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TAX TIP No. 2
Beware the complicated and costly AMT
Three letters, AMT, are striking tax fear in the hearts of
more and more middle-class filers.
These folks are simply trying to use the tax code, legally,
to lower their annual Internal Revenue Service bills. They claim exemptions for
eligible dependents, deduct the interest on their mortgage and associated equity
loan, and write off the state income taxes they pay. Some of these tax breaks,
however, will do them no good under the alternative minimum tax system.
Commonly
referred to as the AMT, this tax has its own set of rates (26 percent and 28 percent)
and requires a separate computation that could substantially boost your tax bill.
Basically, it's the difference between your regular tax bill, figured using ordinary
income tax rates, and your AMT bill, figured by filling out more IRS paperwork.
When there's a difference, you must pay that amount, the AMT, in addition to your
regular tax.
The AMT was designed in 1969 to ensure that wealthy
taxpayers didn't use loopholes to escape paying their fair share of taxes. The
original target was 155 filers with the then-exorbitant income of $200,000 who
avoided paying any federal taxes.
More
AMT victims, higher taxes
On average, when an AMT payment is required, the federal coffers get around $2,000 more per tax-paying household.
Government number
crunchers point to other alarming
figures. Four million people
paid AMT in 2005 and until
Congress acted in late December,
it looked like the AMT would
ensnare around 23 million
taxpayers when they file their
2007 returns. Thanks to the Dec. 26, 2007, law change, most of those folks are off the AMT hook this year.
The legislative
fix, however, was only for
a year. That means that federal
lawmakers must keep making
changes to the AMT or around
52 million taxpayers will
face the parallel levy by
2015.
Why the increase? Because the tax is
not indexed for inflation. Without that annual adjustment, your yearly raises
of a few percentage points have been moving you closer or even into the income
realm that the tax law deemed almost 40 years ago as prime AMT bait.
The IRS' own Taxpayer
Advocate says the system should be scrapped; the President's Advisory Panel on Tax Reform agrees.
While lawmakers and economists wrangle every December
over how to tweak the AMT, taxpayers are left
to deal with it. Here's what to look for, as
well as what to look out for, when it comes
to this potential added tax burden.
Calculation
insult to tax injury
Adding insult to injury, the AMT's parallel
system demands that taxpayers do more work to pay more in taxes. The effort is
required both in filing paperwork (the dense, two-page Form
6251, Alternative Minimum Tax -- Individuals) and maintenance of separate
records for regular and alternative tax purposes.
Even filers
who escape actual payment of the higher tax still must do additional work just
to learn that they are off the AMT hook.
To help sort through the AMT mess,
some taxpayers turn to computer software packages,
most of which include AMT computation, or hire
professional help. Both choices should help
you stay on the IRS' good side, especially if
you owe AMT, or at least put your mind at ease
if you don't.
But the options also will add
to the overall cost of calculating your tax
bill.
Free
help in figuring your AMT
For the last couple of years, the IRS has provided
some free AMT calculation assistance.
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