Try to avoid the dreaded AMT

Sun., Oct. 22, 2006

Universal Press Syndicate The Spokesman-Review

Wal-Mart Goes Generic

Wal-Mart (NYSE: WMT) made news recently, announcing that it will begin selling 291 generic prescription drugs for $4 a month to anyone (insured or not) with a prescription who visits one of the company's stores in the Tampa, Fla., area. Based on favorable reaction, the company said it will roll out the program to stores in other states as well.

This is an obvious boon for both senior citizens and the uninsured. The program will, of course, benefit Wal-Mart by creating additional traffic in its stores, which should lead to additional sales of its other products.

One of Wal-Mart's direct competitors, Target, said it would follow suit in Florida, and others, such as Costco, may take steps in that direction as well. Drugstore chains such as Walgreen, CVS and Rite-Aid also will feel some pain, as most of them derive 60 percent to 70 percent of their total revenue from pharmacy operations. Meanwhile, Wal-Mart gets to play up how good a corporate citizen it is.

Shareholders and potential investors should stay tuned, watching to see how this new program affects store traffic. Though the $4 program included only 291 drugs to start, it's reasonable to assume that other generics will be added. This move could change the game for a number of retailers over the next few years, especially the pharmacies.

Although the alternative minimum tax (AMT) was intended to apply to high-income taxpayers who take advantage of loopholes (called “tax preferences” in the professional lingo), it can also apply to middle-income taxpayers who haven’t sufficiently planned their taxes. In fact, the AMT is hitting more and more taxpayers each year.

It’s not pretty, either. Your calculations might show that you can expect a refund of $1,500, but when the AMT rears its ugly head, you might end up owing $2,000 more in taxes. Ouch!

You’re probably not familiar with all of the issues surrounding the AMT — but in this case, ignorance isn’t necessarily bliss. Let’s take a few minutes to see where you and the AMT might meet.

The characteristics most likely to give rise to AMT liability for “ordinary” taxpayers who do not operate businesses are:

• a large number of personal exemptions (such as many children);

• a large sum of state and local taxes paid;

• a large amount of miscellaneous itemized deductions;

• a large amount of deductible medical expenses;

• certain incentive stock options;

• large capital gains.

If you have one or more of these factors on your tax return, you could have the unpleasant obligation of paying the AMT. You may want to consult a tax professional for advice.

In the meantime, Jeff Schnepper at MSNMoney recommends considering accelerating income and deferring deductions. Read his guidance at http://money central.msn.com/ articles/tax/basics/6647.asp.

Ask the Fool

Q: Are viatical settlements good investments? — K.F., Hackensack, N.J.

A: They may make sense for some people in some situations, but they’re not without risk, and they may make you uncomfortable.

Viatical settlements are when a terminally ill person sells his or her life insurance policy to someone else. Imagine John, stricken with a fatal form of cancer and expected to live only three more years. If he needs cash to pay for medical bills or just to spend and enjoy, he might sell his life insurance policy to Jane. If it’s set to pay $100,000 on his death, Jane might pay $66,000 for it. That way, John gets a lot of cash now, and Jane expects to get the $100,000 in about three years. At that rate, she’d be earning roughly a 15 percent annual return.

Viatical settlements are not necessarily win-win, though. The middlemen arranging these settlements take cuts. John may hang on for many years, significantly reducing Jane’s return. A cure for his cancer might be discovered, and he may even outlive Jane! But if he lives, he’s without his life insurance policy, and few insurers will want to insure him.

Many people are uneasy about investing in something that has them rooting for speedy deaths and against medical breakthroughs. Also, there have been a lot of instances of fraud with viatical settlements. Learn more about them online at www.sec.gov/answers/ viaticalsettle.htm, www.viatical-expert.net and www.lisassociation.org.

Q: If I sign up to use an online brokerage, can I deposit funds by just mailing in checks? — P.D., Dallas

A: You certainly can. That’s how most online brokerage account holders handle it. Learn more about brokerages and how to choose a good one at www.broker.fool.com.

My dumbest investment

As an engineer, I knew about Microsoft long before it ever went public. I regarded it as a high-quality company for software for personal computers. When Microsoft went public in 1986, the stock rose rapidly. I figured that I would wait for a month or two for the stock to come back down a bit. Then I got totally involved in my job and forgot all about Microsoft for several years. So one of my investment rules now is to set aside a specific period of quiet time — maybe an hour a week on Sunday or maybe once a month — to sit and review my current investments and potential investments. — J.C.M., Berkeley, Calif.

The Fool Responds: Your example reminds us that many investing mistakes involve actions we don’t take instead of ones we do. Regularly reviewing one’s portfolio and seeking new investments is indeed a great habit for investors to get into. It can help you spot problems with your holdings before they sink your stock and can also help you discover some terrific opportunities before many others do.

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Try to avoid the dreaded AMT

Ask the Fool

My dumbest investment

Jesse Tinsley

Jim Meehan

Molly Quinn

Rob Curley

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