Alternative Minimum Taxes

Back in the 1980’s high income individuals and corporations were perceived to be skewing their income through converting capital gains to ordinary income, buying assets and taking advantage of depreciation and tax credits and seemed to owe little or no taxes. To require them to pay “something” Congress came up with the alternative minimum tax. It is a separate tax calculation. Very basically, all deductions, exemptions are disallowed the the taxpayer gets a single exemption of $70,950 for married couples filing jointly The AMT rate is 26-28% depending on income. 26% on the first $175,000 of income and 28% on anything about that (again married filling jointly). The capital gain rate is 25%. Depreciation is calculated at slower rates, tax exempt private activity bonds interest (like Airport and sports arena bonds) are added back into the calculation. Depreciation deductions are limited. Incentive stock option income is added in. Certain farm tax shelter losses are added back in. In a corporate context, long term contracts are re-calculated, key man life insurance proceeds are added back in. Because of the way it works, planning to avoid the AMT is well nearly impossible. For example, a person pays his state estimated income taxes and his real estate taxes in a year when due. Such expenditures may trigger AMT. Or employee business expenses may likewise trigger the AMT. The funny thing is that once you are subject to the AMT, the numbers always turn out the same, no matter what the deductions are. The reason that AMT expiring tax provision is a huge deal is that the trigger number for the AMT will go down from $70,950 to $45,000 in 2011 (for married couples). This means that more taxpayers will be subject to AMT.

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