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AMT: Tax hell
5 Tips: Dealing with the Alternative Minimum Tax
April 1, 2005: 9:28 AM EST
By Gerri Willis, CNN/Money contributing columnist

NEW YORK (CNN/Money) - April 15 is fast approaching and if you thought the IRS was the bogeyman, think again. There is something worse -- it's an alternative tax system -- think parallel tax universe called the Alternative Minimum Tax.

Anybody who falls into its clutches will find themselves paying more than they would under traditional IRS rules. Here are 5 Tips on what you need to know now about the AMT.

1. Get the 101.

Enacted in 1969 to make sure wealthy tax cheats were paying their fair share, the tax is impacting more and more middle class Americans. In fact, the IRS says, if you make $75,000, you need to make sure you're not liable for AMT's extra tax bite.

While just 1.9 million people owed AMT in 2002, according to the Tax Policy Center, 2.4 million people owed it in 2003, and 32 million will owe it by 2010.

How much more could you owe? The Taxpayer Advocate says the average AMT taxpayer will owe an additional $6,000 in tax in 2004.

2. Check out the at-risk pool.

If you have a lot of itemized deductions for any reason and live in a high tax state, you could be on the hook. And the bad news is that the AMT tax calculation effectively eliminates those deductions, and replaces them with one personal exemption. So, goodbye mortgage deduction, personal exemption and even standard deduction for each of your children.

The result? You'll owe more, perhaps thousands in additional taxes. In fact, you don't even pay AMT, unless the bill is higher than what you would owe under traditional IRS federal tax rules.

Let's take an example created by Len Burman, co-director of the Tax Policy Center. Imagine the "Brady Bunch." With two working parents, six kids, and a total income of $150,000, the Bradys should pay $17,300 under the regular tax system in 2005.

Having too many kids (or 8 personal exemptions) has slapped the Bradys with the AMT, forcing them to pay $20,000 in taxes. That's $2,700 more because of the AMT. If the Bradys only had four kids (say, cut out Bobby & Cindy), they wouldn't face the AMT in 2005.

3. Know what you owe.

It's YOUR responsibility to understand whether you owe AMT. Unfortunately, the process is complicated. According to the National Taxpayer Advocate, taxpayers often must complete a 12-line worksheet, read eight pages of instructions, and complete a 55-line form just to find out if they are subject to the AMT.

So it's not surprising that 75 percent of AMT taxpayers hire practitioners to prepare their returns. If you're going for it, fortunately, all the major tax preparation software will do the calculation for you. If you're doing it the old pencil, paper and calculator way, point your browser to www.irs.gov and download FORM 6251. You'll see if you're in AMT's crosshairs by filling it out.

The bottom line is, if you have a lot of deductions and live in a high tax state like New York or California, you're more likely to feel AMT's pain. (Plus, if you're lucky enough to get stock options from your boss, exercising them may toss you into the AMT pool.)

4. Do what you can.

There's no real way to prevent yourself from falling prey to the alternate tax universe -- however, if it was exercising stock options that put you there, the year you sell that stock, you can get a tax credit, which should ease some of the pain. (However, the credit can only be claimed in a year you aren't subject to the AMT).

5. Think ahead.

There's not much you can do to get yourself out of the AMT's grip for 2004. However, if you think you will be subject to it again in 2005, think about pulling as much of your income as possible in this year.

That's because the top AMT bracket is 28 percent, lower than the top 35 percent tax bracket under conventional tax rules.


Gerri Willis is a personal finance editor for CNN Business News and the host for Open House. E-mail comments to 5tips@cnn.com.  Top of page

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