Alternative Minimum Tax (AMT) Patched Again!

For yet another year, Congress has applied a patch to the AMT by increasing the AMT exemption amount and continuing to allow nonrefundable credits, such as dependent care, child credit, education credits and others that most middle-income taxpayers use to avoid this punitive tax.  In addition, the amount of long-term unused AMT tax credit that can be applied in the current year was also substantially increased.  The following is an overview of these changes:

• AMT Exemption Amount for 2008 Increased - The AMT exemptions have been increased for 2008 to: $69,950 for married individuals filing jointly, $46,200 for unmarried individuals and $34,975 for married individuals filing separately.  The AMT phase-out rules remain unchanged.

• AMT Relief for Nonrefundable Personal Credits - Nonrefundable personal credits will offset the AMT for 2008.  Those credits include the dependent care credit, elderly and disabled credit, Hope and Lifetime Learning credits, adoption credit, child tax credit, mortgage credit, saver’s credit and certain residential and home energy credits.

• Increased AMT Refundable Long-Term Unused Credits - Prior to this change and for purposes of claiming the long-term unused minimum tax credit, the refundable credit amount was limited to the greatest of (1) $5,000, (2) 20% of the long-term carryover or (3) the AMT refundable credit amount (if any) for the prior year– before any reduction by reason of AGI.  Under the Act, the $5,000 limitation has been removed, and the 20% limit has been increased to 50%.  This effectively allows taxpayer with existing long-term unused credits to utilize the entire amount of the unused credit in 2008 and 2009.

In addition, the Act provides for abatement of any underpayment of tax outstanding on October 3, 2008, which is attributable to AMT on incentive stock options for any taxable year ending before January 1, 2008. The abatement extends to any related interest or penalty.

Originally conceived to combat taxpayers in the higher-income brackets who utilized legal tax shelters and tax preferences to avoid paying income tax, the AMT can be tricky and hit when you may not expect it.  The tax was supposed to inflict a “minimum” tax on those who were able to avoid the regular tax.  However, years of inflation have pushed many middle-income taxpayers into the reach of the AMT.  Although there is a long list of items that can trigger the AMT, for most individuals, the triggers include the following or combinations of the following:

• Preference income from exercising stock options from an employer’s qualified plan, sometimes referred to as incentive stock options (ISOs)
• Having large itemized tax deductions
• Having large miscellaneous itemized deductions
• Large medical itemized tax deductions
• Home equity debt interest deduction
• Interest income from private activity bonds  

There are planning techniques that can avoid or mitigate the effects of the AMT.  If you anticipate an AMT problem, you may wish to set up an appointment for a planning session before year’s end.

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