Alternative minimum tax hitting wider target

PERSONAL FINANCE

February 12, 2006|By EILEEN AMBROSE

Stephen Seipp never heard of the alternative minimum tax until he triggered it a few years ago.

The Lutherville audiologist considers himself upper middle-income, but not one of the rich that the tax was originally intended to snag.

"It's designed for people who have a lot more money than I have," the 56-year-old Seipp said. "What really bothers me now ... people who are making less than I am are going to get hit with this thing. It's appalling to me."

Congress created the AMT decades ago after dozens of rich people evaded taxes through heavy use of deductions. Filers are supposed to figure their taxes under the regular tax and the alternative minimum tax and pay the higher tax bill.

The AMT was never adjusted for inflation, so over time it began to net middle-income households.

Tax cuts in recent years have exacerbated the problem. Regular income tax rates were reduced, but the AMT tax rates stayed the same at 26 percent and 28 percent. The result is that more filers end up owing more under AMT and paying that bill.

It's a particular problem for Marylanders. The AMT doesn't allow many of the regular tax deductions, such as state taxes paid.

Because of the higher taxes here, Maryland ranks among the top states affected by the AMT, along with New York, New Jersey, California and Connecticut, according to the Tax Foundation, a tax research group.

Less than 1 percent of filers paid AMT in 2000, but that's expected to continue to grow to about 20 percent - or around 30 million filers - if nothing is changed, the Tax Foundation reports.

To repeal the AMT would be expensive, and for that reason many tax experts don't expect the government to get rid of it.

There are proposals to temporarily reduce the impact of the AMT on middle-class taxpayers.

For the past few years, the AMT exemption - or the amount not subject to the tax - had been raised. But this expired at the end of last year. In his proposed budget to Congress last week, President Bush extended the patch by one year for 2006 returns. The Senate is proposing more generous relief.

Without a temporary fix, the number of taxpayers caught by the AMT is estimated to swell from 3.6 million last year to 19 million next year, said Mark Luscombe, a principal with CCH Inc., a tax information provider in Illinois.

Congress likely will pass some form of AMT relief, Luscombe said. "It's an election year."

"It's hard to imagine that Congress will want to go home with 16 million angry taxpayers out there," said Clint Stretch, director of tax policy for Deloitte Tax in Washington.

Politics aside, what's a filer to do? It's too late to do anything to avoid the AMT for returns now being filed.

"Your AMT planning has to be done by the end of the year," said Jackie Perlman, senior tax research coordinator with H&R Block in Kansas City, Mo. "And even then, there may not be anything you can do about it but be aware of it so you don't faint on April 15."

But you might need to calculate whether you owe AMT this season. There's no magic income number that tells you whether you will definitely owe the tax or not. Other factors besides income determine AMT liability.

Slightly less than 7 percent of taxpayers with incomes between $100,000 and less than $200,000 paid AMT last year, according to the Joint Committee on Taxation. But about 56 percent of filers with incomes of $200,000 and more paid the tax. Once income goes above $500,000, though, the AMT becomes less of a factor because these filers tend to owe more under the regular income tax.

The IRS recently launched an online calculator at www.irs. gov to help filers figure out whether they need to fill out the AMT Form 6251. The AMT Assistant is geared more for those filing paper returns, the IRS said. Other software programs usually calculate AMT liability automatically for electronic filers.

What you'll find when dealing with the AMT is that it doesn't allow many of the familiar tax deductions, such as personal exemptions. A well-publicized case occurred in 1990s, when a Kansas couple making less than $100,000 got an AMT bill from the IRS because they took personal exemptions for themselves and their 10 children.

And forget about deducting state taxes. "No tax is deductible under AMT," including state sales, income and real estate taxes, Perlman said.

Seipp, 56, the Lutherville audiologist, suspects that his Maryland taxes and five personal exemptions pushed him into the AMT a few years ago. "I'm lucky enough to have an accountant that explained it to me," he said. "I remember ... talking to friends and acquaintances about this tax. They looked at me as if I had 10 heads."

There's little you can do if high state taxes and children put you into an AMT situation.

But if you're borderline, you might want to consider whether financial moves this year could have an AMT impact.

"Think twice before taking out a home equity loan," said Laurie Asch, a senior tax analyst with RIA, a tax information provider in New York.

It could have an effect on AMT if you use the money for purposes other than improving a home, such as paying off credit cards, she said. In this case, the interest can't be deducted under AMT, she said.

Exercising incentive stock options - often awarded to executives - also could have an AMT impact. Consult with a tax professional before doing so.

For millions of filers like Seipp, the answer to the AMT may be out of the hands of accountants.

"I wish our people in Congress would do something," Seipp said.

eileen.ambrose@baltsun.com

Podcasts featuring Eileen Ambrose can be found at baltimoresun.com/ambrose.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.