Alternative Minimum Tax (AMT)
Revised By: Whitney Ibarra
The Henssler Financial Group Position Paper

It is projected that by 2010 almost one-third of all taxpayers will be hit with alternative minimum tax. This would mean that AMT would account for almost 10% of the total federal tax revenue.

There are no specific tests to determine if you are liable for AMT — you must first figure your regular income tax, and then determine whether "tax benefit" items must be added back to your taxable income to calculate AMT. Without these "tax benefit" items, some taxpayers might be able to escape income tax entirely. The IRS cannot let that happen! In essence, the alternative minimum tax is a recapture mechanism, reclaiming tax breaks allowed to us by the IRS itself.

You may owe AMT if you claimed:

  • Itemized deductions such as taxes, interest, medical expenses, and miscellaneous deductions;
  • Certain tax-exempt interest, incentive stock option benefits, or accelerated depreciation; and/or
  • A substantial number of dependents (exemptions).

The deduction items that are added back are classified as either "preference" items or "adjustment" items, each having a significant tax impact. Preference items are deductions that are allowed in computing regular taxable income but are not allowed in computing alternative minimum taxable income. Deductions that are preference items are eliminated or reduced each year to reflect the amounts that are considered preferential. These items can only increase alternative minimum taxable income, not decrease it. Preference items can include tax-exempt interest on qualified private activity bonds, accelerated depreciation on property acquired before 1987 or qualifying small-business stock.

Adjustment items are items of income and deductions that are computed differently for AMT than for regular tax. Adjustments can increase or decrease alternative minimum taxable income. Adjustments can include mortgage interest, state and local taxes, MACRS depreciation, incentive stock options, long-term contracts, research and experimental expenses, and other items. These adjustments are usually required in order to eliminate a "timing" difference that can result from tax laws allowing the acceleration of deductions (e.g., MACRS depreciation) or the deferral of income. Thus, the recalculation usually results in an increase to alternative minimum taxable income.

Every year taxpayers need to consider whether they will have to pay the alternative minimum tax. The AMT Assistant is intended to provide a simple test for taxpayers who fill out their tax returns without using software to determine whether they may be subject to AMT. The AMT Assistant is an electronic version of the AMT Worksheet in the 1040 Instructions (http://www.irs.gov/pub/irs-pdf/i1040.pdf), called the "Worksheet to See if You Should Fill in Form 6251 - Line 45." The AMT Assistant is easy to use. You just answer a few simple questions about entries on your draft 1040 and the system does the rest. You will see the results immediately on your computer screen. Based on your entries, the results tell you either you do not owe the AMT or that you must go further and fill out Form 6251 to find out if you owe the AMT. Your entries are anonymous and the information will be used only for purposes of determining your eligibility. All entries are erased when you exit or start over. The Assistant can be used by individuals, tax practitioners and community or public service organizations. You can access the AMT Assistant at http://www.irs.gov/businesses/small/article/0,,id=150703,00.html.

A taxpayer's regular income tax is compared to the tentative minimum tax. The net minimum tax due is the amount by which the tax computed exceeds the taxpayer's regular tax. In a sense, it is a true alternative tax. Technically the taxpayer's regular tax continues to be imposed, and the net minimum tax is additional.

Before you tackle your Form 6251, let me give you some points of interest:

  • If you claimed the standard deduction instead of itemizing on your return, you may not claim the standard deduction as an AMT deduction. Standard deductions are disallowed. This is an adjustment item.
  • Exemptions for yourself and your dependents are not allowed for AMT purposes. Inflation-indexing of personal exemption amounts has triggered taxpayers with large families into alternative minimum tax situations. The Tenth Circuit appeals court and the Tax Court (although "sympathetic") agree that the AMT rules apply. If you are subject to AMT tax because you have a large family, then you must pay the AMT tax. After all, rules are rules.
  • If you exercise incentive stock options, you have to treat, as an AMT adjustment, the difference between your purchase price and the fair market value at the time of purchase. This "income benefit" is added to your alternative minimum income. The only way to avoid this adjustment item is to sell the stock in the same year that you exercise the option. Reminder: Your AMT basis in your stock acquired through the exercise of an ISO is increased by the amount of the required AMT adjustment. Therefore, you must keep basis records for both AMT and regular income tax purposes, since in the year the stock is sold, the reportable gain for AMT purposes should reflect the basis adjustment. This is an adjustment item.

AMT is reported and paid with your regular income tax. It is subject to the same filing requirements, payment of estimated taxes and record keeping requirements.

When a taxpayer pays alternative minimum tax, the amount of the tax paid is allowed as a credit against the regular tax liability of the taxpayer in subsequent years. However, the credit (called the minimum tax credit) cannot be used to reduce the tentative minimum tax in subsequent years. The minimum tax credit applies only to the alternative minimum tax created because of deferred preference items.

AMT, potentially, affects every income tax planning strategy. Taxpayers must focus not only on their income tax strategy, but now reducing the impact of their alternative minimum tax. If you would like any further information regarding this issue as well as any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.

 
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