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Published on January 5, 2008

Author: lawson

Source: authorstream.com

The Individual Alternative Minimum Tax:  The Individual Alternative Minimum Tax Presented by Claudia Hill, EA, MBA President’s Advisory Panel on Federal Tax Reform March 3, 2005 AMT - Always Means Trouble.:  AMT - Always Means Trouble. It’s neither an alternative, nor a minimum. It’s a “gotcha!” tax. Taxpayers are discovering that the alternative minimum tax has become their mandatory maximum tax. Who is subject to the AMT?:  Who is subject to the AMT? Anyone whose income is above the exemption amount can be hit: $58,000 for married couples, $40,250 for singles and head of households. In 2006, the exemption drops to $45,000/$33,750. Real people, with real problems. AMT sends the wrong message to taxpayers::  AMT sends the wrong message to taxpayers: The AMT Penalizes – Having children. Incurring big medical expenses. Paying state & local income, property or sales taxes. Paying advisory fees or portfolio management expenses to help earn investment income. Incurring out-of-pocket costs to earn wages. Paying legal expenses to receive a legal settlement (except for certain civil discrimination suits). This includes suits to obtain alimony or spousal support. Business taxpayers are sent the wrong message, too. :  Business taxpayers are sent the wrong message, too. A duplicate set of books is required. A second AMT version of basis information must be kept for assets until they are sold. Expecting to benefit by directing your business investments in a way that is rewarded with business credits may sound good, but don’t expect to use those credits against AMT. The AMT is wretchedly complex.:  The AMT is wretchedly complex. The nature of the complexity is exhibited: in the inability to anticipate when one may be subject to AMT, in the additional compliance burden associated with duplicate computations; and in the lack of rationality and intuitiveness. The AMT calculation is not intuitive.:  The AMT calculation is not intuitive. I’ve worked with taxpayers and AMT planning, and I do not try to estimate its impact on a specific taxpayer…I always model the clients’ situation, with fairly sophisticated software. The stated objective of the AMT has drifted so far off the mark, it rarely hits the target. The AMT is wretchedly complex.:  The AMT is wretchedly complex. It creates anomalies in IRS compliance efforts and taxpayer contacts. The IRS struggles in efforts to understand and detect front-end processing issues with AMT returns, as well as identify and pursue violations on the back end. Taxpayers and their preparers err in understating, as well as overstating AMT, liability. The AMT Credit is not intuitive. :  The AMT Credit is not intuitive. Theoretically, the AMT is an advance payment of tax on select deferral preferences. Theoretically, the credit is the mechanism to equalize that advance payment when the preference is later reversed as income. In reality, the credit does not work that way. Taxpayers can expect to wait for many years to actually use their AMT credit. Unfortunately, the way the law is structured, a taxpayer can find their AMT credit reduced, even when it is not used to offset regular tax. Summary:  Summary In some circles, we might discuss AMT as "a riddle wrapped in a mystery inside an enigma ..." But for anyone who has found themselves having to pay it, I can assure you the thoughts are more of unfairness and entrapment. Summary:  Summary The AMT as it exists today has mutated into a prime example of the law of unintended consequences. Unless massively revised or eliminated it will continue to ensnare millions of unsuspecting middle and lower income taxpayers. AMT should not continue in its present form.

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