Are You Being Snared By the Alternative Minimum Tax (AMT)?

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 you when least expected.  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 a combination of the items listed below:

• 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 itemized deductions for state income or sales tax, real property tax and personal property tax;
• Large medical itemized tax deductions;
• Home equity debt interest deduction; and
• Interest income from private activity bonds.  

Because of its unintended impact on the middle class, Congress has been promising AMT reform.  However, the AMT as it is currently structured provides a significant amount of tax revenue that Congress is reluctant to concede without a replacement.  So each year for the past several years, they have been applying one-year patches to AMT in the form of inflation adjustments to the amount of income exempt from AMT.

For 2009, Congress has patched the AMT for yet another year by increasing the AMT exemption amount and continuing to allow nonrefundable credits to offset this punitive tax. The following are the details of the 2009 patch:

• AMT Exemption Amount for 2009 Increased - The AMT exemptions have been increased for 2009 to: $70,950 (up from $69,950 in 2008) for married individuals filing jointly, $46,700 (up from $46,200 in 2008) for unmarried individuals and $35,475 (up from $34,975 in 2008) 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 2009.  Those credits include the dependent care credit, elderly and disabled credit, education credits, adoption credit, child tax credit, mortgage credit, saver’s credit, certain residential home energy credits, first-time homebuyer credit and plug-in electric vehicle credit. 
 
Even with the patch, a significant number of taxpayers are finding themselves snared by the AMT.  You can tell if you were hit by the AMT by looking at line 45 of your 2008 Form 1040.  The amount on that line (if any) represents the extra tax (AMT) you are paying over and above the regular income tax.

There are planning techniques that can be used to avoid or mitigate the effects of the AMT.  If you anticipate an AMT problem this year, it may be appropriate for you to make an appointment to see if there are any steps that can be taken to alleviate the effects of the AMT in your specific tax situation.

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