Alternative tax to hit more with high incomes in 2004

February 06, 2005|By Eileen Ambrose

At this point, it's too late to do anything to avoid the alternative minimum tax for this filing season. Now, you just need to find out if you'll have to pay it.

Taxpayers will owe the government under the regular income tax or the AMT, whichever brings in more money to the government. Those who might be likely AMT candidates - and there are more of them every year - must figure out their taxes twice. To figure the AMT, they'll need Form 6251. Online calculators also are available at www.hrblock.com and www.quicken.com.

Because the AMT hasn't been adjusted for inflation and regular income tax rates have dropped in recent years, the chances of falling under the AMT have grown.

Who's a likely candidate?

"That's a tough one," said Alan Friedland, a certified public accountant in Cockeysville. "I've seen people with income of $90,000 and $100,000 hit with the [AMT]."

The AMT used to be aimed at the wealthy. Congress created it after learning of 155 rich people in the 1960s who creatively used deductions to avoid paying taxes. The AMT formula forbids a lot of the deductions available under the regular income tax, such as exemptions for children or deductions for state and local taxes.

Experts said taxpayers who take big deductions, exercise incentive stock options or live in states with high taxes, such as Maryland, are more susceptible to the AMT. Be aware, if you take the new sales tax deduction, that could trigger the AMT, too.

Typically, if you pay the tax one year, you'll likely be hit with it again, unless your situation has substantially changed.

Congress provided some relief to the tax a few years ago by bumping up the amount of income that can be excluded from the AMT. That relief was expiring last year, but Congress extended it for another year.

It's a complicated tax that confounds many filers.

"They just don't understand the rules. A lot of them get upset about having to pay the AMT," said Theresa Bandell, a certified public accountant in Towson.

For the third year in a row, Nina E. Olson, the national taxpayer advocate, recently recommended that Congress repeal the AMT. The Office of the Taxpayer Advocate is an independent organization within the IRS.

Some doubt the AMT's repeal will happen.

By 2008, the government would lose more revenue getting rid of the AMT than if it repealed the regular income tax, according to the Urban-Brookings Tax Policy Center. After all, 33 million taxpayers will owe AMT by 2010, compared with 1 million in 1999, the policy group said.

- Eileen Ambrose

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