WASHINGTON — Bad news. You’ve spent days trudging through tax forms only to run into a kink that eliminates most of your tax benefits and sticks you with a much bigger bill.
That kink is called the alternative minimum tax or AMT, and it’s creeping up on a growing number of people with circumstances that trigger a trap once aimed solely at the richest tax dodgers.
The system can strip taxpayers of benefits they would otherwise have gotten for children, out-of-pocket business expenses and state, local and property taxes.
Could you be at risk?
Those who fall “into this category, more and more, are people with large itemized deductions or both state and local income taxes and both real and personal property taxes,” said George Jandl, a partner in charge of private client advisory services at KPMG.
“Many are shocked by it.”
About 2.4 million taxpayers paid $8.7 billion in alternative minimum taxes in 2003.
John Battaglia, a director in private client advisers services at Deloitte Tax LLP, said taxpayers socked with the alternative minimum tax typically fall into two categories. Some agonize every year, while others find one year that a special circumstance has unexpectedly knocked them into its pitfalls.
The chronic sufferers typically earn $100,000 to $500,000 and fall outside temporary restraints that keep the AMT from hurting too many middle-class families, Battaglia said.
Families who don’t consider themselves especially wealthy can get caught in its claws.
“I would call it middle- or upper-class taxpayers, generally anybody earning more than 75,000, 80,000 (dollars) a year might be subject to the alternative minimum tax,” Jandl said.
Those who think they might fall into the group should keep an eye out for a couple of warning signs. Some work or live in a high-tax state. Some have significant income from investments, like capital gains and dividends, and relatively less income from ordinary wages. Some have significant work expenses that don’t get reimbursed by their employers.
Those alarmed to find out they might pop into the AMT can sometimes plan to avoid the extra tax, but not always. Big deductions for numerous children, significant medical expenses or large unreimbursed work expenses could pose a problem. Those who exercise incentive stock options run a very high risk of paying the AMT.
And pay attention, lottery and stock market winners! A significant increase in income, including capital gains, can trigger the dreaded AMT and sometimes even a penalty for not paying enough taxes to Uncle Sam throughout the year.
Those looking forward to taking advantage of a new deduction for state sales taxes will find that it’s not permitted under the AMT system.
“So the government giveth and the government taketh away,” Jandl said.
Taxpayers might find they have limited flexibility to work their way out of the AMT. Planning well in advance can help. Given the AMT’s complexity, calculating its impact or avoiding its bite often require the help of a tax professional.
Taxpayers can, with some help from a professional or a financial calculator, figure out the tipping point where their mix of income and deductions shifts from the regular tax to the alternative tax. The exercise might enable some taxpayers to shift their income or deductible expenses and avoid the higher bill.