More middle-income families could find AMT quite taxing
by Jim Tischer  

Why worry about the alternative minimum tax? Most people know the alternative minimum tax, or AMT, only as a tax that applies to the rich. In the past, this was true. The AMT is a separate tax that was originally designed to assure that everyone pays some tax, even affluent taxpayers who could afford to hire tax advisers to eliminate the regular income tax.

Today, there is good reason for many readers to worry about the alternative minimum tax. In 2002, the AMT only affects about 3 percent of families with incomes of $75,000 to $100,000. But it is no longer a tax on the wealthy. In fact, unless Congress acts to reduce or eliminate the tax, in just three years, one out of three of these families will pay the AMT. By the end of the decade, four out of five of these middle-income families will pay the AMT.

These numbers are pretty sobering when you consider that most of those who soon will pay AMT cannot begin to explain the difference between the AMT and the regular income tax computations. They also don't understand why it is becoming more likely that the AMT will be their tax.

What is the AMT?

The AMT is an alternative tax computation. In this computation, you cannot deduct state and local income taxes, real estate, personal property or any other tax that typically could be deductible by those who itemize deductions.

When you compute the AMT, you also lose most of the "miscellaneous itemized deductions" and part, or all, of the medical expenses that are allowed for your regular tax computation. There are no personal exemptions for the AMT computation.

The AMT taxable income is determined by adding back these items as well as making several other, often significant, adjustments. The AMT then is determined by applying a two-tiered tax rate to this broader tax base. The first tier applies to the first $175,000 of AMT taxable income at a flat 26 percent rate. Any income in excess of this base is taxed at a 28 percent rate.

There is a flat exemption ($49,000 for married filers; $35,750 for others); but it phases out at higher income levels.

If the AMT computation yields a tax that is higher than the regular tax computation, the AMT applies. All of the tax cuts Congress passed in the past couple of years have reduced the regular tax, but not the AMT. As a result, the AMT will become the prevalent tax within the next few years.

Those who should be most concerned about the impact of the AMT are those with large families, employees with unreimbursed employee business expenses, and those who pay a lot in state and local taxes.

The tax projections I prepare for my clients show that several of them will pay the AMT this year. Many more will pay it next year and even more the following year. While you may not be able to avoid the AMT, you certainly don't want it to catch you by surprise. When you meet with your tax adviser, ask how soon the AMT will apply to you.

Jim Tischer is a certified public accountant and partner with Dayton-based Brady Ware & Schoenfeld. Reach him at jtischer@bradyware.com. This article originally appeared in the Dayton Business Journal.

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