimbursed employee business expenses. In addition, taxpayers with one-time events such as large long-term capital gains or gains from the exercise of incentive stock options should be concerned about the AMT.
Q: I have taken $32,000 from my variable annuity and put it in an equity-indexed annuity on the advice of a friend. I have no one to advise me on money matters, and all I know is I was getting 3 percent on the annuity. Was this a wise move?
M.F., Deerfield Beach, Fla.
A: Hard to say. Both variable annuities and equity-indexed annuities are complicated products, says Vince Clanton, a certified financial planner in Atlanta. Each carries a surrender charge that is imposed if you cash them in too early. So if you move from one product to another, you'll probably rack up costly fees along the way, he says.
Besides that friend who dished out advice, you might consider tracking down a financial planner who can give you some professional guidance. For a list of qualified people in your area, you can contact:
•Certified Financial Planner Board of Standards. (www.cfp.net, 888-237-6275).
•Financial Planning Association (www.fpanet.org, 800-322-4237).
•National Association of Personal Financial Planners. (www.napfa.org, 800-366-2732).
This is your money, so ask questions. There are no dumb ones in Mr. Clanton's book. Keep asking them until you're satisfied that you understand, and that the product meets your specific needs.