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THE ALTERNATIVE MINIMUM TAX
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The alternative minimum tax (AMT) was created by Congress to help ensure that taxpayers, both individual and corporate, who enjoy economic income do not escape taxation through creative accounting and "over-use" of tax benefits provided under the regular tax system.
The AMT is actually a separate, parallel tax system with its own rules for determining taxable income, deductions and credits. The basic formula for the AMT is fairly straight-forward. The computation begins with "taxable income" as it is computed under the regular tax system.
This figure is then either increased or decreased, depending on circumstances, by AMT "adjustments." Next, AMT "preferences" are added. Then, the respective AMT "exemption" is subtracted to arrive at the Alternative Minimum Taxable Income or AMTI. These “preferences” and “adjustments” are corrections designed to prevent high-income taxpayers from taking too much of an advantage of tax breaks that further economic or social goals.
The exemption amounts are much like personal exemptions under the regular system. For 2005, they are $58,000 for joint filers and $40,250 for individuals. For 2006 the exemption amount decreases to $45,000 for joint filers and $33,750 for individuals. There is also a phasing out of these exemptions if income exceeds certain levels.
The result of these computations is alternative minimum taxable income (AMTI). To arrive at the AMT, multiply the AMTI by 26% if the AMTI is under $175,000 ($87,500 for singles) and 28% for AMTI over $175,000 ($87,000 for singles). Finally, after deducting certain credits, the AMT is compared to the tax computed under the regular tax system. The taxpayer is then liable for the larger of the two taxes.
The interaction between the AMT and the regular tax system can make multi-year tax planning difficult. Consulting a financial planner or tax professional is probably a wise idea if you intend to engage in any significant tax planning strategy. |
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