Be Aware of Alternative Minimum Tax

If you're like many people, you may not be that familiar with the alternative minimum tax (AMT). However, you might want to acquaint yourself with it, because it's becoming less “alternative” and more “mainstream” — and its cost to you can be far from "minimum."

Here's a little background on the AMT. First, there has been some type of minimum tax ever since 1969. Because many well-off individuals used credits and tax breaks to cut their tax liability to little or nothing, Congress passed laws requiring taxpayers to calculate their tax liability first under the conventional method and then under the AMT method — and then pay whichever tax is higher.

Although the AMT tax rates are lower than the top regular tax rates, the AMT rates are levied on a broader income base — one that excludes personal exemptions and many itemized expenses. In its first three decades, the AMT affected relatively few people, but that began to change a few years ago, largely due to two factors:

• Lower tax brackets — In 2003, Congress lowered the tax brackets. These lower brackets, combined with the available exemptions and deductions, meant that many middle- and upper-income taxpayers' regular taxes were lower than the AMT — which means they had to start paying the AMT.
  
• No adjustment for inflation — Most taxpayers have been shielded from the AMT by its large exemption. But this exemption is not adjusted for inflation, so, as wages and earnings rise each year, more and more people will be subject to the AMT. In recent years, to prevent huge numbers of people from being swept into the AMT, Congress has applied “patches” to the AMT laws by increasing the exemption amounts annually. For the 2008 tax year, the exemption is $69,950 for joint filers, $46,200 for singles and $34,975 for married individuals filing separate returns. 
  

Unfortunately, you may unwittingly have done things that made you even more susceptible to the AMT, such as receiving incentive stock options or pre-paying property taxes due in 2009 to gain a larger deduction on your 2008 taxes.

If you do need to pay the AMT, it can affect your investment strategy. For example, the interest payments from some municipal bonds — especially those that involve a public/private partnership for facilities such as stadiums or airports — might be subject to the AMT. Also, if you have a home-equity loan, your interest payments may not be deductible, particularly if the loan is used for purposes other than home improvement.

The AMT debate is still alive and well in Washington. In fact, the AMT was an objection of discussion in the Obama Administration’s economic stimulus plan. But for now, the issue has not been resolved beyond the temporary patches, so make sure you follow the legislative proposals that deal with this controversial topic.

In the meantime, though, see your tax adviser to determine if you are susceptible to the AMT, and, if so, what you can do about it. The AMT can be complicated — but if you've got a good understanding of how it works, you might not be unpleasantly surprised when tax time rolls around.

This article was written by Edward Jones for use by your local Edward Jones financial advisor.